Pricing Compensation Events In NEC Contracts

We break down how to assess compensation events on price under NEC, focusing on the dividing date, defined cost, and the difference between assessment by agreement and assessment by default. Two worked examples show why you must compare cost with and without the change, not tender prices against new costs.

• definition and purpose of compensation events under NEC
• the dividing date and why it stays fixed
• when assessments are retrospective versus prospective
• using clause 63.2 by agreement for small, similar changes
• default clause 63.1: defined cost with and without the change
• worked example: deletion and abortive costs explained
• worked example: design change and preserving tender position
• implementing updates in activity schedules or bills
• common pitfalls and how to avoid them
• handling time and money together with the accepted programme

View the webinar: https://www.gatherinsights.com/en/webinars
Join the LinkedIn Group: https://www.linkedin.com/groups/2893228/

Transcript

Welcome And Series Context

SPEAKER_00 0:18

Good afternoon, everyone. Afternoon. Afternoon. We're just waiting for our presentation to be uploaded and we can make a start this afternoon.

SPEAKER_01 0:29

There we go. Good afternoon. Welcome to what is episode four, which, if this is your first episode, means you've missed three episodes. But the good news is you can catch up on them. So details on how to catch up on previous webinars will make available to you. So to introduce myself, I'm Glenn Hyde. I run GMH planning for a specialist consultancy that focuses on NEC forms of contract, providing training and support to the industry. I'll let David and Ben introduce themselves as we move on. So this is episode four, which is our third episode associated with compensation events. So the very first episode on the compensation events, we looked at the notification and the quotation phase. And then last time out, we looked at assessing compensation events, but part one considered program, because that did warrant a whole session in itself. And now to complete the set part two, we're going to be talking all about price. So today's session, that's what we're going to be focusing upon. Now we'd love you to ask questions along the way. So please feel free to put chat in the chat, ask questions along the way, and then we'll either pick them up during or we'll have a good uh amount of time at the end to pick up on any other questions as we see fit. So I'd like to introduce you to David from Seeker to introduce himself and also a bit about Seeker.

Who We Are And Why Price Matters

SPEAKER_02 1:46

Thanks, Glenn. Hi again. I'm David Allen, the Executive Director for Seeker Southern. Back for part two of the webinar around assessing compensation events today, that will be looking, as Glenn said, to address the price element of that. Some of you who've been on these webinars before will know that Seeker Southern are just one part of a member-led trade association that represents organizations delivering and maintaining civil engineering infrastructure across the mainland UK. And you can find out more about what we do by going to our website, and that'll give you the whole list of all the bits and pieces we do, which are quite comprehensive. However, from the training and awareness perspective, we deliver NEC training and we understand that our members can face enormous challenges in getting compensations events approved. So I'm really pleased that that's actually going to be the focus for us today. As I say, to learn a bit more about us, please visit the website and we can sort of update you on that. But I would also echo what Glenn's just said. If you have questions of your own, please put them in the chat function and we'll all learn from them. This is all about collaborating around how we use the contract and some of the challenges that we have. And unless you sort of get those across to us, then we're not going to be fully aware. So with that, I'll hand you back over to Ben from Gather to take you on to the next stage. Thank you, David. Good afternoon, all. Yes, I'm Ben from Gather Record Management. And uh today's episode is uh, as uh David and Glenn have said, all about assessing compensation events. And this time we're gonna focus on price having looked at time impacts uh last month. Um, so quick overview, quick recap on uh compensation events. Glenn's gonna take us through that. We're gonna look at that compensation event process just to orientate ourselves and remind ourselves where where on that we are. We'll just also recap on the dividing date. We'll look at some examples and the significance of that. Then we're gonna jump into the real sort of main topic. And we've broken this into two parts. First bit's pretty simple. It's how to assess the change for the prices by agreement, using agreement to use a basis of rates or sums as as the basis of assessment. And we'll look at why you might do that and actually probably encourage you to do it where the conditions and circumstances make sense. Then we're going to break into the bit that personally, I don't know about you, Glenn, I find is not well understood. So every training session I've uh delivered over the years, uh I try and squeeze in this a little bit of practical theory, do it, do a kind of case study, do a calculation really to tease out whether or not this clause 63.1 is understood. And to do that, we're gonna look at two worked examples. We're gonna look at a deletion of an item from the scope and also a change to an item in the scope. And on both of those cases, we'll be using the the default approach of defiant cost and the resulting fee. So looking forward to that. Should be a good one. And then as always, we'll round off with common problems and solutions and we'll take your questions. So with that, I will hand over to Glenn. What's a compensation event, Glenn?

What A Compensation Event Really Is

SPEAKER_01 5:09

I was hoping you're going to tell me, Ben. So uh compensation event, well, it's an event which, if it occurs through no fault of the contractor, entitles the contractor to change the prices to completion date and key dates. Well, relevant, as we saw last time out. Just because there's a competition event, we've got to demonstrate the impact it's had on the program. So you can't just unilaterally move a completion date every time there's a CE. It needs to be on the critical path or on the chain of a critical pathing to a leading to a key date. It's also set pre-contract, as it says there. So when we're tendering as a contractor, you will know what is a compensation event. They've been set to the list of compensation events are listed within 60.1, and then there's a few others littered throughout the contract. So I think it's important to say, consider all entitlement to change the prices and the completion date, because it's not just the default that every C will affect one or the other, or both. Occasionally it could be neither. Sometimes we'll go through the compensation event process and realize that there's almost like an ad and limit, and it kind of neutralizes itself and they can be can be zero. So that's our definition, if you like, of what is a compensation event. 636 reminds us that the rights of the client and the contractor to change the prices, the completion date, the key dates are their only rights under compensation events. And again, we'll emphasize that as we go through the session. And where NEC maybe sets itself apart from other forms of contract is the fact that we're going to consider first of all the impact on the prices, the completion date, and the key dates are set together prospectively where possible, and without revisiting. So once it's agreed, that's it, it's full and final, and we don't go back. And the assessment's going to be based on the impact upon defined cost and the resulting fee, which will preserve the contractor's original tender position. And I think we'll explain that in a bit more detail, or that makes sense more as we go through this afternoon session. So let's take a look at the process. Just to remind ourselves, you can see the red arrow where we are this afternoon. And but first of all, we've got the awareness and the notification phases. So 60.1 primarily is where we're going to find what is a compensation event. But as we can see there, there's some in the insurance provisions in 80.1, some in the option specific for B and D, and then some in the second junctions, like X2 changes the law, for example, it will be picked up. And also there's space in Contra Data Part 1 now for additional compensation events so there can be some listed there. So that's that's where they are. And then the notification phase and the quotation phase are covered there in section 61 and section 62. So that's what we covered on our first webinar when we were talking about uh compensation events, which is actually our episode two. So we talked about either party can notify. So sometimes the project manager, sometimes the contractor will be notifying, and then we talked about the fact that obviously the the quotation process will be the next one. And we're really going into the detail today as to what that quotation uh will be made up of. So time we've considered uh in the last episode three, but we are focusing on the quotation assessment here within the assessment. We also talked about project manager assumptions as well. So that was more in episode two. We talked about the project manager can make assessments or on which the contractor can base the quotation. So for more details on that one, do pick up on our previous webinars. But today we're focusing on the assessment phase and naturally we'll be picking up on the conclusion, which is implementation. So that kind of sets the scene as to where we are in our journey.

The Dividing Date Explained

SPEAKER_02 8:53

Indeed. And if you have a copy of this, which of course you have on your desk, not in your drawer. I might need a new one, Will. Mine's getting very tattooed now. It's only two minute years old. If you've got one of these, get it, have it open and we'll we'll kind of read through. Obviously, with slides, we we sometimes for space need to abridge the clauses, but it's important to read them properly, and it takes seconds, you know, half a minute or so to do it. It's well worth capturing the whole thing and following the language of it. So we're gonna look at clause 63.1. Last time it was 63.5. We were looking predominantly in the last episode at time. We're gonna hone in now, target in on 63.1. And this, I don't know about you, Glenn, but this is the one in the training where I put the slide up for 63.1, everybody nods at it, we think we know what it means, and then we go on uh and we do the next slide. Uh and I like to loop back around and just check that we've nailed this, and and that's the purpose of these case studies that we're about to open up and have a good look at. Before we do that, new to NEC4 was a little bit of drafting that just, and we covered this in in the last episode as well, for time, but it has it also has just as much importance to assessing price change. And it's uh it's a concept called the dividing day. And it kind of makes clearer the intention of NEC two and three in that we have to have a static point in time which divides the work done from the work not done, such that we can apply cost and time risk allowances for things that have a chance of occurring that are at the contractor's risk. And you know, because NEC is prospective in nature in so many things, whether it's forecasting your your defined cost in your applications for payment for option C, D, and E, or forecasting the effects of compensation events post-dividing date, it's important that that date is understood to be static. Now, this means that even if we end up revisiting a quotation, maybe instructing a revised quotation, and we might go around that loop a couple of times, hopefully not, but certain circumstances might mean we do, that we lock in that date. So we don't keep overwriting and resetting this date. We also lock in the accepted program current at the dividing date as well. So this brings stability to the assessment, and it also aligns much better price and time assessment. So that's what it's for. It's not a defined term, but it is described in the clauses in a literal sense. And it's simply the bit that separates the actual defined cost for work already done and forecast defined cost for work not done by that dividing date. Gives us that kind of stable platform within which to apply risk. And I say it doesn't reset, but what we do need is a little graphic perhaps that gives us an inclining, a quick look up as to what sets it. So how do we know what that dividing date is from compensation event to compensation event? Well, this next slide should help us with that, Ben.

SPEAKER_01 11:59

Yeah, so we we picked some examples here where sometimes the assessment is potentially retrospective, and equally where the assessment is prospective. And one of the, I don't know, maybe more surprising ones people find in training is they don't quite realize that if we take the number one on the right-hand side, project manager gives an instruction change in the scope. Well, unless the contract has had an instruction in writing for the project manager to change the scope, they should not have been doing anything before that instruction. So therefore, that one can only be prospective. As in, uh, we'll only be looking at forecast defined cost, never actuals. Because in theory, you wouldn't have done any work without an instruction. And if you have, you need to come on to one of our other webinars to learn why you shouldn't be doing instruct things without an instruction. But we'll save that for maybe episode seven. So that is always going to be prospective, instruction to stop work potentially will be these will all be more prospective. So on the right hand side, there'll be times where yes, nothing will have happened before that element has been instructed, and therefore it will be a prospective assessment. But there are times where there will be elements where it could be uh retrospective, or we've got actual costs already incurred that we will be assessing maybe as part of the compensation event. For example, the physical conditions, there might have been some of the works encountered before it was aware it was a compensation event, and then the dividing date will be when it was the compensation event was notified. So there could be an element of actuals, an element of forecast in there. Weather is the one that probably will always be retrospective because you don't know what a one in ten year weather event is till after the calendar month. So broadly, that one is highly likely to be retrospective. But I think that's the first thing we need to think about. So when we're assessing cost for a compensation event, we need to ascertain, and this should be relatively factual as to when is the dividing date, and therefore, are we considering actual or forecast or occasionally is it a balance between the two? Does that capture enough, Ben? Or is there anything else to add there?

When Assessments Are Retrospective Or Prospective

Using Agreed Rates Under 63.2

SPEAKER_02 14:12

No, I I think I think it does, and and that does align us back to that those risk allowances that you're allowed to put in and should put in in in your quotations, and also clause 62, too, talking about uh quotations for compensation events comprising both proposed change to prices and any delay to completion date and key dates. And that and that all kind of syncs in nicely when we've got this static date. So I think Glenn, I would still be using the program. Certainly, there should be synergy between your program and the what events and activities around the compensation events so that we can understand how that price is being built up, particularly if it's forecast. And maybe we've got some good records demonstrating some measured miles with some productivity insights that further support those forecast assessments. And then if you've got that, then you know, fine-tuning for risk allowance, you're building confidence in there. So yeah, no, all good stuff. Taking that in mind on board, because this is something we have to do this dividing date, regardless of the next bit, which is do we base the assessment on some agreed rates and prices as the basis, or do we go into a full-blown defined cost impact analysis? Let's look at those two in turn. I'm gonna start us off with what we I think we'd encourage where appropriate, and that is to use clause 63.2. So we leapfrog the clause we're really gonna unpick today, and we just look at the alternative way of doing it. I I say this isn't the default, there's no default as such an NEC, but this can only happen by agreement. Why wouldn't you agree? Well, you might have some rates or prices that you know you're making money on, in which case the other party might not agree to doing it, or you might be losing money. There might be lost leaders, in which case you might not, as a contractor, feel comfortable using those as the basis of assessment. But let's give a couple of examples. So let's take, for example, a scenario where we have an area of landscaping L01 in the scope that has a corresponding activity schedule price of£1,100. And we've unfortunately forgotten to include a similar area of landscaping on the other side of the junction. So we uh we we need we need it. So we do a uh an instruction changing the scope under clause 14.3, that triggers a compensation event, 60.1 number one, and we instruct quotations. Now, whilst we're sort of getting ready to receive that quotation, hopefully we workshop that with the contractor so we don't shock and surprise each other and burn management time unnecessarily. It comes to light that, well, this is very similar to a slightly bigger area, a couple more trees in it. Shall we just base it on the price of 1,100 pounds plus a bit? And you negotiate and say, okay, fine, uh, let's agree a price of 1250 for that bit of work. That's 63.2 in action. But a quantity example might be look, we want to extend this wall a little bit. Okay, it's not the other end of site, it's not a brand new wall somewhere else. It is a change, not a re-measure. If it was a re-measure, because we need more earthworks for some reason or other, then that would just be a re-measure. That might happen even without a change. This isn't that. This we haven't had to remeasure this. This is extra wall, but it's only 20 meters. We've just done 2,000 meters squared. We need an extra tiny little bit. Okay, let's use the bill rates. The scenarios here are where it's a low-value compensation event, and it doesn't make sense to spend pounds achieving the accuracy for pennies, if that makes sense. We don't want to spend 800 quid fine-tuning that 1250. Okay, if we did, maybe we get to 1225 or 1275. We might be 50 quid out. It doesn't seem worth going to. So if both parties in agreement, we we can do it. Again, it might not seem worth building up in the scheduler cost components, the people, equipment, plant and materials, subcontractor costs, and then adding a fee on to get to that extra 20 meters squared. You might be accurate to within another 50, 60 quid. Is that really worth it when you consider the quotation might cost you a few hundred at least? So I think the question here for yourself is ask yourself, are my auditors going to be okay with it? Are my stakeholders going to be okay with it? If they are, have the conversation and by agreement. You can do that, which I think is sensible. The default position, and that's going to be default, probably for the certainly for the bigger, more material compensation events, is what we're going to unpack next. Before we do, Glenn, if you want to give us your sort of uh insights on how this clause works.

SPEAKER_01 19:03

Just on the last slide, Ben, I think uh just looking at that word you underlined and made bold. I don't know if uh NEC need to define that as a term. I mean, you you'd like to think they wouldn't need to, but can I just point out that a project manager saying, but I want to use the rates is not agreement. So it's both parties agreeing, means just that. So the project manager of the contractor, and it says may, may agree. So you do have to come to an agreement to do that. Uh neither party can insist. Otherwise, we're going to go down the road of, well, where we're going to head for the rest of this webinar.

SPEAKER_02 19:37

Very true. Thank you, Glenn.

SPEAKER_01 19:40

So 63.1 tells us the change to the prices is assessed as the effect of the compensation upon. And then again, we've got the actual defined cost of the work done by the dividing date. The forecast defined cost of the work not yet done by the dividing date and the resulting fee. The prices are changed by the compensation event under 63.1. The prices are not used to assess the compensation event. So it doesn't say the difference between the price and the forecast defined cost. And that subtlety we're going to explore over the next two examples that we're going to run through. So it's a comparison of the two estimates. So the defined cost of the works without the CE and with the CE, and that's what we're going to take a look at. But the easiest way to do that is to look at a specific example, and hopefully these two examples will bring it to life.

Core Rule 63.1 And Why Price ≠ Cost

Worked Example: Deleting A Building

SPEAKER_02 20:34

Yeah, thanks, Glenn. And again, just to stress that, we the bullet points take us to actual defined cost of the work already done and the forecast defined cost of the work not yet done. And that's important. But really the takeaway from this is as Glenn just said, and I'm just going to repeat it, it doesn't say you compare the price with the forecast to find cost of the work you now want. It doesn't say that. And that's, I think, what lots of us, I used to do it for a while until I realised I was doing it wrong and put my hand up there. And I'm and I'm pretty sure that there's a lot of us out there, the practitioners out there, misreading this and they're taking the price in the schedule and comparing it to the forecast-defined cost that we're not yet done that we now want. And actually the approach, as Glenn just said, is it's almost a double exercise. We've got to do the defined costs with the compensation event and the defined costs that were going to happen before we had the compensation event. And that's what we're compensating. Remember, to compensate is together to equalize, together to put back where we were, but for the event. So I've got the pleasure of giving you the first example, which is the deletion, and then in a moment, Glenn will take us through the change. So we're going to delete an item from the scope. We're not going to use clause 63.2 here, because I think the auditors might have an issue with it, or perhaps the Katractors uh stakeholder might might have an issue with it. Clearly, to sort of casually agree, yeah, the building's probably 90,000 quid, might might kind of come back to bite us. So uh we're going to delete this ME plant building for whatever reason we've decided we don't need it anymore, and we're going to save some cash in the budget and we're going to do away with it. So the change to the scope is a clause 14.3 instruction from the project manager to delete that building. And you can see there, we've in one picture we've got the building, in the other picture we've got a green field. Now, uh probably the case that having the green field isn't free because there's possibly some abortive defined cost already expended. We might have gone and done a survey, we might have uh gone and put some small road out to it or whatever it might be. So there could already be some defined costs inherent with not building the building, and we must take those into account. So on the right hand side of the calculation, we've got the defined cost with the compensation event, and that comes to 10,000 pounds. So not building this building is still gonna cost us 10,000 pounds for the abortive stuff that we've already done. Maybe we need to restock materials and terminate a small subcontract, it's all gonna add up. Of course, it wouldn't be 10,000, it would be 9,673 pounds. But just for easy maths, you'd appreciate we've rounded the figures. Now, what the contract says, 63.1, and this is where you want to be geeky and have this in front of you, is it says the change to the prices is assessed as, so the change to the prices is to change that 90,000 to a new number, is assessed as the effect of the compensation event upon defined cost and the resulting fee. Okay, we know we've got to distinguish between defined cost actually already spent and defined cost forecast, but let's leave that for a second. So we need to look at this impact. It's not the difference between 90,000 and the 10,000 pounds, which is where a really good percentage of people still get this wrong, and this is why we've been inspired to create this webinar. So let me show you what the calculation ought to look like. Here we go. So it's the left-hand bit that we've got to remember to do. And now on an option A contract, this might be the first time that you've got transparency of cost within this part of the works because we would normally just pay the 90,000 pounds and we wouldn't know the cost effects in the background. But all compensation events, clause 63.1 is a core clause, and therefore it doesn't matter what the payment mechanism is, what the main option is, we would always have this defined cost transparency. So even in option A, we do our uh defined cost build-up of the works with the compensation, which we've already said is 10,000, and we do the defined cost build-up of the works before the compensation, without the compensation edit. And we find that the contractor was actually going to spend£70,000 worth of defined cost in building that ME plant. As I say, this might be the first time we've seen it. So the compensation event is the difference between the£70,000 the contractor was going to spend and the£10,000 that they're now going to spend. So the difference is£60,000. And of course, that's a reduction to the prices. And the resulting fee would be in this example, top right hand corner, the fee percentage we put at 10%. So that means an overall compensation value of a reduction of£66,000. Modeled that back onto the 90, we end up with£24,000. Now, this is the tricky bit if you are trying to explain this to a client. The client may think, oh, I'm going to delete that building. It's a priced contract. I'm going to get 90,000 quid back. Thank you very much. And we need to explain that that's not the approach. The 90,000 pounds on the activity schedule, well, the activity schedule is just a fairly crude pricing document. It might have 100 items in it, and it's not separately identifying prelims, overhead, profit. And who knows, the contractor may be making a little bit of money or losing a bit of money on that price. It's really a moot point for the assessment. What we need to explain to the client is in deleting that building, the contractor is going to spend 60,000 less to find the cost and the fee you on top of that, you're going to get 66,000 back. And this is why it might, if it's not pressing and critical, you might want to explore this with a proposed instruction, a proposed change to the scope before pressing the button on it to see what the true saving actually is going to be. So I put in the top left there scenario one. And let me just bring in a second scenario. This time you can see the if you look at the left-hand side of the calculation now, we've got a 90,000 pound price and a 70,000 pound defined cost. Let's just look at the second scenario. On this one, we've got a 90,000 pound price and a 100,000 pound build cost. So forget scenario one for a second. We're now in a in a situation where we've done the right-hand calculation. All of this would be a single quotation. So within this quotation, we've done this right-hand side with the CE and we come to 10,000 pounds. And in this scenario, when we calculate the defined cost of building that building, if we were to do it today, we get 100,000 pounds. So this time it's more than the 90,000 pounds in the price, in the activity schedule, which is irrelevant. Again, it's irrelevant. We mustn't fixate on that. The clause does not say compare the price with the new cost. It doesn't say that. It says the price changes as the effect of the compensation event on cost, which means we have to model it with and without the compensation event. And this time we get£100,000. So£100 to 10, the difference is 90. The contractor's going to spend 90,000 pounds or less. We model the fee percentage onto that, we get a reduction of 99,000. So on this occasion, the activity schedule price needs updating. And there's a couple of ways to do this. We'll touch on that. But effectively, the contractor's going to give back another 9,000 pounds on top of the 90. This is all recorded, so you can watch this again. And you might want to watch it a few times. I certainly had to watch it a few times when I first, when it first clicked for me. But it's a very elegant way of isolating the effect of the compensation event as a change, and it leaves the tendered position alone. So you can see in this scenario, this is not what I'm about to say, take with a pinch of salt, because I've just explained the activity schedule is a crude apportionment of your overall monies against, you know, a limited list of activities. But just very crudely, the contractor was always going to lose 10 grand against that price. If you look on the right-hand side column, without the building, there's a similar result. So you need to unpick that yourself with a few words samples to get to the bottom of it. But this this theory uh will hold. We're compensating the effect on defined cost and modelling that back onto the price.

SPEAKER_01 29:29

Okay. Anything to add, Glenn? Yeah, a couple of thoughts. One, we said, and you've rightly said, that it's defined cost plus fee. Yes, contractors, you do have to give feedback on emissions of work. Sorry, we don't write the rules, but I think if we did write the rules, we would probably say that's a fairer than not. A lot of contractors seem to think that hang on, no, what about a lot of profit? Yep, there's an argument to say that could be unfair, but the contract says it's defined cost plus fee. So with extra works, it's defined cost plus fee. Fee with the missioner works, it's defined cost plus fee. So we just have to accept that yes, you would need to give the uh the fee back. That's like an example I think is really interesting. I I I do wonder how many contractors will admit it would have cost them 100,000, really, or not the 90. But like any any quotation, the project manager would have to assess if the contractor has assessed it correctly. So in theory, you know, they should build that up to 100K. But like any compensation quote, the project manager would have to make their own assessment to see if indeed the contractor has assessed it correctly. And I do find this is the one time that a project manager might say that a contractor's not assessed it high enough when it is a saving rather than obviously uh an additional element of works.

SPEAKER_02 30:48

Yeah, and you know, in terms of I I guess you're right about the fee being passed back. I think the thing contractors, if if you can at all possible, just keep keep clause 16.1 in mind, because if you come up with this idea, if the general pressure is the client needs to save some money and you come up with this as an idea, then I think there's um you know a reasonable route through the value engineering clauses where you know you might actually be part of the solution finding the budget saving. And actually, whilst your turnover will drop, you might actually better convert half the difference or something like that, depending on what main option you are and what the percentages in contract data say as a bit of profit. So uh yeah, maybe turn turn that into a positive. Okay, Glenn, I think you're gonna take us through this second example then, which is a change for the scope.

SPEAKER_01 31:39

Sure. So this time, rather than an emission, we've got a we've got a change. So on the left hand side, we've got a fairly simple concrete beam, and on the right hand side, we've got a much more complex concrete beam on the top of this uh this structure. So the original activity schedule price was 100,000, which is for interest. And now we're going to consider the activity schedule price. Okay, what should the change be? So for this one on the right hand side, the defined cost with the compensation vent will be 150,000. So let's now take a look on the left-hand side and see well, how do we how do we get to how that how much this should change by? So again, similar principle to Ben's one, we're not going to use the activity schedule rate to assess the original basis of the original beam. Because if we now know that that would have cost us, as the contractor, 120,000. But again, this is obviously any quotation has to be proven, has to be justified, has to be robust. So here, if the original beam would have cost us 120,000, the new beam will cost 150, 150,000. So the difference is now 30,000, not the 50,000. So again, we're going to apply our 10% fee, which is 3,000. So the change to the prices will therefore be a 33,000 increase. How we adjust the activity schedule, and similarly with the bill of quantity, we're going to pick up on in one of our bulletins early next year. So that's probably a little bit more detail than we've got time to go through on to this afternoon's webinar. But to adjust the prices, there will be a change there of 33,000, because the original cost would have been 120 and the new cost is 150. So, in a similar vein, we need to ignore the original activity schedule rate and we're building up for first principles to see what the what the true uh difference actually is. So that's where it's more. I think one more example, Ben, haven't we? Where so this time, if it could have been, if the original structure could have been done for 70,000 and the defined cost for the new one is 90,000, then again the difference is 20,000. Apply now 10% fee, so the change this time will be£22,000. A lot of people struggle. Uh certainly on the last example that Ben ran through, just another thing came to my mind where a client deleted£100,000 worth of, well, the activity schedule was£100,000, and they thought by deleting it they get£100,000 back. And when we submitted a quote, there was a fraction of that, and there was good reason why it wasn't going to give them anywhere near the saving they thought it would be. When they got the quote through, they said, Well, that's ridiculous. We get hardly a saving at all. And when they went through it and understood it, they said, Well, we're going to instruct it back in then. So they instructed it back in, but unfortunately, we cancelled all the uh fabrication and the procurement slots. So to add it back in was now going to be 150,000. And because they'd instructed it, they said, Well, we can't afford that. And then they said, Well, we'll have to cancel it again. And we said, Well, we've incurred costs now because you've already incurred costs. So it sounded a bit like Lauren Lahardy-ish, but cut a long story short, they had to omit the works and it cost them about 80,000 to not have anything. Where if they'd left it alone, they'd have had the works for 100,000. So I think, Ben, you said there that uh if there's time, maybe the proposed quotation would be the best route to go down. And I'd certainly echo that, where there's time. So if there is, the proposed quotation would allow you to see what this difference will be and then make a decision if you want to go ahead or not.

Worked Example: Changing A Concrete Beam

SPEAKER_02 35:30

Yeah, it's a really good point. Ben, and and again, what this does, just to emphasize what we've just said, Glenn is it's isolating the effect of the compensation event on cost. So it's totally uninterested about what the price is. We just superimpose that change back onto the price to preserve the tenant position. So when looking and pricing, it's important to know when you're pricing at work, right? Because if you suspect that this client, you know, they keep changing their mind, they're gonna need, they've said they're gonna need one of these, I think they're gonna need four of them. There is no benefit to leaning up all your rates and loading that one item in the hope that when you get, if you get three more, you're gonna get three times that price. You're not. The extra three will be assessed in defined cost and you'll pay the extra. So there's no there's no sort of tender pricing sort of benefit here. Gamesmanship. There's no gamesmanship. And I we chose these figures very carefully to illustrate an important point. You'll see on this second scenario, the defined cost with the compensation rent is 90,000. The defined cost without the compensation rent is 70,000. And the thing to note there is that the defined cost with the compensation rent is still less at 90,000 than the original price. And you might find clients are reluctant to understand, well, why would I pay? Hang on a minute, I've got the full details now. It was only going to cost you 70. So I ought to be able to have the thing that costs 90. That's still making, you're still making 10 grand. That argument's deeply flawed. No, no, we tendered it in the round, and this part of the you know works were going to cost us 70 grand and now they're gonna cost 90. You can't wipe out my tender advantage just because you want a slightly different shaped beam. And if we go back to scenario one, I think there's a lot of contractors out there who may well be losing or winning, and not just contractors, I mean you talk about clients as well, who may win or lose money un unknowingly by approaching this incorrectly. Because certainly, Glenn, I don't know about you, but when I first started with NEC, I would not have looked at this left-hand side. I'd have probably got, when we get to the scenario, I'd probably got that far and I'd have thought the compensation was worth 55 grand. Would you got anything different, Glenn?

SPEAKER_01 37:57

No, no, I think, yeah. I think you're yeah, exactly that. And I think something you said earlier, Ben, sort of resonated with me as well, where it's it's trying to put you in the same position you would have been. So you would have made or lost anyway, and after the compensation, it's trying to put you back in that same position that that you would have been. And that's what I think people struggle with, seeing they don't quite see that.

SPEAKER_02 38:18

Exactly. Yeah, and and here I I just thought of the other way I I might have done it. If I compare the 100 with the 150, which is the wrong way to do it in case you're watching this on playback, then you'd add your fee, you get 55. So that the new price would be 155, that would be wrong. The other wrong way to do it would be to delete the 100 and put the 150 in plus the fee, which would give you 165. That would also be wrong. The bit that's missing from these quotations, and if you look at something like managing reality, that box set there, you'll you can see the suggested template for setting out a quotation has this sort of before before the compensation and after the compensation event uh defined cost assessment. And it's the difference in the two, which is what gives us the effect of the event on defined cost, and that's the crucial bit. Anything further to add, Glenn? We are by all accounts spot on in terms of time. We might actually have uh full 20 minutes of questions, Will, if you want to line us up some questions. Anything to ask else to add? We've got a few more slides to cover, but anything else on this, Glenn?

SPEAKER_01 39:22

No, I think I think we've we've covered, I covered most of the points, and and again, uh I think you you said already a couple of really good personal things uh this afternoon. And one of them is that yeah, there's no point in playing games with your rates anymore. And that's what NEC has tried to cut through. It's tried to set up good practice project management to avoid gatesmanship, to avoid sort of wrong behaviours. So if you do have a an increased rate or an increased activity schedule rate, well, you're not gonna carry on taking the benefit of that going forward because it's gonna be assessed based on actual forecast define cost. So, yeah, by agreement, if it's if both parties agree it's about right, then we're gonna take it forward. And obviously, if what either party doesn't think it's about right, then okay, you won't, you won't take it forward. The cynical client might say, Well, contratto, why are you proposing an activity schedule eight? It must be much cheaper, otherwise, why would you be proposing it? And hopefully, well, it might be the case occasionally, but genuinely the contrats are trying to say, well, look, it feels about right. And here's our rough breakdown. If you just want a very quick thumb, sort of uh rough calculation that shows it's about right, it's gonna save us a lot of work if we both agree this is about right. So, yeah, we started off by you can use it that way, which is good, but then we've obviously gone full circle, which, well, I guess that that's your conclusion here, Ben. So wrapping those up.

SPEAKER_02 40:44

I think as practitioners, we want to be careful that we're not looking back at too many events and thinking, well, looks like we kind of accidentally did the agreement through the process of submitting a quote which was based on comparing price with cost. I mean, once these quotes are accepted or assessments being done, they're implemented right. So, you know, uh, you know, the only way to change that then is adjudication. But so I think, you know, the the best time perhaps to have this knowledge is before you start. The second best time is probably today. So, you know, we can we can move forward perhaps with if if we have been looking at it slightly, the wrong approach. This this perhaps is that turning point where we can consciously say we're going to use 63.2 because no one's winning or losing lots of money on the tender. The work is similar, it's close by. If you're happy and I'm happy, let's save the cash on putting all that complex quotation stuff together. Otherwise, um off we go. And I guess the overriding thing with this is there's a bit of admins due, but if we put more effort into the scope, then hopefully there'll be less change. And it was never NEC's expectation there'd be quite so many variations of balance. And I think Glenn we've talked about this before, but maybe that's another subject altogether. I would just touch on, it's like we've got nearly a dozen questions, so I'll just be brief. I'll just touch on if the if we are changing the prices by this default mechanism, then we have to do something with that. Now we've shown in these previous two examples, there's actually a clause in there, 63.14, for main options A and C, which is to say that we change is in a form of the change to activity schedule. In 6315, it states change is in the form of a change to fellow quantities, and that one's a little bit more complex. So we know that there are these different ways of reflecting that implemented price change back into the price schedules. You shouldn't be having a situation where you're paying for the original works off the activity schedule, and then you've got a separate schedule which you're paying compensation rates for. Your compensation rate should be implemented in the form of a change and updates the activity schedule or an update to the bill quantities. And we're, as Glenn said, will unpack that a little bit more because you could end up, you know, deciding to have a ghost item in the case of a deletion. Here we got minus 9,000 pound ghost item or a plus 24,000 pound ghost item, which I think is nice because it preserves the cash flow. Whereas other options might be to spread that price change over the remaining activities. And of course, there's an argument for updating your activity schedule because it no longer reflects the operations of the program. So a few different practical ways of approaching that. Too big a topic to bite now. We'll have a look at that later. So time and cost risk allowances, of course, included in forecast defined costs of the work not yet done by that dividing date, just to recap on that. That takes us to common problems, how to avoid them. A couple of minutes on this, Glenn, and then we'll jump into questions.

Implementing Price Changes In Schedules

SPEAKER_01 43:38

Yeah, sure. So I'll so comparing the tender price with the future defined cost, so issues, incorrect approach, no right to revisit the tender position. And the solution we've gone through today is to base it the difference in define cost with and without the compensation vent. So again, it's play back those two scenarios that um that we've run through. It struck me going through today, obviously, in the time allowed. Another potential webinar is define cost and how you build it up using the scheduler cost components. So we'll talk about the principle. That probably is another worthy webinar that we can go into at another point in time. A client project manager wants to use actual defined cost late. And that's just a misunderstanding of how to apply the actual end forecast to understand the dividing date that is static for each compensation. One of the secret bulletins we've done recently is should you be using actual defined cost? So we've got a web, one of the bulletins already pick up on that fact. So emphasising that what the dividing date, how it works, and how a majority, not always, but a majority of cases, it will actually be a lot more forecast than people sometimes imagine. And the waste on resource, some complex assessments, quotations are expensive. If it's a low value, it really doesn't seem worth the effort. So find a quick way. Use 63.2, agree either rates or proport or ratios of those rates and see if you can just come to a quick conclusion. How how much would it cost to argue over pennies, as Ben said earlier?

SPEAKER_00 45:11

Um, it really isn't worth it. Ben, do you want to pick up the other three? I will, Glenn.

Common Problems And Practical Fixes

SPEAKER_02 45:18

I was just looking at the question, so hopefully I get the right three. You you went down, didn't you? So I'm gonna go ahead and do it. I'm gonna, I'm odd, you're uh you're even. So defined costs are not clearly built up. So unsubstantiated defined costs, particularly where you're forecasting them, right? We need good records and stick to that short or full schedule of cost components and and and keep those records. It shouldn't be a guessing game. And again, a really practical tip with this is build those up together, right? The the time scales in the contract for submitting and accepting quotations are maximums, they're not targets. And you can completely disregard them if you are working on them together. I say disregard, you can submit and accept on the same day, is the point of making. So, you know, and if you're working efficiently and you've got that co-located, you know, way of talking of progressing these things together, then take advantage of it. Use of fixed prelim or prolongation rate. Yeah, so there's no fixed preliminal prolongation rate. I've been on jobs where we've come up with one and it's been quite practical to use. It's quite a pragmatic approach. So we might establish the different sections of the work. And if those works get delayed, the sections or the whole works get delayed, we know that translates to certain overheads, certain people, certain equipment, fences, security, that kind of thing. So it I wouldn't say completely rule it out, but you've got to be comfortable with it and maintain those so that you're aware of what they are, and you must still follow the rules. So the proper assessment would would do that. That build up from first principles across all of things. There's no separate prelim rate. And narrative around price change, uh, difficult to explain. So client confused, paying for something that has been deleted. I've still got to pay something, even though it's been deleted. I think we unpicked that there. It's in the message, in the way in which you're talking about it. I think that, you know, the origin of claim is to cry out in Latin for claim. The origin of compensate is to work together to balance, to bring quality. So I think that uh conversation about putting the contractor financially back in the position they would have been might help that theory come over and build a bit of distance between the prices. And of course, the approach you takes them. So if we know this up front, then we can be cautious in talking about budgetary savings and what the omission of something, deletion of something might do. Okay, that gives us time for questions. I think there's a little bit of lag on getting the questions on the screen. So here we go. Here's the first question. So can the project manager, sorry, Darren, so you have two questions. We've jumped on the second one. Uh, can the project manager request that a CE is broken down into two separate CEs, one dealing with the cost of change, excluding any program consequences, and the second dealing with the program consequences. So that the the answer to that is no, and actually it's not desirable. And the whole sort of big nuance with NEC is that we deal with time and money together. So we are the the big payoff there is that we are getting better budget certainty and outcome earlier on in the project. We're dealing with change of small chunks. We've also got the staff dealing with the actual works, contributing to that in a contemporaneous manner. We're not sort of wrapping up the admin several months, years afterwards with people who weren't there anymore. And and in a sense, yes, it's a bit more, I would say, yeah, it's a bit more difficult. No, I wouldn't say it's more difficult. It's it's a different approach. And it's more similar perhaps to the you know, tendering of the works, the whole of the works. We're just doing a smaller chunk of that as as we go. So we we do need that kind of estimating forecasting skill set in the team, even on the priced contracts, in order to do this properly. So no time and money together. I still see uh correspondence. I'll hear our direct costs, we'll let you know the time effects later. That's not a compliant compensation event. We must deal with time and we're together. Anything type there, Glenn?

SPEAKER_01 49:19

Yeah, just to echo. So time is money, so we can't separate the two. And it always amazes me how people think, oh, we haven't got time to look at the program bit now. Well, how can you not have time? And if it feels difficult to assess the program element now, I can promise you one thing. It's gonna get worse with time, not better. So people think that if we, oh, we'll give it a bit and we'll be able to see what the program impact is. What information you got now is the best, the least objective you're gonna have ever.

SPEAKER_00 49:49

So deal with it, tackle it head on. So thanks for that. So the next one's from Zach.

SPEAKER_02 49:58

If a compensation event was notified and accepted on day north, so that's the the the dividing day probably, and the contractor has taken 180 days to price. So maybe they haven't put their quotation in. I mean, if they take more than three weeks under the contract, the project manager has to assess it. Uh so uh it's one of the rules under 64.1. If you don't get quotation within within within the time allowed, because you can extend that within that three-week period, but if that's not happened, then you have an obligation as a project manager to assess it yourself. So NEC is all about keeping the momentum. If you the I think the only way you could get to 180 days is that if you get stuck in that cycle of submitting within three weeks and replying within two weeks, and you're replied being I instruct to revise, you could in theory stretch it out to 180 days. Do they still benefit from using the forecast to find cost? Uh yes. Because the certainly under NEC4, this is super clear now, the dividing date is set. In this case, if it was a change to the scope, it would be the date of the instruction changing the scope. That was the obligation at which the contractor has to act on that instruction or at least you know take into account the scope is now changed. And therefore, that would be set in stone as would be the accepted program that was current at that time. Although refer to the last episode for seeing how we advance that program under clause 63.5. Anybody anything to add?

SPEAKER_01 51:24

Well, just this says do they still benefit? Well, or disbenefit, of course. And uh don't take 180 days to do a quote.

SPEAKER_02 51:31

No, don't do that. And don't forget your obligation to assess it. Have a look at clause 64.1, right? We'll probably pick up on this in the next episode, actually. Uh, the last bullet point on that is an interesting one. Withholding acceptance to a program for a reason stated in the contract, so finding a reason that the contract, not withholding acceptance program, gives you the task of assessing the compensation items project manager. So just be careful of that.

Q&A: Time And Money Together

SPEAKER_01 51:56

Do you want to take this one, Glen? Okay, so Alex has said it can be very difficult to deem if the contractor's quote based on the effect of the defined cost is accurate, and then even harder to make an assessment. Do you have any advice on getting a true formal quotation? Well, I I think it's like any contractor's quote, it's really important that the contractor tries to set out to demonstrate that their quote is a reasonable. I think we mentioned we'll probably pick up on a separate webinar elements of how you build up the quotation in line with the scheduler cost components. So justify that, you know, the rates you're using, the durations, make it clear the risk you've allowed. So just bring make it as uh as substantiated as possible what the the quotation is and why it is. Because look, any any project manager is going to be wary of a contractor's quotation because they're thinking they might be trying to take advantage or you know, take assessive costs. So, like anything, I think you've just got to break it down as detailed as you can and substantiate it to make sure that it is based on sensible prices and sensible amount of risk as well. So transparency in the quotes is, I guess, the biggest advice I can give.

SPEAKER_02 53:07

Yeah, thanks, Alex. I think records, records, records, right? And you know, we spend a lot of time fine-tuning the Z clauses, right? And loads of loads of lawyer time doing all that. If we look in this scope, use that volume two of the scope, sorry, volume two of the guidance, the the user hand, the user guide, how to write scope, chapter three and volume two, how to write scope. In there, it sets out what you should be doing pre-contract, not the end of the world if you if you've not done it yet, you could because it's in the scope, you can change it. You should be describing how you want your records, how you want your applications for payment to be set out. And that will give you some insight in how defined costs should be structured and presented. And then workshopping it together. So don't just, you know, get the compensation event instruction for a quote and wait three weeks, and the first time the other party's seen it is the you know, three weeks later. Workshop it together, narrow the difference. So deal with the stuff you can agree on first and and narrow the difference. But I think I've I actually drafted a suggested supplement to that guidance note on broad, more broadly record keeping for the exact question you asked, Alex. So um, yeah, have a look at that as well. It's on LinkedIn. Okay, uh, Glenn.

SPEAKER_01 54:20

Yeah, happy to take this one. So, how should a contractor deal with a PM who repeatedly requests revised key quotations and with each submission ask for the quotation to be updated based on the emerging actual facts on the site? Well, it's really strange, they only want to use the actuals when it suits them and not when it doesn't. So there's the first thing. So we're back to the rules on if this is uh if the dividing date was in the past, then this will be based on forecast and actuals um never come into it. But the more important bit is the repeater request for C quotation. So here's my advice. First quotation, okay, maybe a contractor might be slightly optimistic on risk or not really stripping things back. So again, justify the quote because we want to try and get it done as quick as possible. But the first quotation might not be agreed, and then there's a second quote and possibly a third one. But by the time I think you got to a third quotation, as a contractor's point of view, you should be absolutely to the bone in the sense of that really is it. We can't strip anymore out. Otherwise, we're doing it for a loss. We put sensible risk. We really believe that to be the final quotation. So at that point, if a project manager asks for a fourth quotation, my advice is submit a revised quote within 10 minutes. And when they phone you up to say, hang on, you've said the wrong quote, it's the same as the last one, and you say, No, it's not, the top right-hand corner, check that. And in the top right hand corner is either the date or the revision number and the good chapter saying, that's it, that's all we've got. So if you don't agree with that, we believe we justified it to the nth degree, in which case, project manager, please feel free, make your own assessment. But be be warned, we believe our quote is right. So if you assess it much slower, we might feel the need to look at the dispute process, would be my advice.

SPEAKER_02 56:05

Yeah, I'd agree. I I think um, you know, the interesting thing with this, if without sounding flippant, the bit about the question about wanting to keep resetting the kind of dividing date. I think use a consumer example. Sometimes common sense can can be found in the consumer example. I I, for instance, have not even tried to phone up my home insurer and ask for my premium back on the basis my house didn't burn down last year. So I think you've got to, you know, we've got to, we've got to see some the kind of the liability on the contractor to price it at that date works both ways. And uh and we have to we have to acknowledge that. But again, yeah, keeping keeping good records and and having a program that's contemporaneous as well. Don't let the program get so old that the accepted program current at the time was two months old. We'll try and get that much better. And also clients should be vigilant, right? If if we've got teams going around, you know, three weeks, two weeks, three weeks, two weeks, constantly getting revised quotations, these things are going on forever, why are we not identifying the bits of principle or quantum we really can't agree? And maybe going to senior representatives, new 2024. So getting those senior representatives involved because all we're if all we're doing is burning cash and distracting ourselves on today's issues with yesterday's work, that's not that you know, is there a resourcing issue there? Is there a skills issue? So I think I would be looking at that as a client and a contractor, sort of stakeholder in the project. What might need to change there if this is a pattern? Good stuff. Thank you for all those brilliant questions. Uh there are loads more. I think we said, Glenn, we're going to put all these together and uh might have to write a book or something because there's there's loads of good questions. Let me just bring the slides up. I just need to I just need to round this off by uh letting you know about the next episode. Glenn, this is really your bag, I think, isn't it? You we we'll have to uh have to let you introduce this one.

Next Session: Making Programmes Work

SPEAKER_01 57:59

Yeah, this this webinar is going to be seven hours long. So, yeah, program, uh getting it working for you. So we're gonna be thinking about all aspects of the of the program. And yeah, we'll look at the contractual obligations, but also some practical obligations as well as to how we can really get the program getting the most out of it is the important thing. So I'm an ex-planner, ex-planning manager. So I kind of recognize that they're they're important, but not everyone has the same passion or recognition of them. And the important thing is everyone in the project team needs to be feeding in and out of the program. So the next session is not just for planners, it's for operational, it's for commercial as well.

SPEAKER_02 58:37

Good stuff. And and the link to that will be in the chat, if not right now, in the next few seconds. We're going to finish on time for once. David, do you have any closing remarks? Yeah, I mean, obviously, there is a question about the program that will be picked up, no doubt, next next time we speak. But the that is key. Keeping the program up together, getting the agreed program there will help this process because that's often the first challenge that is faced, trying to identify where a conversation event sits within the overall program and therefore what the impact really is. So I think that that's key. And if we could get better at getting that uh sorted, we'd all be happier.

SPEAKER_00 59:19

Thank you, David. So it's goodbye for me. Goodbye for me. One day we'll get that to work properly. Thank you very much, everyone. Thank you. Cheers, thanks very much.