Under the NEC4 Option C Compensation Event assessment process, my understanding is we (the PM) assess impact on defined cost, actual and forecast. If the Contractor provides a quote/contract it has agreed with their sub-contractor, therefore defined cost, that we think is far too high, how can we make an assessment on the sub-contractor price? As it has impacted the Contractor’s forecast/actual defined cost and is therefore a valid part of their CE quotation price.
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Hi Saint, firstly under clauses 26.2, 26.3 and C26.4, the PM should have accepted the proposed Subcontractor and the proposed subcontract documents, including commercial information and should therefore be in a position to know how the CE should be assessed correctly under the relevant subcontract.
Under clause C52.2 the Contractor keeps records and in particular, communications about and assessment of compensation events for Subcontractors. Also, records which show proof of payment.
Under clause C52.4 the PM has the right to audit those records at anytime during normal working hours, (e.g. 9am to 5pm).
Under clause C11.2(26) the PM may disallow cost which is not justified by the Contractor’s accounts and records, and/or should not have been paid to a Subcontractor or supplier in accordance with its contract.
With regards to the assessment of the CE, if the PM does not believe that the Contractor has assessed the event correctly within the quotation the PM has the following options under clause 62.3, instruct a revised quotation stating the reasons why (see 62.4), or notify the Contractor that the PM will be making the assessment.
Under 64.1 the PM has to make the assessment if the PM does not instruct a revised quotation - see 64.1 2nd bullet.
Under 64.3 the timing of the PMs assessment is when the need becomes apparent (which is clearly when the PM rejects the original quote and does not instruct a revised one) and the PM has the same amount of time as the Contractor had to make the assessment (3 weeks - see clause 62.3, unless the time was extended under 62.5 in which case the PM has the same extended time).
The PM’s assessment of the CE must comply with the rules set out under clause 63.1 to C63.14, as far as Defined Cost is concerned clause 52.1 states that the rates and percentages in CD2 must be used (where they exist) otherwise open market and competitively tendered prices are used.
When assessing a PM can refer to pricing books, refer to suppliers on the open market, or Google, my preference is, in the spirit of mutual trust and co-operation, to invite the Contractor to a meeting making it clear that I am going to be making the assessment whatever happens but if they want to help me they can, they have the knowledge and access to suppliers, etc. I like to think that that represents true collaboration although it doesn’t mean I will believe everything they tell me and I am clear that I will make my own assessment if I doubt what I am being told or shown.
The PM’s assessment must also take into account allowances for both time and cost, see 63.8 and made on the basis that the Contractor reacts competently and promptly and that any time and cost incurred is incurred reasonably. Risk allowances should be appropriate and only added for matter which have a significant chance of occurring.
Hope that helps, happy to discuss.
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Hi Steve, thank you for such a quick and detailed response.
The problem with where we are on this project is the works covered by the PMI/CEs is large, complex and specialist - evidence of cost would not be found in price books or google unfortuantely. However, we can see where the contractor has made incorrect assessments and accepted inflated values for additional sub-contractor costs where there should be none. I think this could be removed in our assessment of the CE quote under 63.9 and the Contractor not acting competently in their assessment of this CE?
Saint, I realise that you suspect all is not right with the quotation but please be aware that when the PM is making an assessment of a compensation event they are effectively working on behalf of the Contractor and under clause 10.2 they owe a duty to be ‘even handed’ and must ensure that the Contractor is properly compensated in accordance with the rules of the contract. So you must allow for the risks which are carried by the Contractor and which have a significant chance of occurring such as the risk of purchasing materials on the open market at inflated rates because suppliers may double what they normally charge for some reason.
This has been tested in the Courts and it means that if you were to spot that the Contractor had underpriced something or missed something altogether in their quotation, say risk, or scaffolding, etc, you owe them a duty to instruct them to revise their quotation pointing out any such errors. At the end of the day it also protects the Client to make sure that the Contractor is properly compensated for something which is not their fault, i.e. a compensation event.