Valuing variations retrospectively

JCT contracts treat claims for loss and expense separately from the valuation of variations. The contractor is only entitled to payment if direct loss and expense has been satisfactorily demonstrated and that no reimbursement would be made by a payment under any other contract provision. More information on this subject can be obtained from the RICS guidance note Ascertaining loss and expense, 1st edition.

There is no separate process in the NEC3 for valuing what the JCT categorises as 'loss and expense'. NEC3 requires the assessment of compensation events to include any delay to the works (if any) and the impact on defined cost associated with any delay (clause 62.2), within a single assessment. Therefore, contractor’s quotations must include all direct and consequential impacts associated with the compensation event, including any additional supervision or other time related costs.

NEC recognises that forecasting impacts not yet encountered needs to reflect any change in the contractor’s exposure to risk. It, therefore, allows the assessment to include 'risk allowances for cost and time' but only for those risks which are contractor’s risks and only where there is 'a significant chance' of those risks occurring (clause 63.6). Clearly where the assessment includes elements of works which have already been completed the impacts should be capable of being assessed without the need to allow for risk.

Exactly how a 'risk allowance' is to be assessed and agreed is not specified. The NEC3 guidance notes state that the amount included for risk should reflect the way risk allowances were allowed in the original tender. The guidance goes on to advise that the risk allowance is greater when the work is uncertain and there is a high chance of the contractor’s risk happening, and vice versa, the allowance is least ‘when the uncertainties are small and when the work is to be done by resources already on site whose output rates can be predicted relatively accurately’.

Where the project manager decides the effects of a compensation event are too uncertain to be forecast reasonably he or she states assumptions that remove that uncertainty. The assessment is then based on these assumptions (clause 61.6). Should any of the assumptions stated by the project manager prove to be incorrect a subsequent compensation event arises.

The contractor may state his or her own assumptions within the quotation but these are never the subject of further compensation event(s). This principle applies equally to cost and delay and is embodied in clause 65.2, which states that ‘the assessment of a compensation event is not revised if a forecast on which it is based is shown by later recorded information to have been wrong’. They can, however, be helpful to the project manager in understanding particular elements of the quotation making his acceptance more likely.

NEC contains an implied obligation on the contractor to mitigate the employer’s loss arising from compensation events, when in clause 63.7 it states that compensation events are assessed on the basis that the contractor reacts competently and promptly to the compensation event and that any defined cost and time due to the event are reasonably incurred. This acts as an incentive on the contractor to control the cost and time impacts to a minimum by allowing the project manager to ignore impacts that should not have been incurred in his or her assessment of compensation events.