NEC4: The Activity Schedule Explained

Getting an NEC4 activity schedule wrong rarely fails quietly. It shows up as cash flow pain, awkward assessments, and disputes about what “complete” really means. We dig into why the activity schedule is a pricing tool rather than Scope, why NEC expects the contractor to prepare it, and how that single document can either stabilise a project or create friction for months.

We compare NEC option A and option C in plain language. Under option A, the activity schedule directly drives interim payments through completed activities, so granularity and alignment with the accepted programme matter far more than many teams realise. Under option C, the activity schedule sets the target, while interim payment runs on Defined Cost plus Fee in an open book model. That difference can lull teams into letting compensation events drift, even though liabilities, revised targets and delivery reality still need to be kept up to date.

We also tackle the practical contract administration: what “correcting” and “revising” mean under clause 55, why poor cash flow is not a stand-alone reason to revise, and how compensation events should change the Prices using Defined Cost plus Fee. Finally, we share two workable approaches for showing compensation event adjustments in the activity schedule, including how to handle omissions, large changes, and the temptation to front-load.

If you work with NEC contracts, NEC4 option A, NEC4 option C, activity schedules, compensation events, project manager assessments, or defined cost records, this is a sharp refresher with immediate on-the-job relevance. Subscribe, share this with your commercial and planning teams, leave a review, and tell us: where have you seen activity schedules cause the biggest disputes?

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

Transcript

Welcome And Session Aim

SPEAKER_01 0:14

Good afternoon, everyone, and welcome to episode eight of our webinar series. And time is flying. It's nearly April already. So today we're talking all about the activity schedule, particularly under option eight, but also for option C. So we thought it warranted a whole uh webinar just to focus on a very important topic and just seeing how the activity schedule, what it does, purpose it serves, and uh how we need to manage it potentially during the life of the project. So that's our focus uh for today. You'll see David and Ben. They'll introduce themselves shortly. So I'll pass over to you and uh a little bit of introduction on all things seeker.

Who Seeker Is And Why

What The Activity Schedule Is

SPEAKER_00 1:00

Thanks, Glenn. Yeah, good to be here again. I'm David Allen, as Glenn said, I'm the executive director for Seeker Southern, and I'm again looking forward to this episode as I have the others that we put on around the NEC. This one on understanding the activity schedule is particularly interesting and particularly pertinent as well. Something that in reality should be relatively simple to establish and work around, and yet, however, that's not always the case. So it's important that the parties understand both the respective intent as well as the needs of those preparing or reliant upon it. For instance, there are already a huge huge financial burdens on a contractor just getting to the point where they're in contract. So having assurance around the operation of the activity schedule will certainly help their financial management. I know that Ben and Glenn will provide an overview around this topic shortly, and that there will be an opportunity to discuss the issue shortly as well. However, just a quick reminder about Seeker before we get on with that. The Civil Engineering Contractors Association represents represents many of those contractors that deliver and maintain a significant part of our mainland mainland UK infrastructure. Seeker Southern is one part of a member-led trade association that is now actually in its 30th year. We are made up of six English regions, the devolved nations of Scotland and Wales, and have a policy office in Westminster. We collectively engage on industry issues with governments and those bodies that impact on our industry at both a national and regional level. And you can find out more about this on our and our other wider activities on our Seeker website. Today's webinar supports our upskilling and training core pillar. Whilst we already deliver a suite of online seminars around the NEC, where we look to increase Seeker member awareness and seek to promote a fair and equitable use of this tool. This webinar will look at an element of that contract pertinent to the NEC options A and C, which plays a big part in determining the criteria around payments to the contractor. And by increasing all parties' awareness, we will hopefully promote better outcomes for all. So I'll now hand you over to Ben from Gather. Afternoon, all. Welcome then to episode eight. So uh understanding the activity schedule, what we're gonna look at. Firstly, what is it? So we'll cover that, and also its role in main option A of the ECC, so as a priced contract with activity schedule, and also its role in option C, so priced contract with activity, sorry, target contract with activity schedule. We're then gonna have a look at how to correct, revise, and change it, which are the three verbs we carefully found there in the contract. So how do we correct it and when? Uh how do we revise it and when? And what are the rules around that? And finally, how do we change, or rather, change the prices in it uh for things like compensation events? I guess it also extends to acceleration and defect acceptance as well, but we'll we'll stick with compensation events uh for that bit of the topic. Then once we're looking at changes to the prices, how how do we propose those prices are changed in the context of an activity schedule? So, what does that look like in that clause 62.2 bit and how might we present that? There's a few options, as always, uh not necessarily a right or wrong, perhaps just a better or less good way of doing it. So, but we're we'll keep an open mind and explore that. As always, not legal advice, just a conversation starter and some knowledge share. And David, we're going to return to you. Welcome to chip in through, of course. But uh when we're putting this together, I think David had some extra thoughts that were very useful. So we put them in place of a conclusion slide. And then we hopefully, this isn't a massive topic this one, so hopefully we'll have a bit more time for QA at the end and we'll point you in the direction of some other resources. So uh to kick us off, what is it? So it's used in main options A and C. And if you turn to those parts of the contract, you've got to find a defined term that states the activity schedule is the activity schedule, unless later change in accordance with these conditions of contract. That stumped me when I first read it. I thought, is what's it what does this mean? Defining itself as itself. Well, not quite. If you know your NEC sort of syntax or topography, you'd know that the activity schedule written there with capitalized initials is a defined term. And it's this that we're looking at. As a defined term, it's defined as the original activity schedule, the one in contract data, identified in contract data, which is why it's in italics, unless later changed in accordance with these conditions of contract. And as we just saw, we're going to be looking at how to correct, revise, and update it. And that's not unusual. There's a few places where that occurs. You might think of the completion date. So uh the completion date is the completion date unless changed in accordance with these conditions of contract. And so NEC uses this as an elegant way of saying, well, look, this is the contractual starting point. It evolves in accordance with the conditions of contract, and that's why we have both an identified and a defined term. So there we go. And a quick reminder, we're going to say some of these sort of reminders as we go through, but information in the activity schedule is not scope, and it's not site information either. So we mustn't rely on sort of elaborate descriptions of work within the activity schedule as a way of somehow substituting or supplementing what's in the scope. If we do make any references, and indeed we it's quite helpful to do that, we really want to be showing that item coverage. Something will cover a fair bit more. We're not relying on it to say more. I think I've got this slide two, which is just to set out perhaps it's helpful to see what else we might put on there as an activity schedule. You can see in this activity schedule, we're doing uh what the contract requires. We've got uh a list of activities with their with their corresponding lump sum. Collectively, those lump sums are known as the prices. And this particular, and therefore those two columns are really the essential ones, but you can see we've used a bit of license here to maybe put some other things on there, perhaps uh an activity reference that ties back into a program, and then that useful, perhaps that useful synergy and point in the direction of scope as to broadly what items we're talking about. And as we'll see later, this helps us when we bring it into some of the other mechanics of the contract. Now, uh, and I think David will pick up on this point as well, but it's prepared by the contractor pre-contract. So any client procurers out there getting excited by the prospect of firing up a new spreadsheet and setting out a nice activity schedule to achieve some kind of consistency of tender evaluation. It's really not necessary. It's really not necessary. The consistency is bought by the fact that everybody is uh looking at the same scope document, which describes what you want. And the uh the activity schedule is just a pricing tool, and there's some good reasons for not meddling too much in what should be a contractor-prepared document. Now, I say that a little bit naively because I know what goes on, and there's sometimes a to a greater or lesser extent the client will have a go at putting something together. And I know that in certain sectors there's a good reason for probing the buildability, or perhaps there's only one way of doing something, and you want confidence that things are being thought through in a certain way. But that aside, the majority of tasks typically can be put together by the contractor. And there's a few reasons that uh David will help us unpack later as to why that would be the case. So the sum of all the prices on the activity schedule make up that tendered total of the prices. And for option A, price to contract with activity schedule, this gives us that uh uh that that total price, which eventually, if all those things are uh are completed, we will pay. For option C, we don't pay from this, it sets the target with which we then compare costs, and we'll have a look at that later. So it's a commercial pricing document, not scope, not site information. And another point to procure us, remember that the prices on the activity schedule they're not used as a basis of assessing compensation events unless by agreement. The sort of default position is that we use define cost plus fee. And therefore, there is no benefit to procurement in the sense of fully understanding the cost breakdown and build up of those activity schedule prices. So be realistic about why you're asking for things if you are and what it's actually going to be used for. It will not, there's no kind of provisional sums, it will not inform necessarily the assessment of a compensation event. We'll unpack that a bit further later on. Okay, and the next slide, I think, is over to you, Glenn.

What It Is Not And Who Writes

Option A Payments And Cash Flow

SPEAKER_01 10:11

Excellent. Thank you, Ben. Good. So let's have a look at the role of the activity schedule with regards to option A specifically. And we'll do a separate slide for C. Because obviously there's two main options here that refer to activity schedule, um, being A and C. As we've already alluded to, it's gonna, we're gonna be tendering option A to ascertain the total of the prices. So the contractor will be committing a tender price, and they'll produce their activity schedule at tender stage, break the project down into the number of items, each of those items, the sum of those adds up and reflects to the total of the prices at tender stage. So this is going to exist. It'll be submitted as part of Contra Data Part 2, it will exist at tender stage. That's really important because it's then used to assess the price word under date. So in each assessment date, typically for weekly or monthly, then the contractor is paid for completed items in line with the activity schedule. And this is such a simple fundamental point. And only today I've run a training session where I had 17 people. I asked if a contractor's done 80% of a line item on an activity schedule, but the last accepted program predicts they were 60%. How much should they be paid? And everyone gets hung up on the 60 and the 80, and there was only one person who said they don't get paid anything. Most other people thought they got paid 60 in line with the last accepted, a few thought 80 in line with what they'd done. It's really simple. They get paid nothing until an item is complete. So there's no provision to pay part percent complete. That in itself isn't a problem, it's not unfair. As long as the contractor knows that, then they just need to break their activity schedule down to a suitable level of granularity to give them a sensible cash flow. It really is as simple as that. So break the activity schedule down to a suitable level of detail, and that will depend upon their own sort of sensitivity to cash flow, and also much more fundamentally, simply depending on the contract value and the length of the project, will depend on how detailed that needs to be. The activity schedule is then topped up, as we're going to see, for compensation events. They'll be added to and form part of the activity schedule. Really importantly with option A, though, they don't get added until they're implemented. So that's another really important aspect contractors need to think about in terms of cash flow. Because if you haven't had a compensation event agreed, in theory, there's nowhere being paid for that item. You may have proceeded with, may have even finished, but because you haven't agreed it, it's not on the it's not on the activity schedule yet. So there's no way of being uh being paid. Clause 31.4 obligates that items on the activity schedule relate to items on the accepted program. So again, an EC does a lot of this, just it's encouraging, frankly, good practice project management, where I think it's a good idea to have a correlation between the pricing document and the program, particularly with option A. Particularly with option A, I think that's a really important aspect, hence 31.4 is an obligation to do so. So that is some of the fundamental elements uh we've got there for option A. So we don't use, as Ben's already said, we don't use uh the activity schedule to assess compensation events. They will be by agreement you can, but otherwise they're built up for first principle using the uh using the scheduler cost components to define cost to build up the cost there. So that is some of the fund elements of option A there. Now, the practical reality is that contractors, you might find that on some projects you've you've agreed either informally or sometimes even if there's a Z clause going in to say we'll pay part percent complete. I always say to clients, you don't need to do that as a Z clause. Just encourage the contractor to break it down rather than agree part percent complete. But if you are on a project, you are being paid part percent complete. All I can warn you is that tap can be turned off at any point, and you could be unpaid what you've already been paid until you then are completed. So don't rely on a favor, don't rely on spirit, mutual trust, and cooperation to get paid something you're not being entitled to. How about we follow the rules and get paid what you are entitled to? I think that's fair, isn't it, Ben?

Option C Target And Open Book

SPEAKER_00 14:42

Absolutely. Yeah. I mean, it's just going into it, know what it's for and following the following the rules. And uh, you know, it's one of the reasons why hopefully hearing that procurers in the client's team are aware of just one of three main reasons, this being one of them that preparing the preparing the activity schedule for a contractor to price, that's one of the pitfalls is that we create that cash flow, uh, which might mean that, you know, the contractor's financing the works a little bit, so the fee might go up. But why why get involved with that? There's as we'll see later on, there's very little reason to do that, only a few exceptions. And um to your point about the compensation events, absolutely, right? The only way the contractor gets that changed lump sum is through having an implemented compensation event in a timely manner. So if you're a project manager and you want to build that mutual trust and cooperation quickly, then don't treat the timescales as targets, treat them as maximums, see if you can improve upon them, let the contractor know that you're you're going to try and get those things processed quickly. It'll do a lot to improving cash flow and building that relationship. All good stuff. And Glenn, I think also option C. Yeah, let's take a look at C.

SPEAKER_01 15:52

So there's still an obligation to produce an activity schedule under option C. So you'd still, as a contractor, produce the activity schedule in exactly the same way. So you're still breaking the project down to the number of items, putting lumps one against each of the items, the sum of all the line items adds up to the tender price that has been put forward. But this time it's only going to for gonna basically create the target price for that project rather than the lump sum fixed price nature we have uh with option C. Really importantly, this activity schedule is not used to assess the interim payments. So we're paid under option C as contractors under defined cost plus fee. You are not paid in relation to the activity schedule items. So all it really does is get you to your target at tender stage. Okay, so it is a requirement just to get to the uh to get to the target. Now, interestingly, NEC3 used to talk about revising the program with option C, which you're going to come onto in a bit more detail later. But with option C, the real basis for the activity schedule is to ascertain the original target, and then it really serves its purpose. It doesn't come into play for any real significant reason after that. Yes, we'll update it in line with compensation events to keep the revised running target, but that's really the only purpose that it serves. So obviously, with that, there's more of a commercial role to do with option C compared to option A, because you've got to prove the cost you've incurred each period, and the client's got to vet that, or the project manager will have to vet that to see if the costs are all justified. The record keeping increases or the opportunity for inspection of the records, because option C is basically an open book contract. So if you're gonna justify your costs, that's got to be substantiated, right? Because the client's project manager is not just gonna trust the contractor that they're asking for what they're entitled to. So the level of commercial administration increases there with option C. So that means administration will be required there. So that is really the purpose there for option C. It's maintaining the target. And then once the final costs at the end of the project are ascertained, so the the original uh lump sum price plus or less any other compensation or other amounts or revise the target, and then we've done a separate, well, it's a separate bulletin, certainly, to show how that sort of pay and gain calculation is done. We've got bulletin 28 there that does that sort of uh detail of the calculation that that's done. So it serves a very different purpose. For option A, it is a payment mechanism. Under option C, it's not used to assess the interim assessments, it's only there to ascertain what the target was at the start, and then you adjust it in line with compensation events. So that's option C.

SPEAKER_00 18:46

Good stuff, Glenn I and I think um just hearing you talk about the kind of open book nature and and it's not used for payment. Do you think that that sometimes triggers a situation where compensation events might take a bit of a back seat? The opposite, in a way, to what we said about option A, where the pressure's on because that's how we get paid. In option C, what's your observation there, Glenn?

SPEAKER_01 19:09

Yeah, really frustrating. There's a very big project going on right at the moment, and I'll leave it at that and say nothing more, where it is an option C, and because the contract is being paid, then there's less pressure seemingly on getting the compensation events agreed. So the forecast costs of the target sat here, the forecast costs are going now. My hands will go out of screen, they go out of shot. I'm not tall enough to show you how far. And also in a similar vein, the uh completion date is here, and I certainly can't go wide enough to show where plan completion is, but it's way out there. And neither party then fully understands their liability. Now, okay, if there's not significant delay damages, which there's not, again, then people think, okay, it's not quite as important. But it's really, really important that we keep on top of that process because you need to understand your liability, your KPIs, if you've got them, it's just as important. But yes, you're right, because people are being paid, there's not the same sense of urgency that you would maybe get with option A.

SPEAKER_00 20:11

Yeah, and under the contract, there's no global delay and disruption mop-up later on. So all that work still sits there. So if you don't resource it now, you've got to resource it to do it tomorrow. And all that you do is you you bring that gap, that lack of contemporaneous to those assessments which you'd otherwise have. So the memory fades, maybe the records have. And yeah, so I think the message from both of us there is just because you're operating on an option C, don't neglect to maintain your prices because they'll create that that that lag on reality that will cause you a big problem later. And it's one of the sure ways to sort of move towards chaos in your in your contract admin. Okay, good stuff. And and really then, Glenn, we can have a bit of a comparison of the two there, just to sort of bring those two things in.

SPEAKER_01 21:01

Yeah, so you've got so option A does set the total prices, and it does for option C. It is used for assessing payments in A, but not with with C. Prices updated for compensation fence, yes, in as much as we'll we'll add compensation fence to the to the original total of the prices. The prices corrected relate to the scope, yes, under clause 55.1 for option A, and revised the prices revised relate to the program, yes, under uh 55.3, which they're not under the option C contracts, set to target or a paying gain share. Well, with option with option C, we've got that paying gain share. Um, but obviously with option A, it's a lump sum uh fixed price contract. The big one, maybe we didn't mention so far, is that errors in the activity schedule with option A remain firmly with the contractor. So the contractor's pricing the whole of the scope, and if they miss something in the scope, that's their life. Liability. They can't say, well, it's not in our activity schedule. You accepted our activity schedule. There's nowhere to claim a compensation event for stuff that's missing off the scope. Estimators' errors is not one of the reasons that you can claim a compensation event. Option C the better news is the contractor can claim the cost of everything they do. And if there was something they forgot to prize, put in the target, they get paid for it. But obviously that will eat into gain share. And the more errors you've got, the less likely you're going to come under. You might go over. And then again, you're going to share the pain share. So it depends what the percentages are, if you're under or over. But I think the word you've used there, Ben, is softened. I think that's a nice word. And it depends how soft the softened is, depending on the percentages.

SPEAKER_00 22:45

But of course, don't forget it won't help you with time. So in either option, you know, you might not have allowed sufficient time to do it. So it's the reason clause 55.1 says information, the activity schedule is not scope or site information. So we can't rely on it. And you're right, in option A and C, where we use an activity schedule, it is envisaged that the contractor will prepare it and that the contractor will price it and carry any risks of errors. So yeah, just to echo that point Glenn just made. As opposed to the bill of quantities in options B or D, which is a document that is assembled by the client and priced by the contractor, there are mechanisms in that if that bill of quantity needs correcting because it's missed some items or is it is otherwise wrong. So bills of quantity operate differently in terms of putting that risk of error. Activity schedules, it is the contractor's liability, if you like, to get that activity schedule appropriately structured for cash flow and appropriate coverage of the scope that they've got to build. And yeah, again, that's another reason why perhaps clients we don't need from a procurement point of view, an evaluation point of view, to put out a document for everybody to price.

SPEAKER_01 23:56

I should have been, I don't think I labored it enough. Joe, that third and fourth line down, one subtle change with option C is that there is no need to revise the activity schedule under option C. Now, under any C3, we we you could, and we discussed this on a previous webinar. Um, but option A, there is the requirement to revise the activity schedule under option C, there is no longer any need to revise the activity schedule and equally no obligation to make sure the items correlate to items on the program. We said it's good practice still to do it, but it's not a requirement to certainly revise the activity schedule with option C.

Correcting And Revising Under Option A

SPEAKER_00 24:31

Yeah, we'll cover that in a moment because I'm a super geek. I've got all the books right next to me within reaching distance. So I just had a quick look and uh I do indeed remember that. And actually, NEC4 went out the door without me realizing that despite being involved in the process just for two years, without realizing that that we'd taken that bit out of option C. And I guess it's because it's not required, but as we'll see in a moment, it's still useful. So you learn something every day. For me, it was that uh that had disappeared. Although I think many of us in practice might still do it, particularly if we're contractors, because uh we'll see in a moment why it's still very helpful. Okay, so let's let's look at uh correcting and revising. Just to make that point one more time, the correcting and revising no longer happens under option C as an obligation, but we still update the prices uh for compensation events. So we're still updating for compensation events. That's the green yes halfway down that list in option C. It's just the other bits, the maintenance of it for program changes that we don't have to do anymore. Although, as Glenn said, it's likely to be useful. We'll cover that in a moment. So when we look then at um correcting and uh and revising and changing the activity schedule under option A, let's have a quick look at correcting to start with. So this clause says that if activities on the activity schedule do not relate to the scope or operations on the accepted program, the contractor should correct the activity schedule. So this correction is not a compensation, it's just an alignment of this important sort of payment tool to the reality and mapping that to those realities. So maintaining that synergy between the activity schedule, the scope in the accepted program, is very useful and a contractual obligation under option A. That is not a contractual obligation to do under option C, although perhaps it's useful. Um, errors, we just covered this. Errors in the preparation of the activity schedule, both in A and C, are the contractors' risk, more pertinent under A because we're paid, we can apply for anything we that we do is defined cost under C. But bearing in mind, any errors in in either case aren't compensatable. So they're not going to actually get us any time either. So this does not constitute a compensation event. The total of the prices is not amended. It's just we we're sort of stuck with it. The consequence of a pricing error in option A is greater because the contractor absorbs the full financial error. Under option C, that sort of misstep would find a price being realistically lower than the corresponding cost, all things being equal, and therefore it will contribute to a negative gain share position in the scheme of things. And that shared position is in accordance with the ranges and percentage percentages stated in contract data. So once again, there's no mechanism for the contracts to recover additional money arising from errors in the activity schedule. Again, it's one of the reasons that we would look to the contract prices different to a bill of quantities. Okay. Glenn, over to you.

SPEAKER_01 27:40

Yeah, so more specifically, we touched on it already, but let's look at the revision of the activity schedule under option eight. So the first reason is a change in the plan method of working. So these are identified in the contract as the reasons why the contractor can propose a revision to the activity schedule. So reason one, the contractor changes their plan method of working at their own discretion, and the contract or the current activity schedule no longer reflects the new approach. So an example might be a single operation is now going to be done in two distinct activities with one element subcontracted at the different times. So there is going to be a significant uh gap between the two. We're going to do it in one go, but now we're going to do 60% of it early, and then 40% of it at a later stage, significantly later, then that might be change in the plan method of working. There may be it may or may not be a new constraint, which may or may not be a compensation event that's caused that. Um it could just be simply the contractors changing their ideas now. Programs are fluid, right? So contractors will regularly revise durations, logic, sequencing, and that may mean that the activity schedules originally scheduled just isn't quite right, representing how they now plan to do the works. Reason two is correcting items to relate to the scope. So the contractor wishes to correct the activity schedule. So the activities do properly relate to the scope. This is a contractual obligation. It's fundamental to the clarity of what is due for payment. If the contractor realizes that there's an item that's not in the activity schedule, then they can add it. But obviously the total the prices still need to be the same. So yes, they can add an item and put money against it, but obviously that money needs to then come from somewhere else on the activity schedule. So you'll have to maybe lower the cost of one or several items elsewhere to at least mean that when you're doing the work, you're getting paid proportionally, you know, for what you're doing along the way. Now, there is a note that poor cash flow is not a pure valid reason on its own. 55.3 does not entitle the contractor to submit a revised activity schedule under. Now, myself and Ben have had long conversations on this, and I think we agree that we do agree that that is the case, that poor cash flow is not a valid reason. However, at the end of the day, if the contractor is realizing that uh yeah, they've they've not split it down in enough detail by agreement, you know, anything's possible. So under clause 12.3 by agreement with the client. So that will be between the uh the client and the contractor can agree to do something different, or the client may or may not choose to empower the project manager to do something, do different something different here. Having said that, if there is a genuine reason for changing an item on the activity schedule, there's nothing to stop the contractor at the same time also adding in a bit more detail. There's nowhere that says they can't do it, but equally there's nowhere that says the spoon feature say you can do it. So I kind of feel there is always a kind of a reason or excuse the contractor will be able to find a reason why they should be revising the activity schedule. But does it solely mean they can only change that bit? Well, I don't think the contract expressly says either way. But bottom line is there is a risk that the project manager could say no, because I think you're just doing it purely to amend your cash flow. So the simple answer really is don't fall into this trap and produce a decent activity schedule to a decent level of detail from the outset, because you cannot solely rely on poor cash flow as a reason to revising the activity schedule. And I certainly wouldn't condone a contractor every month revising their activity schedule like they do the program, just to squeeze in a bit of extra cash coming in the door. Definitely not. And I'd I'd, as a project manager, I'd find a reason to not accept the uh the revised activity schedule. Because under clause, under clause 55.3, the only reasons for not accepting the revised activity schedule is that they're not in line with the uh the accepted program, or they're adversely front-loaded, so they're not reasonably distributed, or the total of the sum does not add up to the total of the prices. So it is important that a contractor only revises the activity schedule when absolutely necessary and not thinking they can do it just to marginally improve the cash flow. Anyway, the chances are it won't make it won't make it in time for this month, this month's application, because if they do revise the activity schedule, the project manager's got the period for reply, which will probably exceed the date the application's due. So you can't rely on it for this application anyway, just to try and improve on your cash flow.

SPEAKER_00 32:37

I think probably the robust view of it is to if you look at clause 31.2 in the program, you're supposed to state for each operation of how you plan to do the work in each operation. So I uh for me, that's the test. Have you had to change that statement? And if so, you you might open up that reason. If it's just that you've bundled things in, you know, a bit of a kind of uh bill of quantity summary page and you've called that your activity schedule, that's whether in in the in an extreme case, you put all your reinforced steel in one place, uh, all your steel reinforced concrete in one place, that's perhaps the the the the the the trap you don't want to fall into. So yeah, just follow what it says. Uh if the client's saying to you pre-tender and you're able to to have a conversation about those tender instructions, why have you priced this? I was hoping to do it a slightly different way. Sorry, why have you prepared the activity schedule for me? I was hoping to prepare it in a slightly different way. That's probably a helpful conversation to draw out. Uh, but yeah, all good. So those are those three reasons on the screen there, uh, Glenn just mentioned. So, yeah, not relating to operations on the accepted program. And, you know, the the the previous one as well, the reason for changing it around it not complying with the scope, you know, maybe it's scheduled over a nesting season or something like that, and you're talking about chopping trees down, you know, all that kind of stuff that's not possible. It's just bringing synergy in with everything. Change prices are not reasonably distributed. That's that front loading bit that Glenn mentioned. Good stuff? So we know that's for A. We don't have to do the revising and the correcting for C, like we did in NEC3. It's not, it's not absolutely necessary, so it's been taken out. But I actually think it's quite useful to still do for some of the reporting exercises at least. So so we're talking about continuing to maintain that synergy of the activity schedule and the prices in it against the the changing program as things evolve, and very useful perhaps to keep that updated and and in sync, which you have to do in option A, you don't have to do in option C, but this is why I would do it. I think it makes sense because mapping the activity schedule to the accepted program and time-scaling those prices got nothing to do with payment under option C, but it's how we priced across the project. So we get that time-scaled S-curve of our target, if you like. Now, of course, each it could be very crude. There might only be a few dozen items on there for a very expensive project. It's probably not. There's probably a degree of granularity to it. So how well things map to reality and when is obviously a question of judgment when you put it together. But in the absence of anything else, it gives us at least the whole of the prices. So forecast over a period of time, we can then plot our defined cost plus fee. And you can see we're we're up to month six here, when the line breaks into a dashed line, which is our forecast defined cost through to completion, which we have to do anyway, right? So we have to give forecasts of defined cost for the whole of the works as part of clause 20.4 under option C. So it's you know not too difficult to add the fee to that to bring it into parity with the price and maybe plot the two on the same chart. Yeah, it's a bit of a graphical way of doing that value analysis, isn't it? And we're then predicting what that paint gain share might look like. No requirements do this, but often when we talk about making main option selection choices, we think a great deal about the risk of a main option, budget certainty, value for money, compared with the quality of the scope and the ground. But we don't often think about the resources we need to run it, and perhaps even less so the reporting that we might like to get out of it as a degree of predictability on a target contract. This is probably getting close to the best we can do. In option D, obviously, this is much more complex because we're not just speaking to a document that speaks to the program there. We've got to somehow allocate all of those small items, something I had to do for real once, which was complex. The other thing it helps with, of course, is that X1 price adjustment for inflation, because we're time scanning things, you could also perhaps build that into this model. Okay. Anything to add there, Glenn?

SPEAKER_01 36:53

No, I think that's good. I think yeah, it's it's useful. There's some useful exercise to be done, but I must admit, I I do get why it was taken out of uh of NEC4. I can see why, because why we're revising an activity schedule when or even even the fact it's got to relate to items on the accepted program as definitive as a when it's not being used as the pricing tool. Yeah, I get it. I wouldn't mind it either way, but I I get why it's come out.

Changing Prices For Compensation Events

SPEAKER_00 37:19

Yeah, I'd agree with that. Okay, so let's look at that final bit. So we've dealt with correcting the activity schedule, we've dealt with revising the activity schedule, and now we want to look at changing the prices on it, which is the verb around compensation events and a few other places as well, defect acceptance and acceleration, too. But we're with we we're told that uh clause 63.1 tells us the prices are changed due to the effect of the compensation events on defined cost plus fee. We look at uh the prices of the lump sums in the activity schedule. There's no mechanism describing how exactly to update the activity schedule. Clause 63.14 is common to option A and C. It says effectively that changes to the prices are in the form of changes to the activity schedule. So we know we've got to do something to represent the compensation that's in the activity schedule. Now, there are many ways of doing this. Glenn and I were debating this in the secret bulletin that went out, was it last month or month before, about about revising the activity schedule for price change due to CEs. There's a few different ways of doing this. I don't think there's a right or wrong. Pick your pick your approach, and we're gonna have a look at a couple of those in a moment. So, yeah, clause 62.2 tells us that quotations comprise proposed changes to the prices. So I think that's not just how much they're changing by, but how they're changing. And I think putting that in your quotation is also pretty useful. And then clause 66.2 tells us that when a compensation event is implemented, the prices have changed accordingly. So there's a bit of devil in the detail there around how, and that's what we thought we'd unpack on this next bit. So I think uh we're gonna have a look at this first option. Ben, do you want to talk us through this first one given I'm gonna jump onto slide 16?

SPEAKER_01 39:17

Yeah, sure. Okay, so this is one way we can we can do it. And I must admit, this is Ben said, there's more than one way we can do things, and not necessarily right or wrong, but from a practical point of view, when I was when I was on the tools doing proper work like many of you, rather than just doing this Mickey Mouse training stuff. So this is what I did on live projects, especially with option A. So, first of all, as a as a planner, as a planning manager as I was, um, we'd make sure that the activity schedule was basically aligned with the program. So we had a direct correlation between the pricing documents and the and the program, which clause 31.4 obligates anyway. So, because there's that obligation, if you go the whole hog, you can then cost load the program in line with the activity schedule. Okay, so that then means that the planner can actually do the application straight to the program, which is a step too far for some commercial people who want to make a control and say, no, we're not we're not linking that to the planning team, but it works really well. That's almost a side note, but it does work well. But with that in mind, that's why I quite like this approach with what we're calling option one here. So, what I want to do is we've got the original activity schedule, we've just made, you know, nice and simple one, 10 items, 100 grand, it's a million-pound uh tender. And then if we go to figure two, we're gonna see we've got two compensation events. The first one is to uh delete activity two, and the second one is some extra extra works added in. Now, first thing to say is we don't use activity schedule rates to assess compensation events. So if activity two is deleted, it's not a simple case of, well, we knock off£100,000. If the contractor believes with what the information they now know, they could have done activity two for£80,000, then that is the saving. But then we've got to think about okay, how do we adjust the activity schedule in line with that? So particularly from a program point of view, I really want to maintain the original token prices as consistent and then have the compensation events with the ads and the emits. So what we've done is we've tagged activity two with CE1. CE1 is then a minus assessment of 80,000. So you've always got the original 1 million pounds as the bottom line, and then we're amending through the compensation events what the adjustment should be. So all we need to do is remember that when we're applying or when we're applying C1, when it's implemented, we will then take off the£100,000, but also the minus£80,000, which leaves the contract with the residual£20,000 that they will be paid. And also C2, much clearer, it's just an extra compensation event,£25,000. So we've added in an extra£25,000. So you can see here on the activity schedule, we've got the original£1 million is always maintained. So we've always got the original sum that we're clear on, the original activity schedule value. And then the minus 80 and the plus 25 means the cumulative total is 945,000. Now, one side note is we need to think about for the if we take the 25,000, it's probably not that big a deal because it's quite low value. But if you just have CE2 as one line, then obviously you only get paid when that at when that item is complete. If that was a bigger item, 250,000, then as part of the CE quotation, you need to break that down into chunks and put lumps of money against each of them so that when it gets added to the activity schedule, you've already kind of agreed a breakdown as part of the CE quotation as to how you're going to be paid. The further problem with that is the quote might not be agreed at those values. So when it is implemented by the project manager, the granularity is agreed, but you might need to re-evaluate the numbers to reflect the value the project managers are assessed it at. So there's a small nuance there. But that's one thing just to be careful of. Big compensation events, you don't add them as one line. Um you want to break those down into further chunks, that could be done as part of the CE quotation. So back to the main point. Option one is always maintaining the original£1 million. So we've got it, and we've got that number. We can always reconcile on the program. And then the compensation are dealt with as a separate line item overall, though we know the total of the prices here is 945,000. That's one option.

SPEAKER_00 43:47

Good stuff. And I think you know, it's got some benefits to reporting from planning point of view, Glenn. I think you mentioned. I guess I take a slightly different approach, and I would probably favour this option, which we're calling option. Two. And you can see straight away that I use the same notation that activity two has been adjusted by CE number one. But this time I'm putting in the net effect of that. So we lose the visibility of that original price. But then I guess you know that's in a previous saved version of the schedule. And then I'm adding in another activity in the appropriate place to show CE number two there. So we've got a maintained total of the prices and the difference between the prior schedule and this schedule shows that that compensation event effect of implemented compensation events. Then the detail really for me then would be in the compensation register. So you've got, you know, the original total of the prices and then the kind of compensation event tracker. I think part of it comes down to your approach to applying for payment. So some QSs, and I'm not sure this is kind of correct in the strictest sense, apply for activities and compensation events. The subtlety with this approach is you use the compensation events to update the prices and add new ones if you want, as necessary, and then you are applying for lump sums in the activity schedule. Either way, you know, I guess there's a way of doing it, and either one of those probably gets you to the same answer. So, yeah, that I mean, so there are a couple of options. I'm sure people have got a third and a fourth and a fifth as well. So, yeah, that that those are the two ways to do it that that certainly Glenn and I have seen. There are probably other ways as well. I think the other thing with this approach is what if your compensation event affects prices rather than a price? It might affect different bits at different times. And again, I suppose this allows you to do that. I'm sure there's an alternative way of doing that as well, in the other, in the other way. So that's that's the second way that we'd suggest we do it. Now, the interesting thing in either one is that in in either this method or this method, to Glenn's point, we've assessed this compensation event properly, the omission we've assessed properly in defined cost at minus 80,000, including the fee. So that that negative eight, that reduction of 80,000 pounds, which is the defined cost plus fee sort of saving, if you like, means that there is a net payment to remaining to pay of 20,000. Now, in option one, that's kind of taken care of as long as we can establish when we're going to pay this 100,000 original sum, and do we pay the compensation about minus 80 at the same time so that the one necks off the other? But either way around, we do then need to have an updated activity schedule. And I think there's two ways people tend to do this. Put in the in the comments if you've got a third. But essentially, we either have a ghost item, so something we're not doing anymore in the case of an omission, with either a certain with either a a negative or positive balancing sum by the time we take the original price and change it. Or some people get quite excited about that because they don't like the idea of paying for something that they're not doing. So kind of intuitively, I guess, they say, well, I don't want to do that. I want to spread the net remaining element, plus or minus, over the remaining activities we haven't built yet to kind of smooth that cash flow. I actually think the logical thing to do is probably the first of those two choices by saying, Well, we're going to address that net impact in in month, because that is true compensation. Remember, compensation being from the word to together rebalance equally. So the balancing point of taking some work away or adding some work in, we're trying, we're using defined cost to assess the extra or reduced amounts at the time in that month. So I think a ghost item dealing with it probably preserves the cash flow better. But, you know, people do either, and uh, we thought we'd we'd table both there for your consideration. Just looking at time, we've got some really good questions coming in. I think, Glenn, if you've got nothing to add to that, we'll hand to David to do some final thoughts. Any any final words on that one though, Glenn?

SPEAKER_01 48:06

Just one thing, not so much for that slide, but just one thing I was thinking. So to emphasize that there's nowhere in the contract that says we revise the activity schedule with a compensation event. So you are not submitting a revised activity schedule with every compensation event. You're only revising the activity schedule when you change the method of working and such like. So with the compensation event quotations, you need to get across what the changes to the activity schedule are. So once the CE quote is agreed, we've kind of agreed the changes to the activity schedule. And then if you take option one or option two, which both work, then we're conveying how uh what those changes are. So the important thing is we do not revise the activity schedule with every, you don't have to issue a revised activity schedule with every compensation fit, which on projects where you've got 400 C's a month, that's very good news that you don't need to do that.

Closing Thoughts Plus Q&A

SPEAKER_00 48:58

That's my take on it, Glenn, as well. I think uh because it talks about changing the prices and the prices live on the activity schedule. But I guess if you ever you did do a revised one and it doesn't hurt to to to refresh it every now and then, perhaps just to keep the admin trail clean, you'd of course, I imagine, take account of of the latest information. David, a few final thoughts? Yeah, thank you for that. It as I say, it's quite an interesting topic, but I think some of the feedback that I've had and some of the consideration that needs to be out there really is that if the client is going to prepare the activity schedule for the contractor to price, then that can cause issues in itself because it's not actually aligning necessarily with what the contractor's delivery plan is and what their cash flow plans will be required and things like that. So you're not actually you're building in an approach that doesn't naturally fit what the contractor is trying to deliver. And you will have a number of contractors that are bidding for the work and and they will all have their own approach to it. And so you're not allowing that to necessarily come to the fore. Uh you're potentially stifling innovation, and by not actually seeing that come through and and letting the contractor, the individual contractors, develop their own activity schedule, you're actually missing the opportunity to to compare what you're getting and why you're getting something maybe slightly different, and and which might actually be a benefit to the client if they were to look a bit deeper and actually evaluate that. We also know that the sort of if the activity schedule is dealt in such a way that it stifles the the ability for the contractor to get the get payment when they actually need it, it can create cash flow problems. And when you think that the the whole driver behind sort of getting involved in the competitive exercise is actually to engage in work that delivers a positive outcome for everyone, including an income for the contractor, then by not doing that or putting complications in the way, that can create a few challenges. So that you know that that just part is part of the problem. But also it it's you know, one of the points I've got here is that it's not to be used for assessing compensation events, so you need to actually still be having a separate build-up for that. You you you know, if you're we do have feedback where clients have been making assessments of what they might do next and are actually using the activity schedule to guide them on that. And that, as we've heard from Glenn and from yourself, Ben, today, is not how it's meant to be used, but in some cases it is being used like that. I suppose equally uh there's a significant problem, is actually defining the item coverage in terms of what is deemed to be complete or substantially complete. A lot of that, you know, we we have issues where the uh some of the documentation can either be a bit vague or it can be very precise. And it's identifying within that where you will as a contractor get that signed off as being substantially complete. And if there are sort of differences in opinion, then obviously that can be quite a challenge. So those are some things that need to be picked up and and considered because ultimately the dispute that can arise can come about from where this has been incorrectly prepared or where it there's a vagary and it things become subjective, and and that's sort of the significant change or challenge that we have. I think I mean w we have done some feedback to our members, and the the general rule is that the disputes tend to centre on the administration, interpretation and the behaviour uh payment behaviours rather than on the concept itself. So I think that that's where the challenge is, and you you have a very formal sort of process to actually get to where you need to go. But if if you do have that uh subjectivity brought into it, or you try and refine the ability of the contractor to bring their sort of expertise to the party, then that's where you have challenges. No, all good points. No, yeah, really, really interesting.

SPEAKER_01 53:33

Just to summarize, just to point out very simply, just a reminder the NEC contract does not expect the client to produce the activity schedule. It doesn't expect it. And if they could if the client has done it, all it is has been alluded to is a tender comparison document. I wish they'd call it that. This is a tender comparison document, and feel free to break it into more detail. That can be the activity schedule, which is in line with the high-level summary one, and then they work in harmony. So by all means, yep, have a tender comparison document you want them filled in, but allow the contract to do a more detailed activity schedule, and that's the one that's referenced in data part two, but it will still add up to the same as their high-level tender comparison, and then they can work in harmony with each other.

SPEAKER_00 54:15

Absolutely. Absolutely. Okay, so we're we're into questions. So Cab, I I noticed this question. I liked it. It was a it's a good one, and and something that you know we should try and do when drafting the contracts is to look at those extreme cases and and and uh and and sort of uh look out for how we might fix them. I think the answer there is yes, in theory it could be. I think uh your client's almost certainly going to say, can you break it down a bit? But strictly speaking, now that those clauses are out that we're in NEC3, I guess this would work. I mean, it is serving to do to do uh just that uh a target. I do think, though, that m that you'll probably want some form of report, and then it might be helpful to distribute those prices in some way. Useful also if you are operating X1, price price adjustment for inflation. Uh and don't forget you've always got to do those forecasts under option C of define cost through to completion of the whole of the works anyway. So this might give you a useful comparator if you are in a bit more granularity. But good question, good challenge. I like it. Glenn, do you want to take the next one from Peter?

SPEAKER_01 55:18

So are compensations again paid when complete? But how is granularity applied in that circumstance for one large CE? So, yeah, if we're talking option A, then yes. Well, well, you're with option A, you're paid upon completed items in line with the activity schedule, and the compensation doesn't make the activity schedule until it's implemented. So for the same reason, yes, you need to get with option A your C's agreed in a timely manner. Otherwise, you're not going to be paid for those. Now, we do see in practice, particularly where a client may be viewed as being seen to be delaying the CE process, the good the quotation process, they may or not pay you some on account. If they if the quote's 100 grand and they've got to 60 so far and you've done the work, they might pay you some on account if you're lucky. But you know, you really need to both try and get through the agreement of the CE process so you you both know where you stand. For that reason, again, we need to break the CE quote down into smaller chunks, because if it's a big expensive CE, we need to break it down into chunks, and then you get paid when those smaller chunks are completed.

SPEAKER_00 56:26

Don't forget, Peter, as well, just to build on what Glenn's saying, that the price for work done to date is completed activities under option A, in which case, as Glenn says, you you'll want to, if if if it's six activities and and each of those activity prices have increased by 10K, you'll get paid that that 10K extra across each of those activities when the work's complete and when the prices have changed, which will be when the event is implemented. Under option C, the timing of when the event is implemented is is kind of uh irrelevant in a way. We're just maintaining those prices. In option C, we're always paid forecast-defined cost plus fee for the work. So the work will include the compensation event, but the contract doesn't distinguish between original works and compensable works, it's just the works. And because the scope might put additional work in, it's just part of the works. So there's no, I know sometimes we account for them independently, but I think that's another reporting layer. The purest contract sense is that we pay for the works in accordance with the price for work done state definition, and we let the mechanics update either the prices or we're we're building in that extra work in the forecasts. Good stuff. We've got one from Mark on an option C. One thing I see frequently is in the NEC4, and as far as I'm aware, does not detail out what should be detailed on a timesheet for defined cost. Well, interestingly, there is a bit of guidance on this. There's a bit more, Gather did a paper on this recently. It's in one of the LinkedIn posts. We'll we'll surface that and do a link to it. That you may include as a sort of scope template entry into how to set out decent records of defined cost. But there's already quite a lot in the contract itself around the kinds of records that constitute defined cost, and always worth having a look at that scheduler cost components or short scheduler from option A to understand the kinds of depth and types of things you'll be doing. And I think very worthwhile putting that and defined or stating it, probably the right word, in the scope to sort of state the kinds of additional records and the level of detail that you want. And of course, use one of these. Well, certainly Gather has an option there for a standard record management system for capturing our records, records, records, records.

SPEAKER_01 58:38

Anything to add to that, no, other than just uh agree early doors, you know. This is a statement for most stuff, but with the records, what details we need, try and agree them early in the project rather than get to the situation where you're now arguing what that should be, try and agree up front. You know you're gonna need this, so let's agree what level of detail we need at the beginning and then uh follow through with it. Absolutely.

SPEAKER_00 59:05

Glenn, you have a plane to catch, so I'm gonna help push stick to the programme. David, Glenn, thank you very much. Nice to see nice to see everybody. Thank you for all the questions. We'll we'll continue to answer them when we go offline. Just leaves us to say advertise our next session, which is episode nine on disallow cost explained. It should be a really interesting one. Uh look forward to to putting that together with with David and Glenn over the coming weeks. Closing remarks, gentlemen. No, just uh do what the contract says. From my perspective, it is do what the contract says, but actually sort of work together. More uh sort of understanding between the parties will unlock the potential of some of these issues that do do arise, unfortunately. And by having that sort of awareness from the outset, then you're gonna get better outcomes. Thank you all for seeing you next time.