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NEC ECC: PSC - Option A - Compensation Event Quoation

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Instruction received (cl 61.1) to change the Scope (60.1 (1). CE confirmed by the Employer.

The instruction to change the Scope  was received part way through completion of an activity (on the Activity Schedule) and the instruction had the effect of re-starting the activity from scratch based on the new Scope. I am hoping for some guidance on the value of the CE/ change to the Prices & also suggested amendments to the Activity Schedule based on the following scenario:

Prices £100,000

Activity Schedule
Activity 1 - £50,000
Activity 2 - £50,000

Activity 1 complete and paid

Instruction received part way through completion of Activity 2.

Actual Time Charges incurred by Consultant (Activity 2) at instruction date is £20,000
F/C Time Charges to complete original scope (Activity 2) at time of instruction is £10,000

F/C Time Charges to complete new scope is £40,000

What is the CE value & change to Prices (£100,000) in the above scenario and what should the Activity Schedule look like? Although this seems like a relatively simple/ common scenario I have received a number of different views and would appreciate some expert advice.
asked Nov 8 in Compensation Events by xavdj99 (150 points)  

1 Answer

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The key thing here is to address how de-scope is assessed. It is not based upon activity schedule rates unless by agreement. It is based on forecast Defined Cost. if we just look at the cancellation of the remaining scope for activity 2, they have incurred £20k cost and forecast that the remaining cost would have been £10k to do the works. Therefore the saving in not doing the remainder of activity 2 should be £10k as a negative CE. Obviously they would have to clearly demonstrate that they could have done the remaining works for the £10k as the Client would be expecting a £30k saving not £10k.  This should include risk and fee percentage to be included within the negative compensation event quote as it would for any positive compensation event.

Then there is the additional scope which is a forecast of £40k , which would be in addition to the £10k saving.

The contract is not explicit on how the activity schedule should be amended so that should be by agreement once you have agreed the numbers. The simplest way would just be to add an extra line item for under activity 2 which would be for -£10k + £40k i.e. overall a positive CE of £30k in addition to the full original line items  so
£130k when you add all three items up.

Others might want activity 2 reduced down to £40k, and the CE for £40k - but it still gets you to £130k for all three items.

This is not straight forward - and I can see why there might be arguments as to how it should be assessed, but hopefully you can see/agree this stands up with the contractual clauses. A Client may well not be happy with the answer as they would want more  of a saving initially - but hopefully you can see why I think the answer is the answer. I do think i is more balanced than it first may seem.
answered Nov 11 by Glenn Hide Panel Member (77,210 points)  
selected 6 days ago by xavdj99
Thanks Glenn - just one more clarification if that's ok.

The answer above does not include the actual Time Charge £20k 'work already done' as part of the CE. The calculation only includes a) the saving £-10k plus b) the £40k for new scope =  balance £30k.

Do you consider 'actual Time Charges'  to only include time spent working on new scope in advance of an instruction (in this case no work was done on new scope before instruction) as opposed to sunk/ abortive cost?
I saw the actual time charge as irrelevant. You have committed a cost for that item of work as an activity schedule item. Whether you have spent £20k or £60k at that point - you would only be due the £50k (assuming they did not change the requirements). That is why the activity schedule item is what it was just less the £10k that you can prove the remaining works being omitted could have been done for. Hence the saving is not as much as the Client probably thought they would get - but those are the (contractual) rules!