NEC Engineering and Construction Contract (ECC) - compensation events webinar

Richard Patterson – Mott MacDonald
…almost the same for PSC and TSC
NEC Engineering &
Construction Contract -
compensation events
Based on ECC3, key
changes in ECC4
For APM 29September 2021

30/09/2021 Mott MacDonald | NEC Programme 2
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30/09/2021 c. Mott MacDonald | NEC risk allocation and management 3
Richard Patterson
BA MBA CEng FICE
Mott MacDonald NEC
Advisory Services
32Years with
Mott MacDonald
25Years with
The NEC
1 Year with NEC as
NEC Consultant
for NEC

30/09/2021 c. Mott MacDonald | NEC compensation events 4

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NEC Contracts
Advisory services

House Keeping
Toilets Phones Fire alarms Drinks

NEC Bitesize
2021
https://mottmac.shar
epoint.com/legal/ind
ustryforms/nec/Pag
es/necsessions.asp
x
Date Session Code
22 January 2021 NEC Contracts - An Introduction - Why are they so different? NEC0001
09 February 2021 NEC - Introduction to the NEC Professional Services Contract (PSC) - pre-
award
NEC0020
01 March 2021 NEC - Introduction to the NEC Professional Services Contract (PSC) - contract
management
NEC0021
30 March 2021 NEC Engineering and Construction Contract (ECC) - Contract strategy (main &
secondary options)
NEC0003
29 April 2021 NEC Engineering and Construction Contract (ECC) - Preparing the tender
documents; tender evaluation
NEC0004
24 May 2021 NEC Engineering and Construction Short Contract (ECSC) NEC0029
22 June 2021 NEC ECC and temporary works NEC0028
14 July 2021 NEC Contracts - Programmes under ECC and PSC NEC0005
17 August 2021 NEC Contracts - The Risk Register/Early Warning Register and risk allocation
and management
NEC0006
13 September 2021 NEC Engineering and Construction Contract (ECC) - compensation events NEC0007
13 October 2021 NEC Engineering and Construction Contract (ECC) -The Supervisor's roles and
responsibilities
NEC0008
08 November 2021 NEC Engineering and Construction Contract (ECC) - Defined Cost, the
Contractor's system and auditing
NEC0009
08 December 2021 NEC and BIM NEC0026

• Pre-award – risk allocation
• Post award – compensation event
management
Plan

But first….why NEC? Why compensation events?
• Client decision to invest in good
management to….
• ….keep better control of their
project

• Main (payment) option A-F determines allocation of
• Quantity risk
• Efficiency risk
• Some secondary options are specifically for risk
allocation – eg:
• X1 Price adjustment for inflation
• X2 Change in law
• But for specific events……
Pre-award - Risk allocation

Compensation event - principle
• The compensation events are
 events which, if they occur, and do not
arise from the Contractor’s fault, entitle
the Contractor to be compensated for
any effect the event has on the Prices,
Key Dates and the Completion Date
 only rights are to change Prices and
Completion Date (63.4 (ECC4 63.6) )
• Key to risk allocation and
management under ECC

• 19 (ECC4, 21) are stated in subclause 60.1
• 3 more are stated in main Options B & D
• Also in secondary Options
• X2, X12.3(6) & (7), X14.2, X15.2, Y2.4
and
• possibly option Z if used to
modify risk profile (ECC3)
ECC compensation events
Where?
• possible ‘assumptions’ stated in
the Works Information

• (1) PM gives an instruction changing
the Works Information (ECC4 Scope)
• (2) The Employer does not allow
access to and use of part of the Site
…. Accepted Programme
• (3) The Employer does not provide
something he is to provide….Accepted
Programme
• (5) Default by Employer or Others
• (12) The Contractor encounters
physical conditions….
• (13) A weather measurement is
recorded…less frequently than
once in ten years
• (14) An event which is an
Employer’s risk stated in this
contract
ECC compensation events
What?
60.1
No ‘claims’; no ‘Variations’ – just compensation events

forecast
outturn
cost
(or ‘period of
contract’ or
‘requirements’)
base
risk
time
feasibility, outline design, detailed design, construction
award
of
contract
client’s risk
Contractor’s risk
‘total of the Prices’
Need to ensure that compensation events in contract
reflect those risks that client wishes to retain
‘shared’ ‘project
risk’ if option
C,D,E,F
Risk allocation

18
30/09/2021 c. Mott MacDonald | NEC compensation events
Client’s risks under ECC
18
compensation events
under the contract
(Cl.60.1 + certain
main and secondary
Options incl. Option Z)
of which some
(Cl 60.1(14)) are
‘Employer’s risks’
stated in the contract
(Clause 80.1
+ Contract Data)
processes for dealing with time
and cost effects (section 6)
Also:
• indemnity (ECC3 83.1;
(ECC4 82.2));
• Contractor no need to insure
(ECC3 84.2 (ECC4 83.3))
Employer’s risks in ECC and TSC – not PSC
Risks that
the client
wishes to
retain
should, in
the
contract,
be made:

Risk Register
• In Contract Data - from both
Employer (Part 1) and Contractor
(Part 2):
• The following matters will be
included in the Risk Register:
………………………

• The Risk Register is a
register of
• the risks which are listed in
the Contract Data and
• the risks which the Project
Manager or the Contractor
has notified as an early
warning matter
• So the Risk Register is a
post-contract risk
management tool and
NOT a place for risk
allocation
Risk Register (Cl 11.2 (14))

• Why were they used?
• Should a ‘provisional
programme’ allowance to go
with it?
• ECC requirement is to
construct in accordance with
the Works Information
• ‘provisional sum’ is not used
• Instead state best
assumptions in Works
Information about what is
required
• When assumptions need
to be changed, then
change the Works
Information….
• ….which will be a
compensation event
What happened to provisional sums?

NEC
NEC is a tool to manage
risk and avoid disputes
Management, Procurement, and Law 2009, No 4
https://www.neccontract.com/About-NEC/News-and-Media/NEC-and-
Risk-Management-with-Richard-Patterson

Post award – compensation
event management

change
management
means
compensation
events
poor Works Info / Scope
means
stressed Project
Manager !
It’s all about change

Compensation events – notify; quotation
• Basic procedure
• PM notifies (61.1) and instructs Contractor
to submit quotation(s) (ECC4 61.2) (or
Contractor notifies (61.3)
• in which case PM has a week to say or
‘no’ or ‘yes’ and instruct quotation
(61.4)
• Contractor submits within 3 weeks (62.3)
• PM replies (62.3) within 2 weeks. Reply is
• instruction to submit revised quotation
• acceptance of a quotation
• cancellation of proposed instruction (ECC3)
• makes own assessment

Contract
Date
Completion
Date
completion
date
planned
Completion
date of
Completion
take over
< 2 wks
defects
date
starting
date
All dates in italics identified in
Contract Data
If Option X5, Sectional Completion, is included,
references relevant to Completion and Completion Date
apply also to each section.
date when
contract
came into
existence
Contractor
has risks
(81.1) and
so provides
insurances
(84.2, 85.1)
Employer
/ Client
provides
access to
(parts of)
Site
(33.1)
key
date(s)
Key Date(s)
(optional)
by which
stated
conditions
to be met
25.3
Required date to achieve
Completion (as modified by
compensation events and
possibly acceleration and
acceptance of Defects)
the date used to assess the effect
of compensation events (63.3
(ECC4 63.5))
in Part 1 or 2 of Contract Data.
Required date to achieve
Completion as at Contract Date
actual date Completion achieved
(11.2(2), certified (30.2))
Employer / Client takes
over: risk transfer (80.1)
last date to notify Defects
access
date (s)
Not in PSC
‘Completion’ is a
state, not a date
26
Dates in ECC……and PSC

• Delay to the Completion Date
(ECC3 - 63.3; ECC4 – 63.5)
• assessed as the length of time
that, due to the compensation
event, planned Completion is
later than planned Completion as
shown on the Accepted
Programme (ECC4 ‘current at the
dividing date.)
• But show effect of CE on
remaining work – update
Accepted Programme first (62.2)
• Quotations to include
for risk (ECC3 -63.6;
ECC4 - 63.8) and not
revised if forecasts
were wrong (ECC3 -
65.2)
Compensation events
Assessment; time

30/09/2021
c. Mott MacDonald | NEC compensation events
28
• Change to the Prices (63.1)
• the actual Defined Cost of the work already done,
• the forecast Defined Cost * of the work not yet done and
• the resulting Fee
Compensation events
assessment; money
• Quotations to include for risk (63.6) and not revised if
forecasts were wrong (65.2)
Time Charge, not Defined Cost, for PSC
• Not the BoQ or Activity Schedule
• But ‘rates and lump sums’ may be used by agreement (63.14 (A,C,E,F),
63.13 (B,D)) (Core clause 63.2 in ECC4)

29
A quotation for a compensation event
change to the Prices (63.1)
(actual Defined Cost + forecast Defined Cost) +
Fee
delay to Completion Date (63.3 (ECC4 63.5))
• A ‘mark up’ to Accepted Programme at
‘dividing date’
• Update to show remaining work (62.2)
• Then show effect of compensation event
62.2
‘dividing date’ is
• explicit in ECC 4
• explicit for cost in
ECC3 63.1
• date of instruction by
PM or notification of
CE by Contractor
• A or C: ‘In the form of
change to Activity
Schedule’ (63.12)
• B or D : ‘in the form of
change to BoQ’ (63.13)

Cost of preparing quotations
• Expressly excluded under Options A and B
• (Defined Cost (ECC3 11.2(22))
• Under C,D,E,F
• Costs may be paid
• But to increase the ‘Prices’
• Contractor (ECC) will have to show
how it has increased the ‘Defined
Cost’
• Consultant (PSC) will have to show
how it has increased the ‘Time
Charge’

31
Project Manager’s assumptions
65.2
(ECC4
66.3)
Implemented compensation
events are not revisited
63.6
(ECC4
66.8)
The compensation event
assessment is to include for
anything at the Contractor’s risk
61.6
The Project Manager may state
‘PM assumptions’ to be used to
take risk out of the assessment
60.1
(17)
If the Project Manager ‘corrects’
the assessment, there is another
compensation event

Compensation events – Project Manager’s flexibility
ECC3 61.2 (ECC4 65) – ‘quotation for a proposed instruction’
61.6 Project Manager’s assumptions
62.1 quotations for ‘alternative ways of dealing with the event’
different technical solutions
with and without delay to the Completion Date
with and without Project Manager’s assumptions
32
ECC3 63.14 (A,C,E.F); 63.13 (B,D) (ECC4 63.2)
‘rates and prices’ instead of Defined Cost

Sanctions re compensation events
33
On Contractor
61.3 Notify compensation events
within 8 weeks (Unless PM required
to notify (61.1))
64.1 PM assesses if
• Contractor out of time
• Not assessing ‘correctly’
• Has not submitted a programme
or alterations to programme as
required
• PM has not accepted
Contractor’s latest programme
On Project Manager
61.4 Contractor can prompt if no
response to notification. Treated as
accepted if two more weeks of
silence
62.6 Contractor can prompt if no
response to quotation. Treated as
accepted if two more weeks of
silence
64.4 Contractor can prompt if PM has
not assessed when they say they will.
After two more weeks of silence
Contractor’s assessment is accepted

ECC compensation events – key clauses – ECC4
Eg change to Works Information Eg physical condition
Project Manager Contractor C
14.3
61.1 notify
3 weeks
62.3 quotation
2 weeks
62.3 reply
61.3 notify
PM
1 week
61.4
decide
revise
62.4 reasons
no
instruct
quotation
< 8 weeks
aware of event
66.1 implemented
accept
PM assesment (64.1)
64.3 notify
62.2 requirements for quotation
63.1 Prices
63.5 delay to Completion?
63.5 no early warning?
63.8 risk
63.2 rates and prices?
63.14 impact on AS (A or C)
63.10 ambiguity
62.1 alternative quotations?
61.6 assumptions?
61.2 fault ? effect on time or cost?
60.1 (1) ie which event?
61.2 instruct quotation
60.1(12) ie which event?
• No response form PM after
allowed period?
• C may notify failure to
respond
• PM has another 2 weeks.
• No response?
• ‘Treated as accepted
30/09/2021
61.4
62.6
3 weeks
64.4

ECC compensation events – key clauses – ECC3
Eg change to Works Information Eg physical condition
Project Manager Contractor C
14.3
61.1 notify & instruct quotation
3 weeks
62.3 quotation
2 weeks
62.3 reply
61.3 notify
PM
1 week
61.4
decide
revise
62.4 reasons
no
instruct
quotation
< 8 weeks
aware of event
65.1 implemented
accept
PM assesment (64.1)
64.3 notify
62.2 programme
63.1 Prices
63.3 delay to Completion?
63.6 risk
63.13/14 rates and prices?
63.15 SSCC? (C or D)
63.12 impact on AS (A or C)
63.8 ambiguity
62.1 alternative quotations?
61.6 assumptions?
61.1 fault
60.1 (1) ie which event? 60.1(12) ie which event?
• No response form PM after
allowed period?
• C may notify failure to
respond
• PM has another 2 weeks.
• No response?
• ‘Treated as accepted
30/09/2021
61.4
62.6
3 weeks
64.4

• Need to agree you want
to manage them… and
monitor progress
• Keep to clear processes
and timescales in contract
• The team needs:
• Accepted Programme and
programming skills
• QSs that understand cost
and risk and the
Contractor’s cost system
• An agreed format for
quotations
• A way of working
with Contractor
for acceptable
quotations
• Negotiation skills –
and empowerment
• Use Project
Manager’s
assumptions (61.6)
• Roll up the little ones?
You need to actively manage compensation events from day 1

• The will and resources to
manage compensation
events
• A collaborative approach
• Contractor and PM staff
working side by side
• Joint systems
• Routine monitoring of
progress (NEC ‘health
checks’)
• Routine (weekly) CE
meetings
• To keep to timescales –
ASAP!
For effective compensation management you will need….

• Agree the sub-clause
• Be clear on the desired
outcome
• eg clear changes to Works
Information
• Discuss alternatives (62.1) for
‘alternative ways’
• Technical alternatives
• With/without delay to
Completion Date
• With/without PM assumptions
• Discuss risks and so any
possible Project Manager
assumptions (61.6)
• Changes to Contractor’s
working?
• Change to Completion
Date?
• Change to Defined Cost?
• Review before formal
submission
For each compensation event

Prices, £
time
at tender
completion date
changed Prices and
Completion Date due to
compensation events
PWDD
No gap here if A or B
‘Incremental certainty?’
30/09/2021

40
Separate processes
early
warnings
16
may lead to…
may
lead
to
a….
compensation
events
6
other
events
programme
3
show on…
change to
Works
Information /
Scope
14.3
changes
corrections
used in assessment of
(62.2, 63.3 (ECC4 63.5))
30/09/2021 40
delays to Completion Date shown on next

NEC Health Checks
– How well are you
doing?
• Date of and days since
last Accepted programme
• Monthly and cumulative
number of early warnings
raised and outstanding
• Date of and days since
last update to Risk
Register
• Cumulative number and value of CE
quotations
• Cumulative number and value of CEs
implemented

Guidance
"Mott MacDonald - NEC - Good practise in
managing compensation events - Rev A.pdf"
can be accessed via the PPCM Practice
site/NEC
https://gmhplanning.co.uk/wp-
content/uploads/2013/07/ECC-Compensation-
Event-Management-Good-Practice-LinkedIn-
Conference-2013.pdf
’

• NEC is different
• Culture and systems
• Early warning and sort change NOW
• Programming, forecasting, negotiation –
project management!
• Collaboration
So what?

30/09/2021 Mott MacDonald | NEC articles 45
Some of our NEC articles, papers and books
Year Title Where published
2021Using NEC outside of the UK - an update Contracting Excellence Journal, World Commerce and Contracting
https://journal.iaccm.com/contracting-excellence-journal/using-nec-outside-of-the-
uk-an-update
2021Price lists in NEC short contract: how clients can simply the process NEC Newsletter, July 2021
2021Mott MacDonald's 'Little Book' of NEC APM website June 2021
https://www.apm.org.uk/v2/media/mmsnvhez/mott-macdonalds-little-book-of-nec-
20201105.pdf
2021NEC4 PSC: understanding the new payment regime NEC website April 2021
2021Using NEC Outside the UK: an update NEC Newsletter , March 2021
2020Three years on it is time for clients to switch from NEC3 to NEC4 NEC Newsletter , Sept 2020
2020Helping NEC clients decide the best way to get a first programme in place NEC Newsletter , Sept 2020
2020NEC family of contracts pitches clearer, more flexible project management PMI UK Chapter 'Leader' magazine (article a copy of that previously published by
IACCM)

30/09/2021 Mott MacDonald | NEC articles 46
2020NEC contracts: best practice tools for risk allocation and management NEC website May 2020
2020The all important F-words in the NEC NEC Newsletter , March 2020
2020ECC Risk allocation and compensation events NEC website, March 2020
2020How to ensure that bid-winning supply chains actually get used NEC Newsletter, January 2020
2019Project overruns? It’s time to use the F-word (and a proper contract) Mott MacDonald website
2019Links between key NEC processes NEC Newsletter, May 2019
2018Building time-related charges into NEC lump-sum and short contracts NEC Newsletter, November 2018
2018NEC Early warnings - the need for education NEC Newsletter, November 2018
2018NEC contracts – use them anywhere for any industry! - including how NEC covers
PMI's ideas on procurement and project management
IACCM's Contracting Excellence Journal, 18 June 2018
2018Design of Equipment in the ECC NEC Newsletter, 91, May 2018
2018NEC3 to NEC4 – evolution, not revolution; some fixes and some good ideas! In-procurement Magazine JanFeb 2018
2018NEC3 to NEC4 – evolution, not revolution; some fixes and some good ideas! ICE's Management Procurement and Law, December 2017 and on NEC website
from 26 Feb 2018
2018NEC Contracts - are they right for you? IACCM Contracting Excellence Journal, Feb 2018
2017NEC Engineering and Construction Contract (ECC): the necessary interaction
between the Supervisor and the Project Manager
Construction Law Quarterly / NEC website
2017When is task not a Task - in the NEC TSC contract NEC Newsletter Sep 2017, NEC website
2017NEC: how to require something is done by a certain date NEC Newsletter No 86, July 2017, NEC website
2017New NEC4 Design, Build and Operate Contract NEC website
2016How to procure a series of work packages using NEC NEC website
2016NEC contracts are ideal to support project management as set out in the PMI’s
‘Project Management Body of Knowledge’ (PMBOK®)
Linked-in

30/09/2021 Mott MacDonald | Prep of tender docs 47
2016How to procure a series of work packages using NEC NEC website
2016NEC contracts are ideal to support project management as set out in the PMI’s ‘Project
Management Body of Knowledge’ (PMBOK®)
Linked-in
2016Submission of deliverables under the PSC NEC Newsletter No 80, September 2016
2016Enforcement Clauses and Links in the ECC NEC Newsletter No 79, July 2016
2016Can we use the NEC as the basis for a standard international PPP contract? ACE's email newsletter, Infrastructure Intelligence
2016NEC contracts - good for hydropower? NEC Newsletter No 76, January 2016
2015NEC contracts - good for hydropower? Proceedings Hydro 2015, Bordeaux
2015Using NEC to incentivise
lowest whole-life cost
NEC Newsletter No 75, November 2015
2015NEC3 Compared and Contrasted, Second Edition - chapter on NEC vs IChemE
contracts
ICE publishing
2015NEC3 - the Role of the Supervisor ICE publishing
2015NEC for design build finance and operate (DBFO) contracts – taking best practice
procurement into PPPs
ICE’s Management, Procurement and Law, November 2015, and winner of the
Parkman medal for best MPL paper, 2015
2015NEC contracts and the CDM Regulations 2015 ICE’s Management, Procurement and Law, 168, June 2015
2015NEC contracts tick IACCM’s ‘top ten’ box NEC website
2015Making the most of your early warnings – sorting out your TQs and RFIs…. and what
about the opportunities?
NEC website
2015NEC contracts and the Construction (Design and Management) Regulations 2015 NEC website
2015NEC contracts and the CDM Regulations 2015 NEC Newsletter No 72, May 2015
2014Getting your project set
up for ECC
NEC Newsletter No 70, January 2015 (published December 2014)
2014Working with NEC Contracts (in landscape architecture) Landscape (Magazine of the Landscape Institute,. Winter 2014

2014ECC Works Information provided by the Contractor - who takes the risk? NEC Newsletter No 69, October 2014
2014Understanding expenses
in a PSC
NEC Newsletter No 67, July 2014
2014The importance of quality works information and site information in ECC projects NEC Newsletter No 66, April 2014
2013NEC for DBO Proceedings of the ICE - Management, Procurement and Law, Volume 166,
Issue 5, May 2013
2013How to prepare the Scope for an NEC PSC Contract By NEC as part of NEC April 2013
2012Managing Reality - the ECC Manuals ICE publishing
2012NEC3: A User's Guide ICE publishing
2011NEC3: contracts for partnering NEC Newsletter No 56, October 2011
2010Ground Conditions and Risk Allocation: Combining the NEC Engineering and
Construction Contract (ECC) and the Geotechnical Baseline Report (GBR)
Tunnels and Tunnelling Magazine, Dec 2010
20106 key links in the ECC NEC Newsletter No 51, July 2010
2010NEC contracts as an enabler to Partnering May 2010 edition of 'The Partner', which is ‘the annual publication of PSL, which is a
CBI and BIS initiative to promote collaborative business relationships
www.pslcbi.com '
2009Using NEC contracts to manage risk and avoid disputes Proceedings of the ICE - Management, Procurement and Law, 2009, No 4.
2009Use of NEC in legal jurisdictions other than English law NEC Newsletter, No,47, July 2009
2009NEC – A real opportunity for the Clerk of Works Site Recorder, Magazine of the Institute of Clerks of Works
2007NEC and Risk Management NEC Newsletter No 40, Oct 2007
2005NEC Managing Reality: Introduction to the Engineering and Construction
Contract. 5 volumes
ICE publishing
2007Dealing with
contingencies - what happened to the 'Provisional Sum'
NEC Newsletter No 40, Oct 2007
2007NEC3 key dates – more risk on the contractor NEC Newsletter No 40, Oct 2007
2001Using NEC for multiple site, undefined contracts ICE’s ‘Civil Engineering’, May 2001
2000NEC and PFI first for Leeds Heathcare NEC Newsletter No 14, July 2000

NEC Manuals
• NEC Managing Reality
– Five volumes covering all aspects of
NEC (ECC)
– 2nd Edition 2013
• Barry Trebes (previously Mott
MacDonald) and Bronwyn Mitchell
• Thomas Telford publishing

• NEC3 A User’s Guide
• Jon Broome
• ice publishing
• Published March 2012
NEC3 A User’s Guide

www.neccontract.com
Mott MacDonald NEC Contract Advisory
Services
www.mottmac.com
richard.patterson@mottmac.com
+44 (0) 1223 463 606
Further Information

A project risk register,
the contract, and the ECC Risk Register
Description
of the risk
Likelihood
Impact
(time)
Impact
(cost)
Owner
Cost
allowance Expiry
date
Actions to
avoid or
reduce the risk
Description of
risk
Likelihood (%) Impact (time) Impact (cost) ‘Owner’ Cost allowance Predicted expiry
date
Actual expiry
date
Actions to avoid
or reduce the
risk
If ‘to be talked about’ in post award ‘risk reduction
meetings’, then include in CD1 in ‘the following
matters will be included in the Risk Register’.
‘Bidder’ can add more in CD2
Contractor required to do?
If so, then in
Works Information
At clients risk?
Include as
- additional ‘compensation event’ (option Z)
- additional ‘E’s risk’ in CD1 or
- cover as an assumption in the Works Information
Client’s risk? – overall amount
included in client’s contingency
outside Prices
Contractor’s risk? – overall
amount included in the ‘Prices’
the contract
Included, after award, as the
ECC Risk Register
Description
of the risk
Actions to
avoid or
reduce the risk

A project risk register and the Risk Register
Compensation events
under the contract
(CI.60.1 + certain main and
secondary Options incl.
Option Z)
Some project level risks may
make it to Contract Data part 1 or
2 and so to ECC Risk Register
All early warnings go to ECC Risk
Register – some may make it to
project risk register, which will
have its own entries
Description
of the risk
Actions to
avoid or
reduce the
risk

• The (ECC) PM updates the Risk Register (RR) and may also be
the client’s pm who manages the (project) risk register (prr)!
• RR has a subset of the columns of the prr
• RR may have risks (rows) that do not merit going on the prr and
• prr many have higher level project risks (rows) that do not belong
on the RR
• Can we manage this as one database / spreadsheet?
• Need to keep the ECC Risk Register simple and used
A project risk register and Risk Register ECC4:
‘Risk Register’
is now the
‘Early Warning Register’

NEC Engineering and Construction Contract (ECC) - compensation events webinar

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