A compensation event is an NEC contract event that entitles the contractor to a change in the prices, the completion date, or both. It covers Client instructions, late access, unforeseen ground conditions and the other events listed in the contract. It is the NEC4 route for what JCT handles through variations, extensions of time and Loss and Expense.
Worked example
On an NEC4 contract, the Project Manager instructs a change to the specification of the floor finishes. The contractor submits a quotation based on Defined Cost, which is the contractor's actual cost of people, equipment, plant and materials and subcontractors, plus the Fee percentage, and a time assessment.
| Item | Amount |
|---|---|
| Additional materials | £6,500 |
| Additional labour (80 hours at £28) | £2,240 |
| Subcontractor change | £3,000 |
| Defined Cost | £11,740 |
| Fee at 10% | £1,174 |
| Change to the Prices | £12,914 |
If the change also delays the key date or completion, the quotation includes the number of days added.
Notification and time limits
Compensation events work on notification. Either the Project Manager notifies the contractor, or the contractor notifies the Project Manager, and then the contractor submits a quotation within a set period.
The contract also sets a time limit for the contractor to notify events that are not instructed, and a late notice can lose the entitlement. The exact periods are in the contract data and the core clauses, so check your own contract rather than relying on a standard figure.
Compensation events in the cost report
Treat each compensation event as a small project. Give it a reference, record the notification date, the quotation, the Project Manager's reply and the implemented amount. Do not count a quoted event as income until it is implemented.
Costs for the work are incurred as soon as you instruct it, so a gap between spend and implemented value is a cash and margin risk. Because the assessment is based on Defined Cost, your cost records, Supplier invoices and timesheets are the evidence.
Related terms
Variation, Extension of Time (EOT), Loss and Expense, Final Account.
Planyard's variation and change tracking records each change against the budget with its cost and status, so quoted but unagreed changes are visible in your forecast.
