If an assessment of a CE includes a sum for an anticipated risk, and that risk does not occur, are you entitled to be paid the full assessed sum?

  1. Yes
  2. No
  3. It depends on NEC Option selected

I recently posted a poll on LinkedIn asking the above question. The correct answer is that it depends upon the option selected.

When quoting for a compensation event a contractor is entitled to include a value for risk for which he is responsible under the contract. The project manager assesses the value of the compensation event and should allow the contractor to include a reasonable allowance for risk. If when the work forming the compensation event is carried out, the anticipated risk does not occur and the actual cost to the contractor is much less than quoted and assessed, the project manager cannot then revisit that assessment to correct for the fact that the risk didn't occur. However, this cuts both ways. If the contractor fails to take into account in his quotation a risk which later manifests in carrying out the work (and it was a risk for which the contractor was responsible under the contract) the contractor could not ask for the assessment to be reviewed and would simply take the hit.

Why then does payment of the fully assessed sum depend upon the option selected?

In an option A (priced with activity schedule) or option B (priced with Bills of Quantities) contract the Prices are changed by the amount of the CE assessment and the contractor is paid that under the PWDD mechanism. However, in an option C (target cost with activity schedule) or option D (target cost with bills of quantities), the Prices are effectively the target cost and the Contractor's PWDD entitlement is to be paid the Defined Cost plus Fee (subject to pain/gain). Accordingly, once the work which is the subject of the compensation event has been carried out the contractor applies for payment of the actual Defined Cost of having carried out the work (not the forecast Defined Cost or the assessed and implemented compensation event sum). If the anticipated risk occurs the contractor will be paid for that risk, if it does not occur the contractor will not be paid for the risk but will benefit from the gain share.