Segregation of people costs into staff costs and direct costs

I am involved in a NEC4 Option C D&D contract (with very few amendments).

I am acting on behalf of the Contractor on a number of compensation events.

In reviewing the PMs performance to-date, I have found him to be very consistent in implementing PM assessments, but in my opinion, consistently wrong.

  1. Implementing clause 64

The PM has implemented PM assessments for over 50 compensation events. In each case, he has never issued a PM assumption (when asking for a quote), nor followed Cl63 when assessing a compensation event
In my opinion he errors in a consistent manner.

He rejects the CL62 programme and simply state no time is awarded. He doesn’t provide his own assessment of the programme.

He then takes the contractors quote and removes all staff costs in their entirety.
He also removes all risk allowances and implements a 10% risk allowance factor without explaining how he got 10%.

The errors above them compound in the case of a negative CE, where he keeps the staff costs in the assessment and increases the negative CE by his artificial 10% risk factor.

All if the above will be subject to a series of disputes so don’t have to be discussed further.

However, one of his principles is a reoccurring point of dispute on every NEC project I have ever worked on, namely staff costs in compensation events.

  1. Splitting people costs in a compensation event

In my view the NEC contracts contain a definition of defined cost. This definition includes the schedule of cost components, which includes the cost of people. There is no split within people costs into staff and direct cost.

As the only rights in respect of a compensation event relate to changes to the prices, the completion date or a key date, the entire effect on the defined cost of people should be captured within an assessment, especially considering that once a compensation event is implemented, it provides an element of finality to matters.

Under NEC, you cannot separate time and money, therefore if the contractor has expended time (whether it be an electrician, GO or Engineer), the cost of that time must be assessed and the two items cannot be separated.

A lot of PM’s (and many contributors on this forum) have this preconceived notion that you should seperate people costs in staff and labour, despite no such terminology existing in NEC. There is then a further assumption that if the contractors staff don’t work longer hours to execute an event, then then shouldn’t be paid for it.

This error (in my view) also goes against the principle of forecast which is enshrined in NEC, as most PM return a judgement that the contractor hasn’t proven he incurred increased staff costs, which of course can’t be proved in a forecast.

All NEC projects are tendered with zero allowance for compensation events (hence the name), yet most PM’s decide that the Contractor should absorb the staff costs of compensation events up to the point where they have to employ additional people.

The same logic however, doesn’t apply to a labourer. He is required on site and may expend 2 hrs of his day on a CE, this will generally be accepted in the CE quote, even though he is onsite anyway.

However, the engineer who has to plan that activity is often rejected as a cost “because he/she is onsite anyway”.

The above rejection is discussed here by many experienced and highly qualified individuals. The majority of whom generally agree with this segregation of people costs.
However, I have yet to see an actual contractual reason for segregation of people costs.

I would note that in the 5 CE adjudications I have been involved in, the adjudicator has always assessed that the cost of people cannot be segregated and that the contractor should be compensated for the staff hours utilised in producing quotations and managing the work.

Case law in topic generally sides with R+v Versicherung Ag [2006] EWHC 1705 (Comm), where the judge held that the internal costs of management and staff being diverted by another party’s breach are recoverable.

So my question to the forum is the following;

  1. Where does the NEC segregate staff costs from other costs?
  2. Where does the NEC outline that a contractor should have to absorb an element of people costs for CE’s in his original tender?
  3. If the answer to the above questions is that the NEC doesn’t provide for that, then what other basis does a PM have for removing staff costs when assessing compensation events (particularly on a forecast)

Personally, I don’t think there’s a one size fits all answer on this, it depends on the facts.

Firstly, the NEC allows for recovery of any change in defined costs caused by compensation events. I think the answer to your query comes down to this point.

There is little debate on costs that are task specific, as generally a contractor’s labour/plant will increase and decrease to match available works and even if they don’t they’ll likely be on site longer if they for example do an extra weeks worth of CE work in the middle. The change to defined cost is evident.

There is more debate over time related item i.e. contractor’s staff. This is partially caused by the fact that a contractor allocates a set amount of staff to a project or perhaps even sections/elements of a project (albeit this fluctuates to some degree), and unless the project is delayed the general assumption is that staff costs won’t increase.

A contractor would have to prove, on the balance of probabilities, that they are likely to incur additional staff costs due to the CE. The likelihood of this differs depending on the facts in my opinion e.g.

If you are working on a small project, with say 1-2 staff allocated full time throughout the project, the likelihood of additional staff allocation/costs is probably not significant especially if there’s a small amount of change.

If you are working on a large project, with 20-30 staff or more, depending on the amount of change, the likelihood of additional staff costs is probably more significant.

I have seen other points brought into the discussion which may have some merit i.e. if the staff work overtime, if the staff are hourly paid rather than salaried, if people who are partially allocated increase their % allocation etc.

Depending on how likely the costs are, the other alternative is to price them as a risk item taking into consideration likelihood.

There has been a lot of debate on this, so expect others have different perspective/considerations.

Seperately, I think the case you referred to is in relation to general damages, so potentially not directly applicable to a compensation event/a case under contract. It’s debatable whether this could be considered in a CE assesment, but may be at a later stage if it progresses to a dispute.

On the first element of your query, it seems unreasonable/inconsistent to deduct staff costs in negative assesments but not apply them in positive assessments (depending on the circumstances). Also the 10% risk allowance seems quite high, but again this is very dependant on the circumstances, it would make sense that this % or at least something would be allowed in negatives as well as positives.

Thank you very much for the reply.

I have to admit, I still don’t see how it can be justified that “on the balance of probabilities” , in a forecasted CE, a PM can refuse to allow an assessment for staff costs.

Having held the position as one of the Contractors one or two staff, I can factually testify that any compensation event which increases the defined cost, requires time to produce a quote, implement the change, manage the work, record the costs and negotiate the final change to the prices.

In my direct experience of both small and large projects, the staff impact is higher on a smaller project.