In this article, Arbicon defines the NEC 4 ECC contract and considers a particular aspect of notifying compensation events which relate to another NEC provision, namely, the giving of early warnings
The NEC 4 ECC contract clearly defines compensation events and how these are to be notified.
Early warnings in NEC 4 Contracts
NEC 4 clause 15.1 states that: “The Contractor and the Project Manager give an early warning by notifying the other as soon as either becomes aware of any matter which could:
- Increase the total of Prices
- Delay Completion …” NEC is entirely unambiguous when it states that an early warning is to be given “as soon as” the Contractor/Project Manager (as relevant) “becomes aware” of such a matter. If either become aware of “any matter” (not necessarily a compensation event) which “could” delay Completion (significantly, it has not delayed Completion yet), it is to be notified as soon as possible.
In respect of compensation events, the importance of early warnings is noted in clause 61.5 which states that, “If the Project Manager decides that the Contractor did not give an early warning of the event which an experienced contractor could have given, the Project Manager states this in the instruction to the Contractor to submit quotations.”
Noting the requirement in clause 10.1 to “act as stated” in any NEC 4 contract, clause 61.5 merely requires that the Project Manager states that the Contractor “did not give an early warning of the event which an experienced contractor could have given …” when instructing the submission of the quotation.
The importance of early warnings
The importance of giving an early warning becomes even clearer when we consider clause 63.7, which deals with the submission of quotations. It states: “If the Project Manager has stated in the instruction to submit quotations that the Contractor did not give an early warning of the event which an experienced contractor could have given [i.e., as clause 61.5 above], the compensation event is assessed as if the Contractor had given the early warning.”
It is also worth remembering that Disallowed Cost (i.e., costs that you cannot recover under NEC 4 ECC contracts under Options C, D, E & F) includes Defined Cost that has only arisen because of a Contractor failing to “give an early warning which the contract required it to give” – see Options C, D & E clause 11.2(26), and Option F clause 11.2(27).
Eight week deadline for notifying a compensation event
Another consideration, found in clause 61.3 states (in part): “… If the Contractor does not notify a compensation event within eight weeks of becoming aware that the event has happened, the Prices, the Completion Date or a Key Date are not changed unless the event arises from the Project Manager or the Supervisor giving an instruction or notification, issuing a certificate or changing an earlier decision.”
Hence, under the standard NEC 4 wording used here (beware of contract amendments which attempt to reduce this time), the Contractor has only 8-weeks to notify a compensation event. The penalty for failure to notify is clear – NO MONEY, NO ADDITIONAL TIME. Hence, it is imperative that the Contractor notifies a compensation event within the 8-weeks.
Thankfully, this time bar does not apply to all compensation events. For example, if the Project Manager gives an instruction under clause 60.1(4) to stop work, which is a compensation event, there is no point the Contractor notifying it as such as the Project Manager is to notify it as a compensation event at the time of the instruction, as clause 61.1. However, if the Contractor encounters unforeseen ground conditions that may be a compensation event under clause 60.1(12), it falls upon the Contractor to notify it as a compensation event within 8-weeks.
So, if the Contractor has up to 8-weeks to notify a compensation event, what is the consequence of a failure to give an early warning (if relevant)? The following example will consider this …
Failure to give an early warning – No money, no additional time?
Under clause 60.1(12), what happens when a Contractor encounters an unforeseen subterranean structure that, noting NEC 4 clause 60.2, was not in the Site Information or publicly available information, was not obtainable from a visual inspection of the site, and was not, in any event, something that an experienced contractor could have reasonably anticipated?
For the sake of argument, let us assume that all boxes are ticked as per clause 60.1(12) and the related clause 60.2 and hence that this is a compensation event. Now what? The Contractor has up to 8-weeks to notify it as such.
But what happens if the Contractor proceeds to excavate and remove said structure (perhaps to avoid delay) before notification of the compensation event and incurs actual costs in the region of £100K (say). As this is a compensation event, is it not a fait accompli that the Contractor may now recover these costs? Unfortunately, with NEC 4 Option C, D, E & F contracts… No.
There are two key issues to note here. Firstly, NEC 4 contracts require compensation events to be assessed by reference to Defined Cost and this does not necessarily mean that you may recover all your actual incurred costs (albeit, properly completed Contract Data and Schedules of Cost Components, etc., should minimise this risk).
The second issue, however, is considerably more significant.
Whilst the Contractor had up to 8-weeks to notify this compensation event, he proceeded to carry out work without complying with the requirement of clause 15.1. Upon discovery of the unforeseen structure, the Contractor failed to give early warning to the Project Manager regarding the unforeseen subterranean structure that “could increase the total of the Prices …”
This should have been done as soon as the Contractor discovered the structure. But, instead, the Contractor elected to wait 7-weeks to notify the compensation event and proceeded to just carry on with the works needed to remove the structure.
Unfortunately, in this situation, the Contractor failed to recognise the importance of giving an early warning to the Project Manager and this must be considered when assessing the compensation event.
Had the Contractor promptly given an early warning and notified the Project Manager accordingly, the Project Manager would have been given the opportunity to instruct what was to be done. He may, of course, have just instructed the removal of the structure and as such the Contractor would be entitled to recover its costs by reference to Defined Cost.
Alternatively, the Project Manager, perhaps by further reference to the design team and the Client, may have concluded that the structure could remain where it is, instructing that the planned works in that location be carried out somewhere else instead … as such, nothing needed to be done to remove the existing structure.
So, by failing to give the early warning, the costs incurred by the Contractor in excavating the structure were all “Disallowed Cost,” as the Contractor failed to “give an early warning which the contract required it to give” – hence, the assessment of the compensation event is £0.00. I.e., all costs incurred in excavating the structure did not need to be incurred. Further, no extension of time became due.
Unfortunately, this example occurred because the Contractor did not follow the most fundamental principle of NEC contacts to “act as stated” in the contract.
Sadly, this is not an unfamiliar scenario to the team at Arbicon. Many enquiries come in where a contractor or subcontractor has signed up to an NEC contract for the first time and are not necessarily familiar with its provisions. Thankfully, we can advise in respect of all NEC provisions, provide training as necessary, and assist with the resolution of any problems or disputes that may arise.
For more information or advice on NEC contracts or dealing with disputes please use our contact form or call our offices below:
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