27/05/24
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Newsletter #8:
Last week we covered early warnings, but what happens when compensation events are triggered? Do you know how to notify, assess, quote, and implement?
This week we cover all of these topics:
Definitions of compensation events
Notifications
Quotations
Assessment
Project Manager’s Assessment
Proposed Instructions
Implementation
Compensation Events Defined (Clause 60)
Compensation events cover various occurrences that may cause changes in project cost, time, or quality. Compensation events are used to compensate the Contractor for events which happen but are not their risk. This process ensures the Contractor is no worse off after an event than they were before it, unless of course the Contractor has failed to act or has accepted the risk by the terms of the contract.
The comprehensive list of these events can be found in Clause 60.1, which includes events (1) to (21). Key examples include:
Changes to the Scope instructed by the Project Manager.
Unforeseen physical conditions on site.
Delay’s to access
Client liabilities
Weather events
Notification Process (Clause 61.1)
Either the Project Manager or the Contractor can notify a compensation event. Immediate and clear communication avoids disputes and ensures all parties are aware of potential impacts:
Project Manager Notification: When the event originates from the Project Manager (e.g., an instruction or a decision), the Project Manager must notify the Contractor promptly, including an instruction for the Contractor to submit quotations unless it's the Contractor's fault or the event has no impact on Defined Cost, Completion, or Key Date.
Contractor Notification: If the Contractor believes an event is a compensation event and has not been notified by the Project Manager, they must notify the Project Manager within eight weeks of becoming aware of the event.
Failures to notify within this timeframe may result in the loss of entitlement to a compensation event, except for specified conditions like instructions from the Project Manager.
Project Manager’s Reply (Clause 61.4)
The Project Manager must reply to the Contractor’s notification within one week, or a longer period agreed upon. Their reply must:
Confirm the event as a compensation event, instructing the Contractor to submit quotations.
Reject the notification if it:
Arises from the Contractor's fault.
Has not occurred or isn’t expected.
Falls outside the contractually defined compensation events.
Has no impact on Defined Cost, Completion, or Key Date.
Example: A Contractor notifies the Project Manager about unexpected site conditions. The Project Manager then has a week to confirm if this is a compensation event impacting cost and/or time and instruct the submission of quotations.
Failure to Respond (Clause 61.4)
If the Project Manager fails to respond within the specified time:
The Contractor can issue a notification of failure.
If this failure persists for an additional two weeks, it is treated as acceptance that the event is a compensation event, instructing the Contractor to submit quotations.
Instruction to Submit Quotations (Clause 62.1)
The process begins when the Project Manager instructs the Contractor to submit quotations. This sets the stage for evaluating the impact of a compensation event on costs and time.
Three-Week Submission Period (Clause 62.3)
The Contractor has three weeks from receiving the instruction to submit the necessary quotations.
These quotations should include a detailed cost breakdown, any adjustments to the Accepted Programme, and supporting evidence.
Example: Upon discovering unforeseen conditions, the Project Manager instructs the Contractor to submit a quotation. The Contractor has three weeks to provide the required details.
Project Manager’s Reply (Clause 62.3)
Upon receiving the Contractor's quotation, the Project Manager must reply within two weeks:
Acceptance: Confirming the quotation is accepted.
Request for Revision: Instructing the Contractor to submit a revised quotation, along with reasons for the request.
Project Manager’s Assessment: Indicating that the Project Manager will make the assessment themselves.
If a revised quotation is requested, the Contractor has another three-week period to submit it.
Example: The Contractor submits a quotation, but the Project Manager identifies inconsistencies and requests a revised quote with an explanation provided. The Contractor then has an additional three weeks to respond.
Extensions and Failure to Respond (Clause 62.5 & 62.6)
Extensions: Both parties may agree to extend the time allowed for submissions or replies if they mutually agree before the deadlines. The Project Manager must inform the Contractor of the extension.
Failure to Respond: If the Project Manager does not reply within the agreed time, the Contractor can notify them of this failure. If there is no response within a further two weeks, the Contractor’s quotation is automatically accepted.
Assessment Criteria (Clause 63.1)
The change to the Prices is assessed based on:
The actual Defined Cost of work completed by the dividing date.
The forecast Defined Cost of work not yet done by the dividing date.
The resulting Fee.
For compensation events arising from the Project Manager or Supervisor's instructions, notifications, or decisions, the dividing date is the date of that communication. For other events, the dividing date is the notification date of the compensation event.
Agreeing Rates or Lump Sums (Clause 63.2)
Project Managers and Contractors may agree upon specific rates or lump sums to assess changes to the Prices. This can streamline the process and ensure mutual agreement on costs and related adjustments.
Adjustments to Prices and Defined Costs (Clause 63.3 & 63.4)
If the event reduces the total Defined Cost, the Prices are not reduced unless specified by the contract conditions.
For reductions due to client-instructed scope changes or corrections to earlier assumptions, the Prices are adjusted accordingly.
Example: If unforeseen ground conditions lead to a two-month delay, the Contractor might need extra supervisory staff. These costs are incorporated into the compensation event’s value rather than claimed separately.
Impact on Completion and Key Dates
Delays to the Completion Date or Key Dates are assessed based on their effect on the project timeline, influenced by the Accepted Programme current at the dividing date.
The assessment accounts for prior delays and intervening events.
If the Project Manager determines that an experienced Contractor could have foreseen the event, this must be clearly stated in the instruction to submit quotations. Occasionally, due to uncertainty, assumptions are made for the initial assessment. If found incorrect, corrections are notified.
Example: If a Scope adjustment requires replacing concrete with steel, the compensation event reflects the cost difference and programme impact.
Project Manager’s Assessment
Clause 64 focuses on the scenarios in which the Project Manager steps in to assess a compensation event themselves, providing a structured and fair framework to address situations where the standard process cannot be followed.
Instances Requiring Project Manager Assessment (Clause 64.1)
Project Managers step in to assess compensation events in specific instances such as:
No Programme Submission: If the Contractor submits quotations but fails to include a programme or required alterations, the Project Manager must assess the compensation event independently.
Non-Accepted Programme: If the Project Manager has not accepted the Contractor’s latest programme for valid contract-stated reasons, they must also perform the assessment.
Example: A Contractor submits a quotation for a change in Scope but does not include the necessary programme updates. The Project Manager withholds acceptance and steps in to assess the impact directly.
Assessment Methodology
When performing the assessment, the Project Manager uses the following approaches:
The Project Manager assesses the programme for the remaining work and uses it in the compensation event assessment, ensuring an accurate reflection of the event's impact.
If there is no Accepted Programme, the Project Manager uses their assessment of the work remaining to evaluate the event.
Example: If the programme is not updated with a new timeline due to an unforeseen delay, the Project Manager assesses the revised plan and incorporates it into the compensation event evaluation.
Assumptions and Early Warnings
Assumptions: When the effects of a compensation event are too uncertain to forecast reasonably, the Project Manager states assumptions in the instruction to submit quotations. If any assumption is later found to be wrong, the Project Manager must notify corrections.
Early Warnings: The Project Manager assesses whether the Contractor provided an early warning of the event, as required by the contract. If not, it must be annotated and reflected in the instruction to submit quotations.
Example: During an extension of work, if the Contractor did not provide an early warning about potential delays, the Project Manager must note this and include assumptions on event impacts when instructing the submission of quotations.
Clause 65: Proposed Instructions
Clause 65 is specifically designed for situations where the Project Manager or the Client wishes to explore the cost and time implications of a potential change before deciding whether to proceed.
Process Overview
Request for Quotations (Clause 65.1): The Project Manager can issue a proposed instruction to the Contractor asking for a quotation. This request essentially asks, "What would it cost and how long would it take if we were to make this change?"
No Immediate Implementation (Clause 65.2): The Contractor should prepare and submit the quotation without starting any work related to the proposed instruction at this stage. This keeps the existing project timeline and costs unaffected until a decision is made.
Example: Suppose a Client is considering upgrading materials from standard to premium quality. The Project Manager can use Clause 65 to request a detailed quotation for this upgrade, including cost and time impacts, without issuing an instruction to proceed immediately.
Evaluation and Decision
Once the Contractor submits the requested quotation, the Project Manager and Client can review the details:
Decision Making: They can then decide whether to officially instruct the change as a compensation event or forego the proposed change if it’s too costly or time-consuming.
Implementation as Compensation Event: If they decide to proceed, the proposed instruction is formalised, and the compensation event process (Clauses 61 to 64) follows for quotation submission, assessment, and implementation.
Example: Upon receiving the quotation for the material upgrade, the Client decides the cost is justifiable and instructs the upgrade, formally triggering the compensation event process for the change to be included in the project's scope.
Avoiding Ambiguity
Early Clarity: The Project Manager specifies in the initial notification that the event is a proposed instruction. This ensures that both parties understand that the quoted work should not commence until a final decision is made. The Project Manager is also required to define the date by which a decision will be made, ensuring the Contractor can confidently impact the programme and assess cost.
By utilizing Clause 65 effectively, you can explore options and make informed decisions without prematurely committing resources to deliver Scope which may turn out too costly or too late for what you need.
Clause 66: Implementation of Compensation Events
Process of Implementation (Clause 66.1)
Once the Project Manager has accepted a quotation or made an assessment regarding a compensation event, the changes must be formally integrated into the contract. This ensures that all parties are aware of the updated contract terms and conditions.
Adjusting the Contract Data: The Project Manager must update the contract data to reflect changes in Prices, Completion Date, Key Dates, and the programme.
Documentation: This requires updating pertinent project documents to ensure that the adjustments are accurately recorded and communicated to all relevant stakeholders.
Example: If a compensation event results in a two-month extension to the Completion Date due to unforeseen ground conditions, this new date must be documented and communicated clearly to all involved parties.
Consequential Changes (Clause 66.2)
The Project Manager must also ensure that any necessary alterations to the Scope are made and that other interconnected project elements are updated accordingly:
Scope Adjustments: Changes to the Scope, as dictated by the compensation event, must be accounted for. This includes resolving any ambiguities or inconsistencies as specified in Clauses 12.3 and 17.1.
Programme Updates: The Accepted Programme must also be adjusted to reflect the new timeframes and work sequences, ensuring that the project timeline remains accurate and feasible.
Example: If a change in material specifications is required to comply with new Client procedures, the Scope documentation must be updated to resolve any inconsistencies or ambiguities, following the rule stated in Clause 63.10.
Concluding Thoughts
The thorough and timely implementation of compensation events, as outlined in Clause 66, ensures precise, transparent, and equitable adjustments to the project. This meticulous approach maintains project integrity and fortifies trust amongst stakeholders.
This comprehensive process can be distilled further into clear steps and actions, forming the basis for all compensation event during contract delivery. Understanding and having a deep grasp of these processes ensures clarity and rigour throughout!
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