NEC3 ECC Option A - PM/Contractor have different opinions in assessing Defined Costs for a CE

The Contractor © has encountered rock in the trench excavation on a beach front (tidal work) installing outfall pipes 3km out to sea (also involves dredging works). The rock is found in the first 400m of trench, therefore consists of using normal excavation equipment (i.e. 1No CAT excavator + 1No D6). Under the Z clause rock is classified as a “Physical Ground Condition Risk” and in the event of occurrence shall be a compensation event. However the first 9 days of assessed delays shall be to the C’s account. The CE has been accepted by the PM and he has asked the C for a quote, however there is disagreement on the cost calculation and method of assessing the price in the quote.
The C has assessed the cost in accordance with the forecast of Defined Cost (DC) of work yet to be done and an element of incurred DC for work which has been done, plus fee. The problem is that the forecast of DC includes an “Onshore Excavation Spread (including 2No CAT excavators & 4No CAT 740 dump trucks)” which is listed in the Shorter Schedule of Cost Components (SSCC) and is a lump sum of 8k per 12hrs worked. The C has used this rate in assessing his future DC even though the actual plant used (1No CAT excavator + 1No D6) is different. The C has also credited back the first 9 days (under the Z clause) time assessment of the rock excavation and the original time allowed for the beach excavation agreed in the baseline programme.
The EOT for the key date is agreed going forward by the PM/C and is based on the actual equipment to be used (i.e. 1No CAT excavator + 1No D6).
The PM does not agree with the quote and insists the cost should be based on the actual equipment used and not the “Onshore Excavation Spread” used in the SSCC.
Please can you advise who is right in their assessment of the DC, giving the contractual reasons.
Many thanks for your future helpful advise.

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This certainly quite involved and it is always difficult to comment on specific aspects without all of the facts and detail.

Firstly you indicate that a clear division between the work already done from the work not yet done has been established.

The work already done is not a problem as this is based on the actual resources used. In regard to the forecast you would expect in the normal course of things for the Contractor to forecast the resources he will actually use. This forecast will also include under clause 63.6 for risk allowances for cost and time for matters which have a significant chance of occurring and are at the Contractor’s risk under the contract. So in this instance he can demonstrate the Equipment and resources he has been using (work already done) and in the forecast he would likely include for time risk allowances e.g. Equipment breakdown, maintenance, repairs, etc, if they have a significant chance of occurring.

The objective of a compensation event is to put the Contractor back in the position he would have been if the compensation had not occurred.

It is not clear what the “onshore excavation spread is meant to achieve” as this is not a standard ECC approach. Perhaps it was meant as a simplified way of dealing with compensation events but without seeing the whole it is difficult to comment.

The above does set out a standard NEC ECC approach to the assessment of a compensation event.

A compensation event should be based upon a forecast defined cost from the point at which it was notified it was a compensation event and that a quotation was requested. It is only actual defined cost for any elements that were spent prior to it being known to be a compensation event (clause 63.1). I am not sure like Barry what “Onshore Excavation Spread” is, but the compensation event should be based upon a forecast as to how, with all the knowledge at the time of producing the quote you anticipated to carry out the works.

It is always quite difficult when the PM has the benefit of hindsight to ignore it, but that is what the contract says. Equally, if I as a Contractor said that an element of work needed an expensive amount of temporary works and convinced the PM it was necessary which he reluctantly accepted, and then I didn’t use that temporary works then you can see why he would be aggrieved. Risk is a common area of contention – where the PM says that £10k of risk did not happen, and as he has not yet agreed (implemented) the quote then he will not pay for £10k of risk that did not happen. On the same grounds however, what if £20k of risk has actually happened – would the PM in the same manner increase the quote by £10k? (I suspect not). The compensation event should be scrutinized as being a true reflection of the cost of doing this extra work, for which the Contractor should not lose out but equally not be making his fortune on.

So, to summarise – if the “Onshore Excavation Spread” would have been relevant and a true reflection as to how the Contractor originally intended to carry out those CE works then it is used in the assessment of Defined Cost, and if it wasn’t then it isn’t! Try to use the words (and guidance notes) for clause 63.1 and in very simplistic contractual terms “do what the contract says”.

I hope between Barry and myself there is some help to you here.