NEC3: Option A - Compensation Event valuation of Defined Cost

Contract is NEC3 Option A.

Client issued a PMI instructing the Contractor conduct additional works.

Contractor deployed his subcontractor to site and Contractor’s foreman to supervise.

Works were carried out over four days, Wednesday through to Saturday (Weekend working not included within total of the Prices). The foreman was required to supervise overtime and an additional the Saturday shift worked.

Contractor submitted his CE quotation to the Client including; subcontractor costs and foreman supervision time (including normal time and overtime).

Client issued his assessment, deducting foreman’s ‘normal hours (9-5)’ from Contractor’s quotation and stated this does not constitute part of the defined cost for this compensation event as the normal time is recovered through the Contractor’s total of the Prices.

The Contractor argued, all time incurred as a consequence of managing this additional scope forms part of the Contractor’s defined costs associated with this compensation event. Contractor stated this time should not be disallowed, as these are hours incurred for conducting additional works.

Who is correct? thanks in advance.

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Like many compensation event assessments it is rarely a straightforward matter.

The assessment of any compensation event is the Defined Cost which is due to the effect of the compensation event, that is the ‘extra over’ cost which is represented by;

  • the total Defined Cost including the CE less the total Defined Cost not including the CE.

How the foreman’s time (and cost) is treated depends on a number of points, such as;

  • Is their involvement ‘time related’ or ‘task related’?
  • What was their planned allocation to the project?
  • Has planned Completion been affected by the CE?
  • Does this CE impact upon other works?

In my experience it is not usually an ‘all or nothing’ answer and likely to be somewhere in between.

Foreman allocation is task related. Site work hadn’t commenced at this stage, Contractor was still in their procurement and planning phase.

As the works are Option A (fixed price), the Contractor is not submitting or managing a resource loaded programme. How do you then adjudge the impact upon defined cost? On a fixed price contract, the Contractor is not required to confirm planned/actual allocations.

A requisite of carrying out this additional work was to provide supervision, the Contractor was not required to perform this task at this stage prior to receiving the PMI as site works had not commenced.

If the Contractor had an allocation for the foreman at this stage and reconciled this time against the actual time incurred, the Contractor would be gifting any efficiency back to the Employer whilst working non productively as a consequence of carrying out additional works.

Planned Completion has not been affected.

This CE had no impact on other works.

Is the defined cost for carrying out this work not the actual time incurred as a result managing this event?

Based on what you have said it looks like it is the cost of the time spent on this work, if no other works were planned to occur at this time.

Although there may not be a resource allocation, if you have a programme then that will clearly indicate what works were planned to occur and from that you should be able to ascertain what resources would have reasonably been required.

Remember that the assessment of a CE is based upon Defined Cost rather than a reconciliation against any allowances within the Prices, not least because the planned intention of working at the point in time when the CE actually occurred may be different to that which was used to calculate the Prices.