NEC: CRYSTAL BALL OR REAR-VIEW MIRROR?
Assessing time related claims after the event under NEC
NEC form of contract1 promotes a prospective approach to demonstrating entitlement to additional time. It prescribes a detailed procedure for programme management, requiring the programme to be regularly updated to reflect the current status of the works. When an event occurs, its forecast impact on the remaining works can be isolated and assessed. However, even once the actual impact is known, the contract still mandates a prospective approach to assess time. This can create a disconnect between the contractor’s original quotation and what actually occurred.
In NEC, change is managed under core clause 6 compensation events (CEs). A contractor can notify a CE as one of the events listed in the contract (clause 60.1). Unless the event arises from an instruction or communication from the project manager, the eight weeks of becoming aware. Failing to do so, the claim would be time-barred, leading the contractor to lose any entitlement to additional time (clause 61.3).
Time is assessed by impacting the last accepted programme (clause 32) current at the time of the CE notification (clause 63.3) and forecasting the effect of the change on the remaining works (clause 62.2).
If no accepted programme exists, or if the project manager considers the contractor’s assessment not to be reasonable or compliant with the contract, the project manager is entitled to undertake its own assessment (clause 64.1).
Once the project manager either accepts the contractor’s assessment or provides its own assessment, the CE is implemented, and the result cannot be retrospectively changed even if the assessment is later to be proven wrong (clause 65.2).
This approach underpins NEC’s ethos of assessing delay contemporaneously, by promoting a prospective assessment and forecasting the impact of the change at the time the CE is notified/instructed2.
However, given the time that may have passed from the submission of the assessment to the project manager’s review and, ultimately, implementation of the CE, issues concerning the extent to which actual events that may have occurred during that period can be taken into consideration are common, especially in a dispute situation.
If the assessment is not carried out at the time or the parties disagree as to what a ‘fair and reasonable’ result is, the contract machinery can become unworkable.
Several common issues that can lead to disputes:
- Time-barred claims: If a CE is not timely notified within the prescribed period, the contractor will lose its entitlement (clause 61.3). Consequently, if a contractor was not aware of the impact of a CE on the programme at the time the event occurred, and only after the prescribed period expires decides to submit a claim due to a CE, most likely its claim will be rejected by the project manager.
- Disagreement over CE validity: The contractor may notify a CE that the project manager does not accept is a CE (clause 60.1). If later on, a subsequent related CE is accepted, disagreement could arise as to which notification date should be used as the date on which the assessment of additional time must be carried out.
- Conflicting assessments: Even when a contractor may have timely notified a CE and submitted its assessment in accordance with the contract, the project manager may still disagree, having the power to reject it and provide its own assessment (clauses 64.1-61.4). This is of particular importance if the actual effect of the CE becomes known before the CE is implemented. A dispute may arise as to whether, after the event, the CE should still be assessed based on the contractor’s forecast or whether consideration should be given to the actual effect.
Opinions are divided as to whether the project manager has the right to carry out such retrospective assessment, in particular, when the contractor’s assessment is substantiated, reasonable and has duly complied with the provisions in the contract. With that in mind, what are the approaches to perform when the actual events are known by the parties?
Three approaches may be used in these circumstances to assess time entitlement under NEC after the event:
Opinions are divided as to whether the project manager has the right to carry out such retrospective assessment.
- A prospective (contemporaneous) view3, as prescribed by the NEC contract, which determines the critical path and assesses the forecast impact on planned completion at the time of the notification of the compensation event or project manager’s instruction4.
- A prospective (retrospective) view, which also determines the critical path at the time the event was notified, but focuses on understanding the extent of the delay once the actual impact is known and can be measured i.e. with the benefit of hindsight.
- A full retrospective view which considers all actual events and reviews the position of the works with the benefit of hindsight, including any potential contractor’s in efficiencies incurred after the switch date, in other works unrelated to the compensation event being assessed5.
These approaches will produce different results which offen lead parties to selecting the approach that is seemingly more beneficial in defending their position6.
From a delay analysis standpoint, NEC mandates that the critical path is determined contemporaneously as the contractor shall submit a programme for acceptance at each reporting period (clause 32). To assess additional time, the contractor inserts an estimated sequence for the CE (fragnet) into the last accepted programme, the l after updated to the CE notification date (switch date), thus demonstrating the impact on the remaining work due to the CE (clause 62.2).
As a result, if the contractor does not promptly notify the CE, as soon as it becomes aware of the event, part (or the entirety) of the effect of the CE may have occurred before the switch date, potentially affecting the critical path at the time and reducing the extent of the impact on planned completion (clause 63.3). The question is then, is there a preferred approach to be used after the event?
Some commentators underscore that clause 10.1, which states that ‘the employer, the contractor, the project manager and the supervisor shall act as stated in this contract’, provides a strong argument in favour of following the provisions of the contract, namely, a prospective approach. Nevertheless, most often the main reason why parties fall into a dispute is precisely because the contract has not been followed as intended.
As a result, there appears to be a disconnect between what NEC stipulates as the correct approach as the works progress, and the approach that leading commentators and judges often consider to be reasonable after the event.
Another argument put forward is that pursuant to clause 65.2 ‘the assessment (of a CE) is not revised if a forecast upon which it is based is shown by later recorded information to have been wrong’. Proponents of a prospective approach argue that this provides a strong point to prevent parties from retrospectively reopening a quotation and/or assessment of additional time and cost once the CE was agreed.
However, this does not cover those situations often encountered in dispute scenarios, where either the quotation was never adequately submitted or the CE was never formally implemented (agreed). A question remains on how to proceed if the forecast sequence is proven to be incorrect before the CE is implemented. A retrospective analysis may prove that the CE did not, as a matter of fact, critically impact planned completion.
NEC does not explicitly address how to proceed in such scenario beyond the contract procedure, nor does it state whether the parties are allowed to take known facts into account as a ‘reality check’ of the forecast assessment. Is there any other guidance stating what the approach should be?
The SCL Protocol states that ‘there is no longer a preferred delay analysis methodology where that analysis is carried out time-distant from the delay event or its effect7 ’, stressing that any conclusions must be underpinned by common sense8. In section 11.3, however, it provides the criteria to be considered for the selection of the method of analysis, listing the relevant conditions of contract as the first factor to take into account, which in this case, would appear to suggest referring back to the contractual procedure stated in NEC.
Similarly, the NEC3 guidance notes version 2005, described the purpose of the switch date as follows9: ‘This prevents the practice of a project manager making a retrospective and selective choice between a quotation and the final recorded costs of dealing with a compensation event’. This practice was never intended to be allowed10. In fact, under NEC, an adjudicator is also required to perform ‘an assessment in the same way as a compensation event is assessed’. (clause W2.3(7)).
This clear wording, however, does not appear in relation to the approach to be followed by a tribunal, stating that ‘[ A] party is not limited in tribunal proceedings to the information or evidence put to the adjudicator’ (clause W.2.4(3)). It remains unclear whether or not a tribunal should turn a blind eye on matters that is aware have already occurred and revert to assessing events using a purely prospective approach as dictated by the NEC contract.
The leading text book on the subject, Keating on NEC3, highlights that factual evidence should be preferred to a speculative approach before the implementation of the CE, stressing that common sense suggests that it would be wrong to ignore actual evidence, resulting in an unreasonable assessment, inconsistent with the principles of assessing damages.
At chapter 7, clause 63, it is stated ‘that the better view is probably that the project manager is entitled to decide that a quotation is not correct if later events that have occurred by the time it considers the quotation have revealed that the effect of the compensation event was not as quoted. If the project manager does make its own assessment, it must follow clause 63.1 although later events can probably be brought into account in making the assessment11 ’.
Clause 61.6 requires the project manager to make assumptions if the compensation event is too uncertain to be forecast reasonably.
It continues by putting forward the proposition that the NEC, in practice, allows for a reassessment of a previously notified compensation event, through the application of two provisions. Clause 61.6 requires the project manager to make assumptions if the compensation event is too uncertain to be forecast reasonably. These assumptions can be corrected if later found to be wrong once the effect of the event has fully crystallised, given rise to a new CE under clause 60.1(17), which resets the switch date to a later date which includes for the actual events up to that point.
There is limited authorative guidance on this issue. The prescriptive nature of NEC would suggest that a prospective approach should be taken, even in a dispute forum after the event. However, in Northern Ireland Housing Executive v Healthy Buildings Ltd (2017) NIQB 4312 the court held that, although the NEC3 regime is underpinned by prospective analysis, the assessment after the event should be informed by the best possible information as to the actual cost and time incurred which in this case was evidence of what happened13.
Similarly, in Imperial Chemical Industries Ltd (ICI) v Merit Merrell Technology Ltd (2018) EWHC 1577 (TCC) the court held that although an earlier assessment may carry powerful evidential weight14 it was not binding and could be opened up and reviewed in a dispute context, as ‘there is nothing in the NEC3 form that states that a PM’s assessment is conclusive as to the rights of the parties15 ’. Irrespective of the prescription for a prospective assessment under NEC, the English courts would not disregard evidence showing what actually happened after the event.
More recently, in UK Grid Solutions and Amey Power Services v Scottish Hydro Electric Transmission (2024) CSOH 5, whilst the court did not specifically opine on the prospective vs. retrospective issue, it did follow from the adjudicator’s consideration of matters and from the result.
The adjudicator had concluded that the pursuer’s prospective approach to compensation events was correct and that the assessment should have been at the time when the project manager had or ought to have instructed the contractor to submit a quotation16. The defender had pursued that a retrospective approach should be adopted.
It is widely argued however that, in Healthy Buildings and ICI, neither party operated the contract as stipulated, so it is suggested that the courts resorted to the compensatory principle set out in The Golden Victory (2007) UKHL 12 by which events that have occurred after the breach reducing the claimant’s loss must be taken into consideration to prevent overcompensating17. It is yet to be seen what the outcome would be if a compliant claimant disputed the entitlement awarded.
What approach should be used to assess compensation events after the event? While the NEC contract is clear as to how a CE is assessed as the works are progressing, it offers limited guidance as to how CEs should be assessed in those scenarios where the actual impact becomes apparent. This creates uncertainty in disputes, where:
- The parties did not follow the procedure stipulated in the contract.
- The CE was not timely notified.
- The effect of the CE has fully crystallised and can be measured.
- The critical path has significantly changed since the notification of the CE.
- The effect of the CE cannot be retrospectively isolated from the rest of changes affecting the works.
These questions show that if parties wish to avoid uncertainty then they should ensure they follow the contract. The benefit is to have a clear and well-defined mechanism by which to assess change when it occurs. The ethos of NEC is to assess time related claims while the issues are fresh so that CEs can be implemented as early as possible and the project can move on, avoiding falling into a dispute18. In short, NEC promotes collaboration as a dispute avoidance mechanism.
As leading text books and case law shows, in a dispute scenario it can prove difficult for the claiming party to persuade a tribunal that it is entitled to more time that it can actually be proven after the event. Case law suggests that a retrospective approach would still be preferred19. In addition, parties may resort to pursuing other legal arguments such as concurrent delay, mitigation of loss or proof that the contractor would have not incurred the loss in any event but for the compensation event, which would not have been present if the CE had been implemented under the contract20.
Purely prospective analyses after the event have generally been criticised by the courts and frowned upon by industry guidance as the focus when assessing time entitlement is on achieving a fair and reasonable result, which arguably does not appear to be the case if known events and circumstances are completely ignored in the assessment21. As a result, there appears to be a disconnect between what NEC stipulates as the correct approach as the works progress, and the approach that leading commentators and judges often consider to be reasonable after the event, that is, the use of actual records as a source of information to assess claims not previously agreed during the project.
When faced with this situation, it is not uncommon for delay experts to adopt a pragmatic approach where the contractual contemporaneous procedure is adhered to (critical path contemporaneously determined), but in parallel, use the benefit of hindsight to recreate, based on factual records, the impact due to the compensation event, without considering any other in efficiencies after the switch date (impact retrospectively assessed). This prospective retrospective approach provides decision-makers with a reality check to assist them in deciding whether the forecast was reasonable at the time.
Irrespective of the approach used, a claiming party’s ultimate objective should be to persuade the decisionmaker, by providing subtantiation through a detailed evidence-based analysis, that the impact on planned completion due to the compensation event is fair and reasonable, avoiding overly theoretical or exaggerated results.
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1 For this article, the contract clauses refer to the NEC3 contract.
2 NEC makes a distinction between the time at which the event occurs and the time at which the event is notified with the l after being the point at which the CE assessment is carried out.
3 The contemporaneous view relies upon a ‘prospective’ (forward-looking ) approach to estimating the uncompleted part of the works at the time of the assessment.
4 Clauses 61.1 and 61.3.
5 The determination of the actual critical path i.e. longest remaining sequence to completion, will be informed by the actual duration of an activity and not by what the contractor estimated that activity to take, which will likely produce different results.
6 Fluor v Shanghai Zhenhua Heavy Industry Co (2018) EWHC 1 (TCC) at 275.
7 SCL Delay and Disruption Protocol, 2nd edition, page 3, section K(c).
8 SCL Delay and Disruption Protocol, 2nd edition, page 32, section 11.2
9 The switch date is a concept mentioned in the NEC3 guidance notes, but the underlying principle emanates from the wording of clauses 63.1 and 63.3 stated in the contract.
10 NEC3 ECC guidance notes, April 2005, commentary to clause 63.1.
11 Keating on NEC3, First edition 2012, paragraph 7-114.
12 Persuasive but not binding in England and Wales.
13 ibid [48].
14 ibid [69].
15 ibid [67].
16 Ibid [47].
17 ibid [83].
18 NEC3 ECC guidance notes April 2013, page 3.
19 Robinson, L. ‘Claims for compensation events – how should a contractor prove its claim for time?’ CLJ 2012, 28(6), 511
20 Under NEC, it is acknowledged that these issues are addressed in the contract procedure: a) the analysis of the effect of a compensation event is carried out after the effect of the contractor’s delay (lack of progress) is considered, b) time and cost are jointly assessed.
21 McAlpine Humberoak v McDerm off International Inc (No1) [1992] 58 BLR 1 at [45], Great Eastern Hotel Company Ltd v John Laing Construction Ltd & Anor [2005[ EWHC 181 (TCC) at [184], Bluewater Energy Services BV v Mercon Steel Structures BV [2014] EWHC 2132 (TCC) at [324]