Compensation Events: Take too long and take the risk!
14/10/24
Newsletter #28:
Welcome to the Instruct newsletter. Bringing you NEC news every week, the second best thing to do in October. Number one is turning on the heating!
Compensation events (CE’s) are at the core of the NEC. The challenge is administering the CE’s in accordance with the timescales to ensure all parties are compliant and protected.
This week we will explain the process, but importantly, identify what happens if the process timescales aren’t followed.
Read to the bottom to see the untold impacts of being late!
The CE Process
A compensation event can occur for two main reasons. Either the Client or Project Manager does something (instruct something, fail to provide access, don’t do something on the programme etc), or the Contractor encounters a situation which they are not liable for. The beginning of the process is slightly different, and we will explain here.
Step 1 - A situation from the Project Manager or Client:
Firstly, the Project Manager must notify a CE under clause 61. This will tell the Contractor that something has happened and the CE process will be triggered. Assuming a quotation is required (see clause 61.2), the Project Manager will also instruct a quotation to be submitted.
Step 1 - The CE is now in the quotation phase.
If its a situation derived from a Contractor situation:
The Contractor will notify a CE under clause 61.3. Notifying the Project Manager that something has happened (known as an ‘event’) which they believe deserves compensation.
Following receipt of this notification, the Project Manager must reply within 1 week, as per clause 61.4, stating if the event is a CE. Assuming it is a CE, the Project Manager also requests a quotation.
The CE is now also in the quotation phase!
Step 2 - Quotation
As per clause 62.3, the Contractor submits the required quotation(s) within 3 weeks of being instructed to do so.
NOTE: If the Project Manager & Contractor agree, the time allowed for the quotation can be extended. This must be done before the quotation is due.
Step 3 - Quotation Reply
Following clause 62.3, the Project Manager replies to the quotation within 2 weeks. Stating that either the quote is either:
Acceptance of the quote
An instruction to submit a revised quote
Notification that the Project Manager will undertake their own assessment
NOTE: For the purpose of this situation, we will exclude the Project Manager assessment. This is covered in clause 64 and will arise if timescales aren’t followed, as well as the Contractor not assessing the CE correctly!
Step 4 - Implementation
Once the quotation has been accepted, or revised such that it is acceptable, this triggers the CE to be implemented. Once implemented, the Prices, Completion Date, and Key Dates are changed accordingly.
NOTE: Unless assumptions have been stated and agreed, the assessment of a CE cannot be changed in the future!
When you take too long! - Project Manager
When you are the Project Manager, and fail to adhere to the timescales set out above (1 week to respond to a CE notification, 2 weeks to respond to a quote), the following happens:
Responding to a CE notification
If the Project Manager does not respond within the 1 week timescale, the Contractor can notify this failure under clause 61.4. If they still don’t reply for a further 2 weeks, the CE is treating as being accepted, with an instruction to submit a quotation.
i.e. Fail to respond and its automatically accepted!
Responding to a quotation
If the Project Manager does not respond within the 2 week timescales, the Contractor can notify the failure under clause 62.6. Failing to reply for a further 2 weeks will result in the CE being treated as accepted!
i.e. Fail to respond and the Contractor gets whatever that have requested!
If you are the Project Manager you need to be 100% on top of this process, as failing to do so, could open considerable financial and time impacts.
When you take too long! - Contractor
When you are the Contractor and fail to adhere to the timescales of submitting a quotation, this is what happens:
Submission of a quotation
Clause 62.3 requires the quotation to be submitted within 3 weeks. If it isn’t, a separate clause is triggered, 64.1.
64.1 states that the Project Manager assesses a compensation event if the Contractor has not submitted the quotation and details of its assessment within the time allowed.
Project Manager ASSESSES a compensation event
Not MIGHT
Not CAN
Not SHOULD
Just straight up assesses! I.e. the Project Manager must now undertake an assessment of the CE. It is no longer in the control of the Contractor!
This is a huge risk for the Contractor having the assessment taken out of their hands and given to the Project Manager!
How to avoid delays and missed dates
Use software to track and highlight dates
Have frequent meetings scheduled with relevant people to ensure coordination
If more time is needed on a quotation, request it before the due date and remain compliant
Use the timescales to everyone’s advantage. Maximise the full duration at each stage if it gives breathing space throughout the process.
Always be transparent with the project team around timescales and hold everyone to account.
The untold impact
If you drag this process out by being slow, missing deadlines, it will critically impact the logic and clarity of the programme.
Elongated CE’s will be harder to assess because programme submissions will supersede the accepted programme at the dividing date, and short term memory will be lost in the sands of time.
How do you relive history when you leave a CE too long and can no longer properly assess impacts because its been months since the event occurred?
People will change, priorities will get in the way, and the CE can fester into a bigger dispute.
Don’t do this. Follow the timescales and have the difficult conversation to reach conclusion.
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