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Commercial Differences: Early Warnings and Compensation Events in NEC Contracts

Introduction:


CostPro carry out many final accounts for Contractors and over the years the same issue remains; understanding the commercial difference between an Early Warning and Compensation Event.


These two concepts serve different purposes, but understanding their commercial differences is critical to successful contract management. As a result of this continued misunderstanding lots of Contractors are leaving themselves at risk of not being paid for monies that they would otherwise be entitled to.


In this article, we will look at the difference between an Early Warning and a Compensation Event in the NEC framework, specifically from a commercial perspective.


Early Warning:


An Early Warning in NEC contracts is a warning of a project risk event that may effect the construction works or how they are delivered. It serves as a proactive commercial tool to identify potential risks and issues that could affect project performance. It serves as a vehicle for parties to address any economic concerns in a timely manner. It is important to note that an Early Warning is not intended to cause changes in terms and conditions or entitlements to compensation or time. Rather, it encourages collaboration, risk mitigation, and open communication.


An Early Warning allows project participants to raise concerns, bring to light possible risks, and recommend operational and commercial improvements. This proactive approach to risk management promotes successful commercial decision-making and assists in the early mitigation of issues from escalating into larger project problems. An Early Warning allows the project team to take timely action, adjust procurement strategies, improve resource allocation, or explore alternative commercial solutions.



Compensation Event:


In contrast, if an event is a defined Compensation Event under an NEC contract, it is a commercial event with a specific function to entitle the contractor to charge additional time and/or costs. These events normally arise from circumstances beyond the contractor's control, or where the risk of the event occurring has been specifically allocated to the Employer. Compensation Events may include Employer/Project Manager Instructions, design changes, Employer (or shared) Risk Events... etc.


In the event of a Compensation Event, the Contractor is obliged to notify the Project Manager within the specified time period. If the Employer/Project Manager accepts the Compensation Event, then the Contractor will assess the impact of the event and determine if adjustments to time and/or costs is required.


It is important to note that if the Contractor raises an event correctly as a Compensation Event but has failed to proactively mitigate the risk of the event by way of an Early Warning, the Employer/Project Manager is allowed to consider this when it comes to assessing the additional time and/or cost the Contractor may be entitled to.


Consider this example; materials owned by third parties have been sitting on the site for months, and the Contractor is aware of this. The Contractor finally comes to carry out works in this area but the Contractor is impeded from gaining access to its work face as a result of the dormant materials. The Contractor raises this as a Compensation Event but failed to raise an Early Warning. This may very well constitute a Compensation Event, however when it comes to assessing the time and/or cost of the Compensation Event, the Employer/Project Manager is allowed to carry out its assessment as if an Early Warning was provided. In this case, the Employer/Project Manager could have easily had the materials moved if given an Early Warning. Therefore the assessment of the Compensation Event could be zero.


The above example highlights the need for Early Warnings and Compensation Events to work in tandem, where applicable.

Conclusion:


Early Warnings and Compensation Events are an integral part of commercial risk management in NEC contracts, but differ in their nature and commercial impact. An Early Warning serves as advance notice aimed at addressing identified commercial risks, promoting collaboration, and aiding the parties to make informed commercial decisions. Compensation Events, on the other hand, are triggered by contractually pre-defined circumstances, leading to changes in the commercial terms of the contract, such as time and cost adjustments.


To properly manage NEC contracts, it is important to fully understand the commercial distinction between an Early Warning and a Compensation Event. CostPro have experienced too many Contractors attempting to rely on Early Warnings to gain contractual entitlement to additional time and/or costs. Unfortunately as described above, this is erroneous and does not entitle the Contractor to cover any losses that may arise as a result of the event in question.

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