NEC ECC: People Costs during Covid-19

NEC3 and NEC4 Contracts Compensation Events
1

The contract is NEC3 Option A, with options X2, X7, X16, X18 and Y(UK)2, W2.

The Contractor raised an Early Warning 0n 20th March that Coivid-19 may affect the works. Following the lockdown announcement they subsequently stopped works on 24th March initially for 3 weeks. No PMI has been issued to Stop the works on this contract. A PMI was later issued to incorporate the CLC guidance into the Works Information as a minimum and a quotation requested, with works not able to restart until the relevant RAMS and CPP were in place and accepted. The site was eventually closed for almost 7 weeks.

A Risk Reduction meeting was not held until 20th May. Subsequently the Contractor has submitted a quotation including their full labour costs for the 7 week shutdown qualified that this is less any furlough payment received from the government. The Project Manager response is that these costs are not allowable as the resources were not working as due to being furloughed and are not in the working area or providing the works.

Contractor responds that their understanding is that when the site was instructed to close due to the Covid-19 situation (under clauses 60.1.4 & 60.1.19) they are entitled to claim for the people who are directly employed and who were in the working area of the time of shutdown for the duration of this shutdown. As all works were suspended and the people could not be re-employed elsewhere they believe these costs should remain as claimed.

It is appreciated that a risk reduction meeting could and should have occurred earlier than stated, notwithstanding this point,

  1. Is the contractor entitled to any payment, under the contract for labour costs of people in the working area at the time of shut down?

  2. How is this affected if staff are furloughed, including any top up amounts paid to staff?

  3. What obligations does the contract place on the Contractor to minimise labour costs during a site close down?

2

This hinges on a number of things:

  1. When did the clause 60.1(19) event occur and my view is that it is different under NEC3 and NEC4 - see here for an article: https://www.linkedin.com/pulse/who-pays-covid-19-contract-risk-allocation-under-nec-contracts-jon/ . Under NEC3, it is when, if you did everything you possibly could do, it becomes impossible to achieve Completion before the Completion Date e.g. even if you brought in extra resource, all the terminal float has been used up and probably your critical time risk allowance (TRA) too. Note that does mean you have actually gone past the Completion Date in the present moment. If you have hit that point, it is a clause 60.1(19) compensation event, regardless of whether the PM instructs you to do anything under clause 19 as he or she should do.

  2. My view is that the extra 20% ‘top up’ costs over and above what the government pays is not payable as they are not being used to Provide the Works, so fall foul of the 2nd sentence in the opening paragraph of the Shorter (and full) SCC. However costs of closing down the Site, on-going unavoidable hire costs etc. are all allowable once the compensation event has happened. Likewise for re-mobilisation.

  3. The instruction to operate according to the CLC Guidance is quite definitely a compensation event changing the WI, but what would be the change in Defined Cost if you would have to do it anyway under CDM Regs and Health & Safety at Work Act? However, if 60.1(19) has been satisfied, this clearly is a cost as a result.

  4. Under contract law, you have s duty to mitigate costs which fall upon the other Party and, under NEC3, 63.7 assumes in the assessment that you do. As part of the assessment, the costs of mitigating are part of the it. E.g. if you spent £10 to save £100, you are entitled to the £10.