Assessing Compensation Events in NEC4: A Guide to Managing Time, Cost and Programme Impact

In construction projects, unexpected events are inevitable. Whether it’s a delay, change in Scope or unforeseen disruption, these occurrences can have significant consequences on project timelines and budgets. To address this, compensation events play a vital role in helping contractors and project managers manage these impacts under the NEC (New Engineering Contract).

The starting point is the core concepts that contractors and project managers need to understand, which Dr Stuart Kings runs through in this article, focusing on:

• Understanding the Dividing Date
• Defined Cost
• Programme Impact

Understanding the Dividing Date: The Point of No Return

The dividing date is a critical point in any construction project, especially when it comes to compensation events. It’s also one of the most complex clauses in the NEC4, defined in clause 63.1:

“The change to the prices is assessed as the effect of the compensation event upon

– the actual Defined Cost of the work done by the dividing date,

– the forecast Defined Cost of the work not done by the dividing date and

– the resulting Fee

For the compensation event that arises from the Project Manager or the Supervisor 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 of the notification of the compensation event.”

The easiest thing is to think of the dividing date as a defining date in time – it’s when the program and decisions are fixed and everything that happens after this point must be assessed against this initial baseline.

When a compensation event occurs, the dividing date marks the moment when all involved parties – contractors, project managers, supervisors and stakeholders – must assess the impact of the event. This date ensures that the contractor’s responsibilities are clearly defined, and any changes in time or cost are measured and forecasted accurately from this point forward.

Contract management software like Sypro can help define the dividing date, down to the minute and second, ensuring compliance and an audit trail if a dispute or a compensation event did arise.

Defined Cost: Clarifying the Financial Impacts

Next up is Defined Cost, which directly ties into the financial consequences of compensation events. It’s not enough to just look at what happened – it’s essential to quantify how an event changes the cost of the project.

In simple terms, Defined Cost is how compensation events are valued under NEC contracts – but the way it’s calculated depends on the contract type. For Main Options A and B (priced contracts), costs are based on forecasted values using the Short Schedule of Cost Components. These are simplified estimates for labour, materials and equipment, allowing for quicker assessments. It’s less about what the contractor actually spends, and more about what they reasonably expect the change will cost.

By contrast, Main Options C, D and E (target and cost-reimbursable contracts) use actual incurred costs, calculated through the full Schedule of Cost Components. This requires detailed time sheets, receipts and records, offering greater accuracy and transparency. A Fee is added on top to account for overheads and profit. While this approach is more complex and time-consuming, it ensures a fairer reflection of the real impact of the event.

Understanding how Defined Cost works under each contract type is crucial for both contractors and project managers. It influences how compensation events are recorded, assessed and ultimately paid – ensuring clarity, fairness and accountability on both sides.

When it comes to the Defined Cost, there are a few clauses both contractors and project managers must keep in mind:

Clause 63.6 – Contractor Able to Include Cost and Time Risk

– What it means: The contractor can include a reasonable allowance for risks in their quotation, covering uncertainties in both time and cost.

– Impact: Helps the contractor manage unknowns without having to re-open the conversation later but must be proportionate and justified.

Clause 63.7 – Contractor’s Obligation to Mitigate

– What it means: The contractor must demonstrate that they’ve taken steps to reduce the time and cost impacts of the compensation event.

– Impact: Prevents inflated quotes and encourages proactive, efficient problem-solving.

Clause 63.7 – Project Manager’s Ability to Make Assumptions

– What it means: If there isn’t enough clarity to assess the full impact of the event, the project manager can include reasonable assumptions in the assessment.

– Impact: Keeps things moving, avoids delays in agreement and gives both parties a working baseline for cost and time.

Programme Impact: Evaluating How Events Affect the Timeline

The final area of focus is programme impact, which examines how compensation events affect the project’s timeline.

When an event occurs, contractors must update the programme to reflect the current situation, with the process involving a three-step method:

1. Using the accepted program current at the dividing date.
2. Updating for progress – assessing how the work is advancing at that moment.
3. Impacting the compensation event – adjusting the programme and planned Completion Date accordingly.

Let’s discuss the process of assessing the impact of a compensation event in the context of adjusting timelines. If the original project schedule allocated a certain amount of float (extra time built into the schedule) before the compensation event, the contractor would need to update the schedule based on the current progress and any delays or advancements caused by the event.

For example, if the project had two weeks of float before the compensation event, but that float was reduced due to delays, the contractor would need to adjust the completion date to reflect the new timeline. On the other hand, if progress was ahead of schedule and the float increased, this could potentially reduce the overall project timeline.

The Paint Analogy: Bringing it all Together

To wrap it all up, imagine a contractor has been asked by a project manager to paint a room, and the project Scope initially requires you to paint two coats of paint on the walls.

However, midway through the project, the project manager gives an instruction to increase the scope to three coats of paint. Here’s how this plays out under the compensation event process:

• Dividing Date: The moment the original scope is changed from two coats to three. This is the baseline from which everything else is assessed.
• Defined Cost: The cost of applying the extra coat of paint. The contractor would need to calculate and justify the cost for the additional work – whether it’s the cost of extra paint, time, or labour required to fulfill the new instruction.
• Programme Impact: If the extra coat of paint impacts the timeline (perhaps the drying time between coats is longer than expected), the contractor must update the programme. The contractor would then assess how the new Scope changes the overall planned Completion Date and adjust the schedule accordingly.

In NEC contracts, when a project manager instructs the contractor to change the Scope – such as increasing the number of coats of paint – the contractor must comply, as per Clause 27.3.

It’s important to note that the Project Manager can’t give instructions that are outside the contract’s scope (or unlawful) but this example of changing the number of coats of paint is within the bounds of the project’s requirements.

Managing Compensation Events with Clarity

Navigating compensation events can be complex, but our expert webinar offers valuable insights into how to manage them effectively using a structured process. By understanding the dividing date, Defined Cost and programme impact, contractors and project managers can ensure that changes are handled with transparency, fairness and precision.

If you’re looking to streamline how you manage compensation events, tools like Sypro can help track and manage these events in real-time, providing easy access to all the necessary information at any point in the project. With more than 2,000 NEC contracts managed, Sypro is proven to ensure compliance and keep you on track.