What should a Contractor do when it becomes aware that an event has occurred which is the Client's liability under the NEC4 contract?

  • Write a letter to the Client
  • Issue an early warning notice
  • Notify a Compensation Event
  • Submit a quotation

In my recent poll I asked what a Contractor should do when faced with an event that is the Client’s liability under an NEC4 standard form of contract. The majority of the participants selected issue an early warning notice, but the answer is notify a compensation event – please read on to find out why.

This question is dealing with the compensation event mechanism under the NEC4 contract. The contract provides that if an event occurs which is one of a prescribed list of events, then this constitutes a compensation event. A compensation event entitles the Contractor to payment of additional money and/or further time to complete the works as a consequence of that event.

Given this question deals with an event which has already occurred, the opportunity to submit an early warning notice may have already passed, as these notices tend to be issued in relation to events which have a chance of occurring. Early warning notices are dealt with in clause 15 and provide for the Contractor (and the Project Manager) to give an early warning when they become aware of any matter which could increase the Prices; delay Completion; delay meeting a Key Date; or impair the performance of the works in use. It is important to issue an early warning notice when required, because clause 63.7 provides that a compensation event will be assessed as if an early warning notice had been given. In theory this could impact on the assessment of the financial or time consequences of a compensation event, because an early warning may have afforded an opportunity to mitigate the effect of the event.

The process for notifying of a compensation event is governed by clause 61.3 and provides that the Contractor must notify a compensation event, if the Project Manager has not already done so. The deadline to notify is 8 weeks from the Contractor becoming aware that the event has happened. The 8-week deadline does not apply if the event relates to the Project Manager or Supervisor issuing an instruction, notification, certificate or changing an earlier decision.

Once the compensation event has been notified, the Project Manager is required to reply within 1 week confirming whether the event which occurred is a compensation event. If the Project Manager fails to respond within 1 week, the Contractor can notify of that failure. If the failure continues for a further 2 weeks after this notification, the compensation event is deemed as accepted by the Project Manager.

The above timescales for notifying and responding to compensation events are based on the unamended form of contract. We have seen instances where the timescales for the Contractor to notify of a compensation event reduced to as little as one week. If the Contractor misses the 8-week deadline for notification (or shorter period if the contract has been amended), they will have no entitlement to additional time or money as a consequence of the event. Therefore, it cannot be stressed enough how important it is to understand this mechanism from the outset of the contract and follow it strictly.