For subcontractors, an NEC compensation event can affect cash flow, delay assessment, entitlement to changes to the Subcontract Completion Date or Key Dates, and cost recovery under the subcontract.
The commercial risk is immediate. An incomplete or late notification can prejudice the Subcontractor’s ability to obtain changes to the Prices, Subcontract Completion Date or Key Dates. An unsupported quotation can lead the Contractor, or another named assessor under the subcontract, to make a different or lower assessment of Defined Cost, Fee or time impact.
The review should start with the notification, quotation and assessment sequence. It should then check the compensation event basis, Accepted Programme, Defined Cost records, Fee calculation and stated assumptions.
This article sets out how subcontractors can review programme impact, Defined Cost records and substantiation. It also explains how to decide whether the next step is a revised quotation, further substantiation, negotiation or the applicable NEC dispute route.
Key Takeaways
- Check whether the event qualifies under the subcontract before treating it as a compensation event.
- Confirm whether the Subcontractor was required to notify the event.
- Check when the notice period started and whether time bar wording may affect entitlement to changes to the Prices, Subcontract Completion Date or Key Dates.
- Follow the clause 61, clause 62 and clause 63 sequence before treating the issue as an assessment dispute.
- Identify whether clause 64 requires or permits the Contractor or another named assessor to make its own assessment.
- Base the time assessment on the Accepted Programme current at the dividing date and explain the programme impact in words.
- Support the Defined Cost build-up, Fee calculation and forecast assumptions with records.
- Decide whether the evidence supports a revised quotation, further substantiation, negotiation or the applicable NEC dispute route.
Key Definitions
Compensation event. An event or matter identified as a compensation event under clause 60.1 or another applicable subcontract provision, as amended by the Subcontract Data, selected Options or Z clauses, and assessed under the subcontract for its effect on the Prices, Subcontract Completion Date or Key Dates.
Notification. A notice under clause 61 by which the Contractor or Subcontractor notifies an event or matter as a compensation event in accordance with the subcontract.
Quotation. A clause 62 submission stating the Subcontractor’s proposed assessment of the compensation event’s effect on the Prices and, where applicable, the Subcontract Completion Date or Key Dates.
Accepted Programme. The programme accepted under the subcontract as the Accepted Programme. For clause 63.5 compensation event assessment, the relevant programme is the Accepted Programme current at the dividing date.
Defined Cost. The cost defined by the subcontract and calculated by reference to the applicable Schedule of Cost Components or Short Schedule of Cost Components, used under clause 63.1 to assess the compensation event’s effect on the Prices.
Fee. The amount calculated in accordance with the subcontract by applying the relevant fee percentage or percentages to Defined Cost when assessing the compensation event’s effect on the Prices.
Dividing date. The clause 63.1 date separating work already done from work not yet done for compensation event assessment. Under the standard NEC4 Engineering and Construction Subcontract, for a compensation event arising from the Contractor giving an instruction or notification, issuing a certificate or changing an earlier decision, the dividing date is the date of that communication. For other compensation events, the dividing date is the date the compensation event is notified.
Initial NEC Compensation Event Checks for Subcontractors
A subcontractor should first check whether the event qualifies as a compensation event under the subcontract. A factual change, access restriction, delay or late information does not automatically create entitlement.
The next step is to check whether the Subcontractor was required to notify the event.
The subcontractor should then identify when the notice period started.
Where the standard NEC subcontract time bar wording applies, late notification may trigger the time bar. It may prevent the Subcontractor from obtaining a change to the Prices, Subcontract Completion Date or Key Dates for that event, subject to the signed subcontract and any amendments.
Where the standard NEC subcontract time bar wording applies, check whether the event was one the Subcontractor was required to notify. If it was, the Subcontractor must usually notify within the applicable clause 61.3 period. That period is commonly seven weeks from becoming aware that the event has happened. The subcontractor should still check the subcontract, Subcontract Data and any Z clauses before taking a position on timing.
The subcontractor should then check the Accepted Programme and the programme logic relied on in the quotation. This helps test whether the event affected planned Completion, a Key Date, sequencing, access, productivity or other programme matters.
The subcontractor should also check the Defined Cost records, forecast assumptions and Fee calculation. Those records should support the proposed change to the Prices under the subcontract.
Once those checks are complete, the response should follow the issue identified:
- revise the quotation if the assessment logic or assumptions need correction;
- provide further substantiation if the records do not yet support the position;
- negotiate the assessment if the dispute is assessment-based and the records are clear; or
- consider the applicable NEC dispute route where the dispute has crystallised.
Why the Compensation Event Sequence Matters
The subcontract mechanism should separate event qualification, time effect, Defined Cost assessment and Fee calculation. The issue is not simply whether more work, delay or disruption occurred. The subcontract must provide a compensation event route for the event, and the Subcontractor must then follow the required notification, quotation and assessment process.
That sequence matters because each step affects what the Contractor, or another named assessor, can assess and what evidence the subcontractor needs to provide. The quotation should connect the event to the Accepted Programme, Defined Cost records, Fee calculation and any stated assumptions.
Check Whether the Event Qualifies First
The qualification check should identify the contractual route for the event. The review should test clause 60.1, any relevant selected main or secondary Option, the Subcontract Data and any Z clause amendment before the subcontractor prepares or relies on a compensation event quotation.
If the quotation relies on an assumption, the subcontractor should identify the contractual basis for that assumption and explain how it affects the compensation event assessment.
The subcontractor should complete the qualification check before taking a position on notification, quotation or assessment. This avoids building a quotation before the contractual basis of the event has been confirmed.
A further risk is inadequate substantiation of programme effect, Defined Cost or quotation assumptions. The Contractor, or another person responsible for assessment under the signed subcontract, may reject or adjust unsupported parts of the quotation. Where clause 64 applies, the Contractor or named assessor may make its own assessment under the subcontract.
The Contractor, or another person responsible for assessment under the signed subcontract, should be able to test the event, time effect and cost build-up without inferring scope, assumptions or substantiation. That reduces the risk of a lower assessment caused by evidential gaps.
Follow the Notification, Quotation and Assessment Sequence
A compensation event review should follow a controlled sequence:
- test whether the event qualifies under the subcontract;
- test whether the notification complied with clause 61 and any amended notice provisions;
- assess programme effect; and
- substantiate Defined Cost and Fee.
Begin by confirming that the NEC subcontract treats the event as a compensation event. The review should include:
- clause 60.1;
- selected main and secondary Options, where relevant;
- Subcontract Data;
- amendments; and
- Z clauses.
The subcontractor should complete the qualification check before taking a position on entitlement, notification timing or any time bar.
The second step is to confirm compliance with the required notice, quotation and assessment steps. The process usually runs through clause 61 notification, clause 62 quotation and clause 63 assessment.
Also check any clause 64 assessment where the subcontract requires or permits the Contractor or another named assessor to make its own assessment.
For notification timing, identify whether the compensation event was one the Subcontractor was required to notify. This is the starting point for assessing whether the subcontractor has protected the notification position.
The next timing question is when the relevant notice period started. Test that date against the subcontract, Subcontract Data and any Z clauses.
Where the standard NEC subcontract time bar wording applies, a compensation event which the Subcontractor is required to notify must usually be notified within the applicable clause 61.3 period. That period is commonly seven weeks from becoming aware that the event has happened, subject to the subcontract, Subcontract Data and any Z clauses.
Treat events that the Contractor is required to notify separately. Check the subcontract wording before deciding whether a late notification point affects entitlement.
The third step is to identify the programme inputs used in the quotation. Clause 63.5 requires the assessment to identify how the compensation event affected the Accepted Programme current at the dividing date. It should also identify whether the event delayed the Subcontract Completion Date or any Key Date.
The fourth step is to identify the cost inputs used in the quotation. Defined Cost and Fee matter because clause 63.1 provides the route for assessing the change to the Prices.
The assessment should focus on the effect of the compensation event on Defined Cost and Fee. It should not be treated as a general valuation of changed work or as a simple comparison with tendered rates.
Build a Clean Chronology
Assemble the chronology in sequence:
- instruction, event or trigger;
- clause 61 notification;
- clause 62 quotation request;
- quotation submission;
- clarifications or replies;
- clause 63 assessment; and
- any clause 64 assessment where the subcontract requires or permits the Contractor or another named assessor to make its own assessment.
The chronology should show how the event moved through the contractual process.
For an NEC compensation event, reconcile the chronology with the project compensation event register, if used. This helps identify inconsistencies between the formal register and the subcontractor’s position.
Check the chronology against correspondence, service evidence and quotation assumptions. These records help confirm what was notified, when notification occurred and what basis was put forward.
A clear chronology helps separate qualification, timing, quotation, assessment and dispute strategy. Without that separation, the issue can become confused as a general assessment disagreement rather than a structured compensation event review.
Explain Programme Impact Against the Accepted Programme
The quotation should state whether the event affected:
- planned Completion;
- a Key Date;
- sequencing;
- access;
- procurement;
- approvals; or
- productivity.
The quotation should then explain how the compensation event affected the relevant activities, sequence, access, productivity or planned Completion.
The programme narrative should link the event to the Accepted Programme current at the dividing date. That programme is the reference point for assessing delay to the Subcontract Completion Date or a Key Date.
The narrative should identify the effect caused by the compensation event and separate that effect from unrelated delay.
If the subcontractor relies on disruption, the quotation should explain how the compensation event affected the planned method, sequence, resources or productivity. The quotation should identify:
- the work fronts affected;
- the planned method or sequence affected;
- the productivity effect relied on; and
- the records that support the disruption narrative.
The quotation should explain the causal link between the compensation event and the programme effect relied on.
The programme explanation should make sense without relying solely on a programme graphic. A programme graphic may support the position, but the quotation should still explain the logic in words.
Support Defined Cost, Forecast Assumptions and Fee with Records
A credible compensation event quotation needs Defined Cost records and forecast assumptions that support the cost assessment. Those records should show the effect of the compensation event on Defined Cost and support the resulting Fee under the subcontract.
Relevant records may include:
- labour allocation records;
- plant logs;
- material invoices;
- delivery tickets; and
- lower-tier subcontractor records.
These records should support the cost components relied on in the quotation.
Test each cost item against the applicable Schedule of Cost Components or Short Schedule of Cost Components. This prevents the subcontractor from presenting project cost records as recoverable Defined Cost unless they are supported by the applicable subcontract assessment mechanism.
The records should support the relevant Defined Cost components, forecast assumptions and Fee calculation. Where costs are forecast, the quotation should identify the basis of forecast.
The forecast basis should explain whether the quotation relies on:
- remaining duration;
- labour levels;
- plant requirements;
- procurement assumptions;
- productivity assumptions; or
- access constraints.
Show what is included and excluded for:
- scope;
- cost items;
- assumptions; and
- allowances.
The Contractor, or another person responsible for assessment under the subcontract, should be able to assess the quotation without inferring scope, rates, assumptions or substantiation.
Keep Assumptions and Risk Allocation Visible
If the quotation depends on an assumption about productivity, working hours, access to work areas or resource availability, identify it clearly and tie it to the clause 63 assessment.
Assumptions should be numbered, specific and capable of audit. This helps the assessor understand the factual and contractual basis of the quotation.
If the Contractor, or another named assessor under the subcontract, does not accept an assumption, identify what the subcontractor needs to provide, revise or substantiate in response. That may be:
- further substantiation;
- clearer programme logic;
- additional Defined Cost records; or
- a revised assumption.
A vague assumption can weaken the subcontractor’s assessment position because the assessor cannot see the factual or contractual basis relied on. Clear assumptions help separate risk allocation, valuation and substantiation.
Practical Checklist
- Identify the event and link it to the instruction, change, condition or information release.
- Confirm whether the event qualifies under clause 60.1, any relevant selected main or secondary Option, the Subcontract Data or any Z clause amendment.
- Confirm whether the event was one the Subcontractor was required to notify under clause 61, the subcontract and any amendments.
- Identify the applicable notice period and any time bar trigger that affects timing.
- Check whether any early warning was issued, but do not treat it as a substitute for a clause 61 compensation event notification.
- Identify the Accepted Programme current at the dividing date and explain how the event affects planned Completion or any Key Date.
- Build a short timeline for clause 61 notification, clause 62 quotation and clause 63 assessment. Add any clause 64 assessment where the subcontract requires or permits the Contractor or another named assessor to make its own assessment.
- Reconcile the quotation with the project compensation event register, if used, and relevant correspondence.
- List the cost records that support each cost component and identify any substantiation gaps early.
- Write the quotation assumptions as a numbered list and keep them testable.
- Explain the causal link between the compensation event and the programme effect before relying on a programme graphic.
- Decide whether the evidence supports a revised quotation, further substantiation, negotiation or the applicable NEC dispute route.
Common Mistakes
- Treating a factual change as a compensation event before checking the subcontract. This can cause the subcontractor to build a quotation before the contractual basis for entitlement has been established.
- Missing a subcontract amendment or Z clause that changes the clause 61 notification deadline. This can prejudice the Subcontractor’s ability to recover changes to the Prices, Subcontract Completion Date or Key Dates.
- Treating an early warning as if it were a clause 61 compensation event notification. Early warning may be relevant to risk reduction and assessment. It does not usually protect the subcontractor where the subcontract requires a separate compensation event notification.
- Leaving service evidence or receipt confirmation incomplete. This can make the notification step disputed rather than assessed.
- Presenting programme impact without linking the event to activities, programme logic, causation and affected work fronts. This makes delay and disruption harder to substantiate.
- Submitting a Defined Cost build-up without substantiation from records. The Contractor, or another person responsible for assessment under the subcontract, may then treat Defined Cost components and quotation assumptions as unsupported.
- Treating the quotation as a general rates-based valuation. A compensation event quotation should assess the effect of the compensation event on Defined Cost and Fee. The subcontractor’s assessment position may weaken where the cost build-up is not tied to the subcontract assessment mechanism.
- Escalating to a dispute route too early. The chronology, service evidence and Defined Cost build-up should be complete and internally consistent first. Early escalation can weaken the subcontractor’s ability to present a clear claim, assessment challenge or dispute position.
- Mixing several events into one notification or quotation. That makes separate assessment, implementation and record control harder.
ICRS View
A subcontractor should not treat an NEC compensation event as only a valuation issue.
The correct sequence is to:
- confirm the compensation event mechanism;
- protect the notification position;
- test programme effect against the Accepted Programme;
- substantiate Defined Cost and Fee; and
- decide whether the response is a revised quotation, further substantiation, negotiation or the applicable NEC dispute route.
The review should separate five issues:
- whether the event qualifies under the subcontract;
- whether the clause 61 to clause 63 sequence has been followed, and whether the subcontract requires or permits a clause 64 assessment by the Contractor or another named assessor;
- whether the Accepted Programme supports the stated time impact;
- whether Defined Cost, Fee and assumptions are substantiated; and
- whether the evidence supports a revised quotation, further substantiation, negotiation or the applicable NEC dispute route.
The order matters because each step controls a different risk:
- qualification controls entitlement;
- notification controls procedural protection;
- programme logic controls time impact;
- Defined Cost records control the change to the Prices; and
- the evidence record should guide whether the next step is a revised quotation, further substantiation, negotiation or the applicable NEC dispute route.
Once those issues are clear, the response should follow the evidence. A subcontractor may need to:
- revise the quotation;
- provide further substantiation;
- negotiate the assessment; or
- consider the applicable NEC dispute route where the dispute has crystallised.
Frequently Asked Questions
- What is an NEC compensation event?
An NEC compensation event is an event that may change the Prices. Where relevant, it may also change the Subcontract Completion Date or Key Dates. The event must fall within clause 60.1, any relevant selected main or secondary Option, the Subcontract Data or any Z clause amendment.
A subcontractor should not assume that every change, delay or access problem is automatically a compensation event. The subcontract should be checked first.
- How does early warning affect a compensation event quotation?
An early warning does not usually replace a clause 61 compensation event notification. It is part of the NEC risk management process. It is not normally a substitute for the formal compensation event notification route.
Failure to give an early warning may affect assessment. That depends on whether the subcontract allows the assessment to take account of what could have happened had early warning been given. That does not make early warning a substitute for a clause 61 compensation event notification.
- What should a subcontractor check first on a compensation event?
The subcontractor should first check whether the event qualifies under clause 60.1, any relevant selected main or secondary Option, the Subcontract Data or any Z clauses. It should then check whether the Subcontractor was required to notify the event. The review should identify when the notice period started and whether the notification complied with clause 61 and any amended notice provisions.
Only after those points are clear should the subcontractor move fully into programme impact, Defined Cost substantiation and dispute strategy.
- Why does the Accepted Programme matter for a compensation event assessment?
The Accepted Programme matters because clause 63.5 uses the Accepted Programme current at the dividing date. It is used to assess delay to the Subcontract Completion Date or a Key Date. The quotation should explain how the compensation event affected planned Completion, Key Dates, sequencing, access or productivity.
Support the claimed programme effect with a clear narrative. A programme graphic may help, but the quotation should still explain the logic in words.
- What records support a compensation event quotation?
Useful records may include:
- the subcontract, Subcontract Data and Z clauses;
- instructions and notices;
- correspondence;
- programme records;
- labour allocation records;
- plant logs;
- invoices and delivery tickets; and
- lower-tier subcontractor records.
Link the records to the applicable Defined Cost components, forecast assumptions and Fee calculation.
The records should also support the programme effect relied on in the quotation. They should allow the Contractor, or another person responsible for assessment under the subcontract, to understand the cost and time basis of the submission. The assessor should not have to infer the missing links.
- What should I do if my quotation is rejected or reduced?
First, identify why the quotation was rejected or reduced. The issue may concern:
- qualification;
- notice timing;
- programme logic;
- Defined Cost substantiation;
- assumptions;
- Fee calculation; or
- whether the Contractor or another named assessor has made, or may make, a clause 64 own assessment under the subcontract.
The next response may be:
- a revised quotation;
- further substantiation;
- negotiation; or
- the applicable NEC dispute route.
The subcontractor should make that decision only after the assessment sequence, chronology and evidence are clear.
Note on NEC clause references
Clause references in this article are to the standard NEC4 Engineering and Construction Subcontract, unless stated otherwise. The signed subcontract, Subcontract Data, selected options, amendments and any Z clauses should always be checked before taking a position on notice, assessment, time bar or dispute procedure.
Disclaimer. This article is provided for general informational and educational purposes only. It does not constitute legal, or other professional advice. While we aim to keep the information accurate and up to date, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, or suitability of the information. Any reliance you place on this content is strictly at your own risk.