What is a change?

The NEC3 standard form uses the term ‘compensation event’ when referring to sources of change that are an employer’s risk. The majority of these events are identified in clause 60.1 and are more wide ranging than variations in the JCT contracts they include:

• a change to the works information (clause 60.1(1));
• the employer failing to give the contractor access to the site on time (clause 60.1(2));
• a failure by the employer to provide something that it had a duty to provide ‘by the date for providing it shown on the accepted programme (clause 60.1(3));
• a failure by the project manager or the supervisor to ‘reply to a communication from the Contractor within the period required by this Contract’ (clause 60.1(6));
• the project manager withholding 'an acceptance' for a reason not stated in the contract (clause 60.1(9));
• the supervisor issuing an instruction to search for a defect, when no defect is subsequently discovered (clause 60.1(10));
• the contractor encountering unforeseen physical conditions on the site (clause 60.1(12));
• a weather event that on average occurs less frequently than once every 10 years (clause 60.1(13));
• the project manager corrects an assumption he or she previously stated about a compensation event (clause 60.1(17));
• a breach of contract by the employer (clause 60.1(18)); and
• an unforeseen event that is not one of the other compensation events and prevents the contractor completing the works or completing them by the date he or she planned to complete them, as shown on the accepted programme (clause 60.1(19)).

Therefor, it is important, regardless of the form of contract, to distinguish between changes that generate a process of valuation or assessment from those that don’t.

Valuing variations compared to assessing compensation events

The processes for valuing variations under the JCT forms focus on cost and in particular adjustments to the contract sum that has a direct effect on the amount the contractor receives in payment for completing the works.  Time impacts of variations are generally considered separately and more globally, via claims for loss and expense.

The assessment of compensation events under the NEC form considers cost and time in a single process. Each main option allocates commercial risk in a different way and because of this the assessment of compensation events will have different effects on the amounts the contractor receives in payment. Adjustment to the prices in lump sum and cost reimbursable based options has a direct effect while the effect on target-based options will be determined through the application of the contractor’s share calculated using an adjusted target.

Because the JCT process leaves the consideration of any delay impacts to other processes the need for the valuation of a variation to be completed at the time of the event is not treated as critical to the management of the works. Whatever process is used for valuing change it should not obstruct the contractor’s ability to progress the works.

The management of NEC contracts relies heavily on the use of the contractor’s programme. This is achieved through the accepted programme process, which requires the contractor to submit an up-to-date programme at regular intervals throughout the contract. The accepted programme is used by the contractor to manage the works and by the project manager to monitor the contractor’s progress. It also records details of when the contractor requires the project manager or employer to provide things such as:

• access to the site;
• information the contractor will need to complete the works;
• acceptance of contractor’s design; and
• items of plant or materials to be provided by the employer.

If a programme is to remain current and up-to-date it should include the effect of change. The processes for assessing compensation events are to be completed in specific timescales, which can be challenging for complex changes. The purpose of applying these timescales is to determine the impact of compensation events in a timely manner thereby allowing each party to understand their commercial position and allow maximum opportunity to apply mitigation measures, where appropriate. This timely assessment actively encourages the use of forecasts when assessing the impacts on cost and time. Such forecasts may only be achieved by applying assumptions. NEC recognises this and allocates assumption risk to either the employer, through the use of project manager stated assumptions, or the contractor.