TheNew Engineering Contract was launched in 1991. It has outshone long-establishedcivil engineering works contracts to become the top standard for majorconstruction projects in the United Kingdom. It was developed as amultidisciplinary contract to assist good management practice. It bearssimplicity, clarity and flexibility. NEC3 is the third edition that waslaunched in 2005.Compensationevents are NEC3 terminology for variations, loss and expense and extensions oftime; a single assessment that deals with the entire effect of an event on timeand money.

Whilst the name suggests this always results in somethingmore for the Contractor (a compensation), this is not always the case (Evans, Steven, 2013).Compensation events create circumstances where either the scope of the contractor other happenings requires the contractor to do additional work that theywere not originally contracted to do. As a result, the contractor incurs costsand /or time not originally forecast through the implementation of a ProjectManager’s Instruction.1.      CRITICALOPINIONS AND THEORIES RELATING TO COMPENSATION EVENTS                   i.           Recovery ofdefined costDefined cost includes only amountscalculated using rates and percentages stipulated in the contract data andother amounts at current market or competitively tendered prices withdeductions for all discounts, rebates and taxes which will be recovered.

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Allother Contractor’s costs not included in the defined cost are assumed to beincluded in the fee. The fee is the sum of the amounts that are calculated byapplying the subcontracted fee percentage to the defined cost of subcontractedwork and the direct fee percentage to the defined cost of other work. In a contract, the contractor isreimbursed the actual costs they incur in carrying out the works plus anadditional fee to cover the contractor’s costs, overheads and profits. Thesetwo components entail a cost of a cost reimbursable contract. The actual costsare calculated on the Contractor’s accounts and records, rather than apre-determined rate or price. On the contrary, all costs cannot be accuratelydetermined on a project specific basis, some are incurred due to theContractor’s inefficiency, and some are unrecoverable under the contract. It isfrom this argument that the costs that can be recovered by the contractor arecalled defined costs while the costs that cannot be recovered are described asthe disallowed cost.

In a broader sense, defined cost is made up of thepayments due to subcontractors and the cost of components for other works likeequipment, people, etc, minus the disallowed cost. Charges arising from compensationevents form one of the defined cost component criteria. The others includepeople directly employed to carry out the works; equipment provided and used bythe contractor; plant and materials intended for use and included in the works;manufacture and design of items needed for the works; design costs, andinsurance.                 ii.           Costs of defectsand the philosophy of Target cost contractsTargetcosts are generally associated with cost-reimbursable contracts.

Theyintroduce a mechanism enabling the contractor, and sometimes the consultantteam, to share in the benefits of cost savings, but also to bear someof the client’s cost when there are cost overruns.Contracting the contractor and the consultant team ona target cost basis can be an effective way of ensuring goodcollaboration.The targetcost is set early in the project, and then cost savings orover-runs are shared based on an agreed formula. The aim is to provide afinancial incentive encouraging cost control, rather than to penalize.Bonus and penalty payments are usually capped to prevent over-zealous oradversarial behaviour.Targetcosts might be set for the overall project, or for specific elements of theworks.

Agreeing the target cost requires that the client hassufficient knowledge and experience to be able to accurately estimate thelikely cost of the works and to negotiate effectively with the contractorand sometimes the consultant team.Examplesof target cost contracts include the New Engineering Contract (NEC)Engineering and Construction Contracts Option C: Target contract with activityschedule and Option D: Target contract with bill ofquantities (Anon., 2016).               iii.

           Early warningEarly warning procedures arecontained in clause 16 of the NEC3. The contractor is expected to give theproject manager warning of relevant matters. A relevant matter is anything thatcould increase the total cost, delay the completion date or distort theperformance of the finished works. The contractor and project manager are thenrequired to attend a meeting specifically for the early warning issue if one orthe other party request it. The purpose of such a meeting is to ensurecooperation and discussion on how to avoid or solve the challenge at hand inthe most efficient manner. It is important to note other parties might beinvited to the early warning meeting (Goud, 2007). The maindistinction between an early warning system and a compensation event is earlywarning deals with events that have not yet occurred but have high chance oftaking place while compensation events are for circumstances that have alreadyhappened.

Both the Contractor and ProjectManager have a responsibility of issuing early warnings as soon as eitherbecomes aware of any matter that could delay the project or key deadlines,increase overall costs or compromise quality.A contractor may receive compensationfor addressing issues raised through early warning. If the contractor fails togive a required early warning and a compensation event then occurs, the clausegives the Project Manager the opportunity to assess the compensation event asif the Contractor had given an early warning. This enables the Project Managerto consider the mitigation measures that could otherwise have been taken, as itmay be possible that an early warning could have allowed actions to be takenwhich would have reduced costs and/or saved time. The Project Manager iseffectively allowed the benefit of hindsight when carrying out their assessmentof delay and extra cost, reducing the Contractor’s entitlement(compensation) (Lenehan, 2014).               iv.           Risk ManagementTheoryNEC simplifies management of risk.

The full list of compensation events is set out clearly and the facility existsto add more options if necessary. Each risk now takes cost and time effectsinto consideration. Of higher importance is that cost and time are valued andadjusted collectively instead of being treated in isolation (McGowan, 1992).Compensation events form one of threepillars on which unexpected risk allocations are made. The other two includerisk allocation by insurance and by termination.

While the term ‘unexpected’ isnot with reference to any class of compensation events occurring but rather thelikelihood of an individual compensation event taking place in the facts of agiven case. NEC drafters recognized this totally with the statement, forexample, with regard to the first compensation event that there may be reasonsfor hanging the works information (McInnis, 2001)                 v.           Time RiskAllowance and FloatAll construction contracts havestart and end dates because a degree of certainty is required by both parties(clientand contractor). As a consequence of this, construction disputes invariably involveissues to do with time.

Extension of time claims self-evidently involve time, asdo claims for liquidated damages. Similarly, prolongation costs claims, lossand expense claims and disruption claims are all fundamentally time related. Therefore,the effective management of time is crucial to construction and is at the heartof many construction contracts. The first step is to identify any risks thatare likely to delay or disrupt the works. Once these risks have beenidentified, it is essential that the design allows for the work sequenceslikely to be disrupted and delayed by foreseeable events to be separated intoparallel, rather than sequential paths, so that they can be dealt withaccordingly.

A Time Model could be used for the project, to measure the projectagainst the progress and should be something that can be improved upon as timechanges. A practical achievable strategy for dealing with intervening eventsduring the design, procurement and construction process must be in place at alltimes. It is essential to monitor progress and update the programme; this shouldcater for any changes, whether scheduled or due to unforeseen circumstances toenable the project stay on track (Kennedys Law LLP, 2013). 2.      POTENTIALAPPROPRIATE RESEARCH METHODSTechniques used to analyze delay arediscussed below.

They can either be prospective or retrospective. Prospectivetechniques predict the likely impact of the delay on the progress of the works.Retrospective methods demonstrate the actual impact of the delay on the project.The latter can only be used after the works have been completed or after theimpact of the delay event has stopped. Prospective analysis can be used bothbefore and after the delay effect has occurred.

i.                   As-planned vAs-builtThis is a retrospective methodthat involves a simple comparison of the contractor’s planned programme and howit purposed to implement the work plan with the actual events. This is done bydrawing bars and/or lines on the planned programme to show when the activitiesactually started and finished. The argument put forward when using thistechnique is that the difference between the two programmes affirms entitlementto an extension of time. This technique requires the contractor’s plannedprogramme and good as-built records to show when work was done.

Since it is asimple graphical comparison, the main advantage is there is no need to have aproperly logic linked programme or to use planning software. Other advantages itoffers are that it is quick and simple to prepare and it is easily understood.ii.                 ImpactedAs-plannedThis is a prospective form ofanalysis. It is the most commonly technique contractors use in claims forextensions of time.

It involves inserting activities and/or constraints torepresent periods of excusable delay into the contractor’s planned programme.The periods of delay are logic linked to activities in the programme todetermine the impact on progress and completion. The argument used with thismethod is that the entitlement to an extension of time is the differencebetween the As-Planned programme and the Impacted As-Planned programme.

ImpactedAs-planned technique heavily depends on having a good baseline programme thataccurately reflects the intended plan and steps to be followed duringconstruction. It does not require as-built records but where possible it isgood practice to cross check the results against as-built turning points. It ishighly preferred by contractors because it is relatively quick and simple toperform, easily understood and often gives results highly to the contractor’sfavour.

For very simple claims for extensions of time, this approach works well.However, where the circumstances are more complex, such as where there aremultiple causes of delay with wide ranging impact, this technique may fail becauseit takes no account of the progress of the works, contractor’s own delays and adjustmentsin levels of resource (Larkin, 2008).3.      PERSONALFINDINGSThe NEC3 contract is easy to use andunderstand as a result of simple language and as a tool for contractmanagement. The idea that risks are managed pro-actively and identified as partof the contract, rather than battled out afterwards makes a lot of sense andappeals to stakeholders in the execution of projects.However, it carries many hiddentraps.

The simple language used to draft it creates ambiguity, particularly asmuch as the rest of law and the legal system operate in a different style.Another trap is timing. The contract defines precise time limits forcommunication and responses by both parties, especially when dealing with theassessment of compensation events. Prescribed time periods instruct contractorswhen to notify compensation events and project managers have to reply promptlyto notifications and quotations. Failure to reply within the allocated timecarries express sanctions within the NEC. Such provisions are drafted to enableparties agree the cost and time effect of compensation events in a prompt andeffective manner. 4.

      CHALLENGESORGANIZATIONS FACE IN DELIVERING A SUCCESSFUL PROJECT WHILE TRYING TOADMINISTER A CONTRACT IN RELATION TO COMPENSATION EVENTSi.                   Undefined goalsGoals that are not clearly definedbring can cause harm to the project and teams handling it, especially whenupper management cannot collectively decide on or support such goals. Mostorganizations have more opportunities and initiatives than they can ever hopeto implement. Many project managers are given more than enough projects thatthey cannot realistically manage them to completion on time and on budget. Somemore experienced ones may push back and inform the senior management that theycannot effectively complete the tasks but out of fear, mostly of losing theirjobs, most struggle with the huge load (West, n.d.). Amid all this work,a project manager may incorrectly assess compensation events of any particular project(s).

The contractor would point out of the wrong assessment and the project manager wouldbe forced to reopen the compensation event and create a mechanism to pay thecontractor his entitlement or choose to face formal adjudication as specifiedin the contract.ii.                 Scope ChangesScope refers to the projectparameters. Scope changes occurs when the project management allows the scopeto extend beyond originally set goals. New features are added to productdesigns already approved. Stakeholders and project team members may ask forchanges to a project.

It takes a strong project manager to assess, decide on andimplement each request. Under clause 60.1, an instruction issued by theemployer which changes the scope automatically translates to a compensation event.Scope changes can give rise to scopecreeps. Scope creep refers to adding features and functionality withoutaddressing the effects on time and available resources. It is a negativeoccurrence that has to be avoided.

Scope creep creates a large number ofcompensation events. Good management would reduce occurrence of such.iii.

               Gaps incommunicationThis mostly occurs after a projecthas taken off. One common issue would be lack of a centralized system to locateand view project history since communication is mostly done through emails andresides in individuals’ email boxes. This creates a problem in case a newresource joins the project and cannot be directed to a reference point in acentralized data location to enable them acquaint themselves with progressmade.One common mistake projectmanagers do is giving an early warning and on a later date, say that this aswell comprised notification of a compensation event. Early warnings areindependent, distinct items and hence compensation events and early warningsshouldn’t be notified within one communication. Another mistake can be seen inmaking changes to works specifications where project managers give instructionsunder clause 14.

3. This is a compensation event in almost all situations andrequires project manager’s instructions for forwarding of quotations. From thissimple change, there are three separate communications needed to be done:instruction under clause 14.3 changing works details; notification under clause61.1 of the compensation event; and instruction under clause 61.1 forquotations to be presented.

It is rare to see this being followed up inprojects, possibly because it may take long to write three letters or fill inthree forms. This becomes a challenge especially when a system to notify allparties of communications made does not exist. The bigger problem arises whenall communication is include within corporate communication models e.gnotifications contained in minutes, progress reports, etc. All these don’t meetthe standard for communication under clause 13.7 of the NEC3 ECC (Woodrow, 2015).iv.               Improper RiskManagementHistorically, using highwayconstruction projects in UK as an example, there have been disputes in agreeingwith final accounts in relation to the total costs and most importantly, inassessing time in relation to change.

Common occurrences pit the contractorreaching the end of a project and in case of a shortfall between actual costsincurred and the sum to be paid, a ‘delay and disruption’ claim is employed tocover up the discrepancy. This circumstance usually leads to disagreements andlengthy negotiation between employer and contractor till they come to asettlement. Most of the times, this happens with no tangible contractualjustification for the final cost amount. The process incurs significant staffcosts from both parties and worst of all, means neither party has followed upon real cost certainty throughout the project duration (Hambleton, 2016).Since compensation events are risk events for which the contractor is entitledto receive financial compensation if the event happens and to the extent thecontractor is affected financially, they should always be clearly and preciselydefined in detailed form to respond to their extraordinary nature. As in thecase of an Act of God, the contract should clearly report the procedures toassess the risk occurrence, the conditions to determine the right of access tothe relief or compensation (which should only be available to the extent thatthe impact could not have been prevented by due care and diligence by thecontractor), and other obligations related to information and communication (Anon., n.

d.). Both the contractorand project manager are required to give an early warning to the other as soonas either becomes wary of any issue which could increase total costs or delaydeadlines. A risk reduction meeting would follow and the parties cooperate anddiscuss ways to delay or decrease effects of the delay.

Early warnings and riskreduction meetings are designed to provide alternative ways of dealing withcompensation events. The contractor, upon request from the project manager, maypresent quotations for other practicable means (Kennedys Law LLP, 2013).v.                 DependencyconflictsMost projects are interrelated, sharing people, equipmentand resources. These dependencies mean that a single project delay creates asignificant ripple effect on related projects. Consequences of such throw intodisarray schedules, causing resource conflicts and even triggering expensivecontingencies.

Such a challenge is man-made and does not warrant anyentitlement to time and money relief (Bennet, n.d.).