How a compensation event is assessed: quotations, Defined Cost and the Fee

Under the NEC Engineering and Construction Contract, a compensation event is priced by forecasting what it does to your cost and your programme. The Project Manager then accepts your figures, asks for a revision or assesses the event itself. The steps and periods are set out below, first for NEC3 (April 2013) and then where NEC4 differs.

Before the quotation: early warning and notification

As soon as you become aware of a matter that could increase cost, delay Completion or impair performance, give an early warning under clause 16.1. If the Project Manager later decides you did not give an early warning that an experienced contractor could have given, the event is assessed as if you had given one (clause 63.5). In practice this can reduce what you recover.

Then notify the compensation event under clause 61.3 within eight weeks of becoming aware of it. Your notification should:

• refer to the early warning, or say why none was needed
• name the item of clause 60.1 you rely on
• say what happened and when you became aware of it
• describe the likely effect on Defined Cost and planned Completion
• state plainly that you are notifying a compensation event

The Project Manager replies within one week (clause 61.4). If it accepts that this is a compensation event, it instructs you to submit quotations.

The quotation: three weeks

You submit quotations within three weeks of being instructed to do so (clause 62.3). Under clause 62.2 a quotation contains the proposed changes to the Prices and any delay to the Completion Date and Key Dates, with details of your assessment. If the programme for the remaining work changes, include a revised programme showing the effect.

The Project Manager may instruct alternative quotations for different ways of dealing with the event (clause 62.1). The Project Manager and you can agree to extend the period before it ends (clause 62.5).

How the price is built: Defined Cost plus the Fee

The change to the Prices is the effect of the event on Defined Cost plus the resulting Fee (clause 63.1). Work already done is priced at actual Defined Cost, and work not yet done at forecast Defined Cost.

Under NEC3 the dividing line is the date when the Project Manager instructed, or should have instructed, you to submit quotations. Defined Cost is built from the Schedule of Cost Components (or the Shorter Schedule, depending on the main Option). The Fee is your tendered fee percentage applied to that cost.

Price the event on what it actually costs you, not on rates in the Bill or Activity Schedule, unless both parties agree to use them. Include risk allowances for matters with a significant chance of occurring that are at your risk.

Time: the Completion Date and the programme

The delay to the Completion Date is the length of time by which planned Completion moves later than shown on the Accepted Programme (clause 63.3). It is measured against planned Completion, so any terminal float you have shown is protected. Key Dates are assessed in the same way.

This is why an up-to-date Accepted Programme matters. Without one, the Project Manager can make its own assessment.

When the Project Manager does not accept

Within two weeks of your quotation, the Project Manager replies (clause 62.3) with one of the following:

1. an instruction to submit a revised quotation, with reasons (you then have three weeks under clause 62.4)
2. acceptance of the quotation
3. notification that a proposed instruction will not be given
4. notification that it will make its own assessment

Under clause 64.1, the Project Manager assesses the event itself where:

• you have not submitted a quotation in time
• it decides you have not assessed the event correctly
• you have not submitted a required programme
• it has not accepted your latest programme for one of the reasons in the contract

Its assessment is due within the period that was allowed for your quotation.

Deemed acceptance

Silence does not run forever. If the Project Manager does not reply to a quotation in time, you may notify that failure. If it still has not replied within two weeks of your notification, the quotation is treated as accepted (clause 62.6). Clause 64.4 works the same way where the Project Manager fails to make its own assessment in time, and clause 61.4 where it fails to reply to your notification.

The event is implemented when the quotation is accepted, the Project Manager notifies its own assessment, or the quotation is treated as accepted (clause 65.1). An implemented assessment is not revised later just because the forecast turned out wrong (clause 65.2).

What changes under NEC4

The structure is the same: an eight-week notice (61.3), a one-week reply (61.4), three weeks for quotations (62.3), a two-week reply and deemed acceptance (62.6). The differences are:

• Dividing date (63.2): this is the date of the Project Manager's communication for events arising from its own instruction, notification, certificate or changed decision. For other events it is the date you notified the event.
• Fee (63.1): a single fee percentage applies to Defined Cost. NEC3 uses separate subcontracted and direct fee percentages.
• Delay to Completion (63.5): this is assessed the same way, against planned Completion on the Accepted Programme.

Worked example (NEC3, calendar weeks)

On Monday 2 March 2026 your site agent finds unexpected rock, a physical condition under clause 60.1(12). You give an early warning on Tuesday 3 March and notify the compensation event on Monday 9 March.

Your last day to notify would have been Monday 27 April, eight weeks after you became aware. That day is Freedom Day. We assume public holidays do not extend NEC3 periods unless your contract says so, so do not rely on them.

The Project Manager instructs quotations on Friday 13 March, so your quotation is due by Friday 3 April. That day is Good Friday, so submit on Wednesday 1 April.

The Project Manager's reply is then due by Wednesday 15 April. If nothing arrives, you notify the failure on Thursday 16 April. If there is still no reply by Thursday 30 April, your quotation is treated as accepted.

What missing the time bar costs

If you do not notify within eight weeks of becoming aware, you are not entitled to a change in the Prices, the Completion Date or a Key Date (clause 61.3). The exception is an event the Project Manager should have notified and did not.

Check your own contract

This guide describes the standard conditions. The signed contract's Z clauses and Contract Data govern over them, and they often shorten periods such as the eight weeks or change the Fee. Read our NEC3 page for more on the edition. This guide is general information, not legal advice.

What Sakhani does

Sakhani reads your signed contract, including the Z clauses, and counts the days from the event. It reminds the people responsible before each period ends, and drafts the notification or quotation cover letter for a person to check and send. See how it works.