Unlike other standard forms, NEC3 deals with events which entitle the contractor to extensions of time and/or additional payment in a single mechanism – compensation events.
There are two aspects to assessing such events:
1. Impact on prices
Whereas most standard forms value variations using rates and prices set out in the contract, the NEC3 ECC Option A bases valuations on the effect a compensation event has on the actual cost to the contractor of carrying out the work plus an allowance for overheads and profit. For example:
- The Works Information requires floating slab foundations (Activity A). The contractor's lump sum price for completing this activity (including profit and overheads) is set out in the Activity Schedule.
- Before works start on site, the employer replaces floating slab foundations with driven piles (Activity B).
- The impact on prices is assessed as:
- the difference between the forecast Defined Cost (being the actual cost to the contractor of carrying out the work, calculated in accordance with the Shorter Schedule of Cost Components) of Activity B and the forecast Defined Cost of Activity A
- the Fee percentage is added to this difference and the total amount is used to change the prices.
The original lump sum price for Activity A does not enter the assessment.
This approach is designed to avoid windfalls to the employer or contractor if there are anomalies in the way elements of the work have been priced, and disputes regarding the applicability of contract rates.
However, the approach is not perfect:
- Forecasting Defined Cost accurately is challenging. Parties often have to include allowances for risk and/or agree assumptions which the forecast is to be based on to account for this.
- NEC3’s own drafting recognises it will not work in all circumstances, for example, where the time, cost and complexity of calculating Defined Cost may be disproportionate to the value of the compensation event. Parties can agree to use rates and prices to value a compensation event if they wish.
2. Impact on completion date and/or key dates
Delays to the completion date or a key date are assessed as the length of time that, due to the compensation event, completion or (in the case of a key date) planned completion of a condition will occur later than anticipated. This approach will be familiar to users of other standard forms.
The key difference between the NEC3 approach and other standard forms is that the anticipated date of completion or planned completion of a condition is expressly stated to be the date shown in the Accepted Programme. It is therefore crucial that parties keep this document up to date, otherwise there can be real difficulties in assessing the true impact of a delay.
There are also other nuances with the NEC3 approach to bear in mind. For example, if the contractor fails to give early warning of a compensation event, the delay caused by the compensation event is assessed as if the contractor had given early warning. This means the contractor may well receive a shorter extension of time than the actual period of delay it has suffered.
As ever with NEC3 forms, users need to be mindful that procedures differ to equivalent procedures under other standard form construction contracts.
It is important that parties consider and address the practical impactions of these differences from the outset to ensure they are not caught out.