NEC ECC: Inclusion of Compensation Events - Option A

NEC3 ECC Option A - Looking to include a ‘contingency’ sum for compensation events as part of Option A contract - like an old fashioned dayworks sum!

Issue I have is that this value is included in the tendered total of the prices. Could the contractor seek the full value of the stated compensation events even though the full value hasn’t been taken up by way of agreed compensation events?

If they are due the full sum, what clauses need to be altered to prevent this from happening? Or are there other ways this could be covered?

Under NEC3 ECC main option A, the amount due to the Contractor is the Price for Work Done to Date (PWDD) which is defined as completed activities which are without Defects etc.

If an amount is included in the tendered total of the Prices then it is only paid when it satisfies the definition of PWDD. In this instance it wouldn’t actually be paid at all as a ‘contingency’ sum does not expressly reference any actual work in relation to Providing the Works, so you could not actually decide when this activity is completed.

Any compensation events are assessed as the change to the Prices in the form of changes to the Activity Schedule, which means that an implemented compensation event is added to the Activity Schedule as an additional item, so that it can be considered for payment purposes.

The traditional approach to provisional / daywork / contingency sums used by other contracts was not adopted by NEC in the ECC or any of the other contracts in the family. It isn’t good practice to do so, indeed I’m not even sure what anyone thinks they are gaining by including them in an NEC contract anyway. Provided the term “works” is adequately defined in the Contract Data then as and when additional work is required for example due to design or requirements changing the PM can issue an instruction to change the Works Information under clause 14.3 which the Contractor must obey in accordance with clause 27.3, the PM is also required to notify the instruction as a compensation event under clause 61.1 which in turn leads to quotation, assessment and implementation. Other changes follow a similar process however not all need to be instructed, for example if ground conditions change the Contractor must deal with them and is compensated accordingly.

Whatever change / risks you were anticipating the sum needs to cover should be kept out of the contract and held separately by the Employer as part of an overall project budget and managed by the Project Manager and adjusted as and when compensation events occur. Compensation events are not the Contractor’s risk and as such they do not need to price them in their Activity Schedule.

I do not recommend you amend the contract to make provision for such sums however if you do decide to do so I’d suggest taking specialist advice from someone who understands NEC contracts.

If you have already included such sums in your contract then what entitlement the Contractor has to be paid them will depend on exactly how the sums were described. If there was a single, generic sum referred to as “contingency sum” or similar then it should be possible to argue that the Contractor can’t include it in an amount due as the activity could not be completed as is required by the definition of the Price for Work Done to Date. If however the sum was specific to some work then it may be harder to argue this point and indeed you may have an ambiguity or inconsistency that needs to be dealt with under clause 17.1.

Much better to never have put yourself in this position in the first place!