Does the last paragraph of Clause 60.4 of NEC3 Option B “If the Defined Cost per unit of quantity is reduced, the affected rate is reduced” give any direction on the assessment of the CE? If yes, how?
Yes. The contract only allows the effect of certain CEs to reduce the Prices (see clause 63.2) because many of them arise from a breach of contract by the Employer, PM or Supervisor it would be wrong for the Employer to benefit from it.
The CEs for which NEC3 allows the Prices to be reduced are 60.1(1), (17), B & D 60.4 & 60.6; see clauses A & B 63.10, C & D 63.11.
An example would be if the Bill included for 3.000m3 of excavation but 10,000m3 was actually completed, the Defined Cost per unit of quantity may well reduce due to economies of scale and therefore the rate in the Bill would be reduced.
Worth adding: (from the NCE 3 guidance notes on Cl.60.4) “The change in quantity, in itself, is not a Compensation Event. A Compensation Event is triggered only by the changed quantity satisfying the two tests stated in this clause.”
This only applies to changes in the BoQ that are not a change to the Works Information (these would be picked up in a CE under Cl.60.1.(1)).
So a worked example:
BoQ:
Item: Pour Concrete
Quantity = 10m3
Rate = £200m3
Total of the Prices = £2,000
Final quantity at Completion = 15m3 (5m3 additional)
Scenario 1:
If the unit rate for concrete (£200m3) has not changed the contractor gets the additional £1000 paid via the BoQ and it’s not a CE. The increase did not satisfy the three bullet points of Cl.60.4
Scenario 2
The Contractor is able to now procure the “additional” 5m3 of concrete at £150m3, due to the increase overall quantity (concrete supplier offers a discount). Therefore, the difference in the “final quantity” (15) x “the rate in the BoQ” (£200) = 15 x £200 = £3,000. This value (£3,000) is greater than the 0.50% of the original contract value (£2,000), this is therefore a CE. The CE only applies to the difference (5m3). If the “price per unit cost” falls to £150m3, then the CE quote is 5x£150m3 (£750), for the additional.
Now it may be that the price rises for the additional extra over (5m3) to £250m3, in which case the CE quote reflects this (£1,250).
I would welcome a sense check on the above if incorrect, thanks.
Thank you for the replies.
I am actually concern how to assess the CE (assume the 3 tests are satisfied).
BQ quantity = A
Final quantity = B (assume B > A)
BQ Rate = C
Defined Cost per unit for BQ quantity = D
Defined Cost per unit for Final quantity = E
New Rate = F = C + (E - D)
Amount due to the Contractor should be which of the following assessments?
Assessment 1
Amount due = B x F
Assessment 2
Amount due = A x C + E x (B - A)
“Assessment 3”
Amount due = A x C + (B x E - A x D)
Hi Luke,
yes on the whole you are correct except the statement that it only applies to the difference, I don’t see that in the contract under 60.4 or 63.13.
63.13 tells us how to apply the assessment in order to change the Prices in the BoQ, it states that for work done, which presumably is the only way we get a difference between the final quantity of work done and the bill, the change is a new lump sum.
In the case described the Contractor is paid in the first instance for all the work completed at the original rate in the BoQ as per the PWDD 11.2(28).
The CE therefore will calculate the reduction by multiplying the final quantity of work completed by the difference between the original rate and the reduced rate, assessed as a lump sum and that is then added into the BoQ, in this case as a negative when the PM implements the CE.
Happy to discuss.
Hi,
hopefully I’ve covered your question in my response to Luke, in so far as the Contractor is initially paid for all the quantity of work completed at the rate in the BoQ. Once the CE is notified and assessed the BoQ is changed under 63.13 by adding in a new lump sum, which if there is a reduction must be a negative sum.
Happy to discuss.
Thanks Steve. Much appreciated.
Luke.
Thanks Steve. It is very helpful
I am confused about the assessment. I note from other article that
"Clause 60.4 states that if a line item changes by more than 0.5% of the total of the Prices then the remainder is assessed as a compensation event. Put in simple terms, for a £1mil project, a single item has to change in quantity by the equivalent of more than £5k. Any extra over would then be assessed as a compensation event using Defined Cost i.e. actual cost they will incur.
This prevents Contractors “loading” bill rates at tender stage (as if) and taking advantage of an increased quantity, but also protects Contractor if they have undervalued an item which the Employer then decides they want much more of. This is about the fairest rule I think that either Party could expect."
Is there any actual case for reference?