Time Risk Allowance in the Assessment of Compensation Events

Steven Hambleton
A look at a possible approach to capture the time effect of minor compensation events within highways contracts under the NEC3 form of contract.

There have historically been issues within highways construction projects in agreeing the final account; both in relation to the cost of the works and, more specifically, in assessing time in relation to the change. A typical scenario sees a contractor reaching the end of a project and if there is a shortfall between their actual costs incurred and the sum to be paid, a 'delay and disruption' claim is then employed to address the deficit.

This situation will usually result in disagreement and lengthy negotiation between the client and the contractor until a settlement is agreed upon; frequently with no real contractual justification as to the final value. The whole process will incur significant staff costs from both parties, and more significantly, means neither party has any real cost certainty throughout the duration of the project.

The NEC3 ECC Approach

The NEC3 form of contract deals with change through the use of compensation events (CEs): the ethos of the contract being one of a proactive approach to be taken by all parties with the intention of addressing and agreeing change promptly as the project progresses. Therefore on completion of the works the final account (the 'Price') will already have been agreed. However, it is often found that the value of change has not been correctly captured or agreed and that discussions to agree the final Price are required. This situation will arise where there are failures in the administration of the contract by both contractor and project manager.

The Use of Time Risk Allowance in Compensation Events

Each individual compensation event (CE) should allow for the cost and time impact of the change, with the contractor identifying and justifying their entitlement. The contractor is only entitled to an extension of time and the cost of that time where they can demonstrate the event had a 'critical' effect on their programme.

Due to the nature of large highways construction projects there are often numerous locations available to be worked on at any given time and the contractor may not be able to demonstrate a critical impact as a result of any individual CE. In our experience the cumulative impact of many small changes can detrimentally affect the contractor's planned completion. The contract requirements and timescales for the administration of the CE process do not cater for this situation, and the cumulative effect is unlikely to be felt until the programme has sufficiently progressed, at which point it may be too late to claim any entitlement.

The NEC3 form of contract deals with change through the use of compensation events...

A possible solution lies in the time risk allowance (TRA) approach which works by analysing the contractor's programme to identify the proposed resource levels at each workface location throughout the duration of the programme. By assessing the duration of the work activities within each CE, each CE will have an amount of time included within it which is added to the Completion Date of the programme and the cost relating to that time is also included within the CE.

The TRA approach ensures that additional time and its associated cost is assessed within each and every CE and that the cumulative effect of large numbers of small CEs is not being missed. The approach is in accordance with the NEC3 ECC which requires that risk (including time risk) be assessed and included within each individual CE.

Does the Approach Work?

Our Cardiff based highways team has recently used this approach on several projects and the results to date have been very encouraging. The feedback indicates that both parties are satisfied that the additional time awarded and the value paid in relation to change is the correct entitlement.

If the approach is to succeed then both the contractor and client need to understand and agree to the methodology and early scepticism needs to be managed. If implemented correctly the approach goes some way to addressing the issue of cost certainty for both client and contractor, and eliminating the risk of any unwanted surprises arriving at the end of the project, therefore achieving the initial goal.