NEC4 Compensation Events and Early Warnings: The Process, Clause by Clause

It is written for the people who keep an NEC4 project's notices moving: the Project Manager and their team, the Contractor's commercial manager and quantity surveyors, and the document controllers who log every communication. It assumes you know NEC's roles (Client, Project Manager, Supervisor, Contractor) and focuses on the mechanics of change.

It is not a guide to FIDIC, which handles claims through notices with its own periods; see the FIDIC Red Book notices and claims guide for that family. And it covers the ECC, not the other NEC4 contracts, whose clause numbers differ.

Under clause 15.1 the Contractor and the Project Manager each give an early warning, by notifying the other, as soon as either becomes aware of a matter that could increase the total of the Prices, delay Completion, delay meeting a Key Date or impair the performance of the works in use. The Contractor may also warn of other matters that could increase its own costs. Only those two parties can notify an early warning.

The Early Warning Register (defined in 11.2(8)) lists the matters the Contract Data names for inclusion and every matter notified since, each with a description and how its effects are to be avoided or reduced. It replaced NEC3's Risk Register, and NEC3's risk reduction meetings became early warning meetings. The timetable in clause 15.2, as practitioners quote it:

• The Project Manager prepares the first Early Warning Register and issues it to the Contractor within one week of the starting date.
• The Project Manager instructs the Contractor to attend the first early warning meeting within two weeks of the starting date.
• Later meetings are held when either party instructs the other to attend, and in any case at no longer interval than the one in the Contract Data, until Completion of the whole of the works.
• After each meeting the Project Manager revises the register and reissues it within one week.

Source: Battersby (2019), quoting 15.1 and 15.2; GMH Planning; NEC on the enforcement clauses.

1. The Project Manager's own events. When an event arises from the PM or the Supervisor giving an instruction or notification, issuing a certificate or changing an earlier decision, the PM notifies the compensation event at the time of that communication (61.1), and the notification includes the instruction to submit quotations.
2. Everything else. The Contractor notifies any other event it believes is a compensation event, which the PM has not notified (61.3).
3. The eight-week bar. If the Contractor does not notify within eight weeks of becoming aware that the event has happened, the Prices, the Completion Date and the Key Dates are not changed, unless the event arises from one of the PM or Supervisor communications listed above (Fenwick Elliott, quoting the NEC4 text). A compensation event that is not time-barred can still be notified by either party up to the defects date.
4. The PM's reply. Within one week, or a longer period the Contractor agrees for that notification, the PM replies (61.4). NEC4 adds a reason the PM can give for no change: the event was not notified within the contract's timescales.
5. Silence. If the PM does not reply in time, the Contractor may notify that failure. If it continues for a further two weeks, the event is treated as accepted as a compensation event, with an instruction to submit quotations (NEC). The reminder is optional; without it, the PM's failure to reply is itself a compensation event under 60.1(6).

The time bar is as strict as it looks, which is why the exceptions matter. Gowling WLG reports an NEC3 case in the High Court of Northern Ireland where a contractor was held not to be time-barred because the employer should itself have notified the instructions concerned (Gowling WLG). The NEC4 wording of the exception is different from NEC3's, so read it in your own contract.

A quotation states the proposed changes to the Prices and any delay to the Completion Date and Key Dates, with the details of the assessment. If the event changes the programme for the remaining work, it includes the alterations to the Accepted Programme (62.2). NEC's Q&A notes that those are extracts: accepting the quotation does not make them a new Accepted Programme.

• After discussing different ways of dealing with the event, the PM may instruct alternative quotations, and the Contractor may add its own (62.1).
• The Contractor submits within three weeks of the instruction, and the PM replies within two weeks of the submission (62.3). Both periods can be extended by agreement (62.5).
• The PM's reply accepts the quotation, instructs a revised quotation with its reasons, or notifies that it will make its own assessment.
• If the PM does not reply in time, the Contractor may notify the failure; two further weeks without a reply and the quotation is treated as accepted. Where several quotations were submitted, the notice says which one (62.6).
• New in NEC4, the PM can ask for a quotation for a proposed instruction before deciding to give it (65). The Contractor quotes within three weeks; a quotation the PM does not accept is itself a compensation event under 60.1(20).

Source: NEC on PM assessments; NEC on the enforcement clauses; NEC101 Q&A; Battersby (2019).

NEC4 assesses a compensation event by its effect on cost and time, not by the rates in the contract. The change to the Prices is the effect on the actual Defined Cost of work done by the dividing date, the forecast Defined Cost of work not yet done, and the resulting Fee (63.1). The dividing date is the date of the communication for an event arising from a PM or Supervisor communication, and otherwise the date the event was notified. If both parties agree, rates and lump sums can be used instead (63.2).

Delay to the Completion Date is the length of time by which planned Completion becomes later, because of the event, than shown on the Accepted Programme current at the dividing date (63.5). The January 2019 amendment rewrote the third paragraph of 63.5 so the assessment takes account of delay from the event already shown on that programme and of events between its date and the dividing date (NEC amendments, January 2019).

The PM makes its own assessment in four cases (64.1): no quotation in time; the PM decides the quotation is wrongly assessed and does not instruct a revision; the quotation lacks the required programme alterations; or the PM has not accepted the latest programme for one of the reasons the contract allows. With no Accepted Programme, the PM uses its own assessment of the programme for the remaining work (64.2). If the PM does not assess in time, the Contractor may notify, and two further weeks of silence make the Contractor's quotation accepted (64.4). Once implemented, an assessment is not revisited (66.3), except where it rested on a PM assumption that later proves wrong (61.6).

Every delay assessment runs against the Accepted Programme, so the programme clauses are part of the compensation event process. A programme shows, among other things, the starting date, access dates, Key Dates, Completion Date and planned Completion, the order and timing of operations, float and time risk allowances, the dates information is needed, and a statement of how each operation will be done (31.2).

• The PM accepts a programme or gives its reasons for not accepting it within two weeks (31.3). The reasons are limited: the plans are not practicable, information is missing, the plans are unrealistic, or the programme does not comply with the Scope.
• New in NEC4: if the PM does not reply, the Contractor may notify the failure, and one further week of silence makes the programme accepted.
• Revised programmes go in when the PM instructs, when the Contractor chooses, and at no longer interval than the Contract Data states (32.2). NEC4 dropped the requirement to show implemented compensation events; all remaining work is shown, including unimplemented ones.
• Until the Contractor submits a first programme with the required information, the PM retains a quarter of the Price for Work Done to Date (50.5).

Source: Fenwick Elliott, issue 94; Battersby (2019); NEC on the enforcement clauses; GMH Planning.

• Wait and see. Leaving compensation events to the end of the project is the first mistake on NEC's own training list (NEC101).
• An early warning instead of a notification. It starts nothing; the eight weeks keep running.
• Notifying before the event has happened. A future risk is an early warning matter; the eight weeks run from becoming aware that the event has happened.
• The wrong Accepted Programme. Delay is assessed against the programme current at the dividing date, not the latest one.
• No reminder notices. Deemed acceptance under 61.4, 62.6, 64.4 and 31.3 depends on the other party being told of the failure.
• Expecting a quotation to update the programme. The extracts in a quotation do not become the Accepted Programme.
• Poor records. Defined Cost is actual cost: without contemporary records, the assessment becomes an argument.
• NEC3 habits. The register, the meetings, the 61.3 exceptions and the programme's deemed acceptance all changed in NEC4.

Source: NEC101 slides; NEC101 Q&A; NEC on the enforcement clauses.

Run it at the starting date, and again when the team or the contract changes.

• Main Option, secondary Options and Z clauses read for every change to clauses 1, 3 and 6
• Period for reply, early warning meeting interval and revised programme interval copied from the Contract Data
• Communication system in the Scope identified, and the rule for when a communication takes effect agreed internally
• First Early Warning Register issued within one week, first meeting held within two weeks
• Compensation event register with one line per event, its trigger date, notification date and next contractual date
• Every early warning that could become a compensation event also diarised for an eight-week check
• A named person who sends the notices of failure that trigger deemed acceptance
• Accepted Programme versions archived, so the one current at any dividing date can be found
• Defined Cost records coded to each compensation event from the day it is notified
• Weekly register review, reconciled against the communications log