NEC4 Option C - Staff Costs within a CE

NEC3 and NEC4 Contracts
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I’m having an issue with the inclusion of prelims within a CE, I’ve summarized the position of the Client and the Contractor below, could someone possibly advise?

The issue: The inclusion of prelims on an NEC4 Option C CE. The Contractor has raised a Compensation Event for work under 60.1(1), the NCE is accepted by the client and they are assessing the Compensation Event. The issue arises with the inclusion of Prelims, most notably the Contractors staff members, Project Manager(PM) and Commercial Manager(CM). The contractor believes they should be included, the client believes they should not be. There is no dispute that the PM/CM worked on the CE.(80% of the work has been completed)

Client: The client believes that in the Activity Schedule for pricing the works and in setting the Target Cost, a Commercial Manager was priced at 100%. Because there is still only 1 Commercial Manager on site, if they allow the inclusion of the Commercial Manager within the CE, it would increase his time within the Target to 110% and therefore cannot be included with the CE

Contractor: The Contractor believes that the Activity Schedule and the build up to that Target Cost is irrelevant when Assessing Compensation Events, as per clause 55.2 The Activity Schedule is not Part of the Scope or Site Information. The Defined cost incurred on providing the CE should be included in the CE assessment irrespective if any time was previously included in a previous forecast.

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A compensation event is not something that is included in the Contractor’s tendered price and if it occurs then they should be put back in the position they would have been had the event not occurred.

This means being sensibly compensated for the change to the Prices, which is due to the effect of the compensation event on Defined Cost. As Defined Cost is based upon the Schedule of Cost Components, the assessment would consider the effect on People.

The evaluation of People cost for a compensation event generally falls under one or more of the following categories;

  • assessment and preparation of the quotation,
  • implementing the CE scope of work,
  • prolongation assessment (programme operations, Key Dates, (Sectional) planned Completion),
  • Imposed inefficiencies (disruption).

As you have mentioned, however, some People resources may be allocated for 100% of their time to the project. If the number of tasks they are required to undertake reaches a ‘saturation point’ this would require supplementary resources. If the additional tasks are due to CE’s, then the cost of any supplementary resources should be recovered within the CE quotations.

This is a difficult assessment to make, however, as one or two CE’s probably won’t affect the resources, but at what point will this start to impact upon resoirce levels and how do you price for this?

As the cost of additional People cannot reasonably be allocated to a single compensation event, an ‘increasing cost allowance’ should be included in individual quotations to account for this. This would represent a ‘forecast’ cost (forecast level of required resources due to the effect of compensation events) or be presented as a cost ‘risk allowance’, or possibly a combination of the two.

This would account for the ‘resource thickening’ assessment, which is the additional People cost required to either do more work or to work under imposed inefficiencies. Where there is prolongation this would be a different ‘preliminaries thickening’ type assessment for additional time.

The calculation is not an ‘exact’ measure and requires commercial judgement. Hopefully over time the effect can be quantified more easily and accurately from previous experience and understanding.

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This topic is an ongoing one on every project. However, in every adjudication I have been involved in, the cost of staff management of the CE has been awarded, even if no delay has occurred.

People often confuse target with actual cost. The concept of target means that the Contractor is always aiming to keeps its cost below the target, not to hit that target.
For assessing staff costs, I will use the example of a Commercial Manager.

If there was no CE on the entire project then the commercial managers role is entirely focused on the preparation of applications for payment and cost management.

If he is good, and the Contractor executes the commercial strategy very well, at some point the commercial manager would not be needed full time and the defined cost for his time on the project would be reduced.

This would result in a gain share scenario to the project in which the employer and contractor would both benefit.

However, by changing the scope, the Employer is now creating additional work for the commercial manager, which will ultimately result in the commercial managers time on the project increasing.

He/she will have to put in additional hours to resolve the CE thus increasing the defined cost of the commercial manager on the project.

By valuing the CM’s cost in a CE quotation at zero, the PM is treating the Commercial Manager as as something he has purchased and is entitled to retain onsite for the duration of the project. This is simply wrong.

Such a strategy by the PM will prevent the Contractor from demobilisng staff early and obtaining any benefit he might obtain for his good performance on the original scope.

By concocting an argument regarding the activity schedule the Employer is not acting in accordance with the spirit of the contract. His argument has no contractual basis, as the Activity Schedule isn’t Scope.

The contractor may execute the original scope for a defined cost which is less than the original target. He will save staff costs in doing so and both the employer and contractor will benefit from that gain.

By implementing a CE (and likely multiple CE’s) with no staff costs the PM will be ignoring the contract and will be ensuring the employer gains at the contractors expense, pushing the contractor over the target into pain.

In every CE implemented in this way, the contractor is penalised every time the employer changes the scope or every time an employee risk event takes place.

Put simply, if there is staff costs associated with quoteing and executing a CE, it should be compensated

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