Do Not Walk Alone – Employers may prefer a pragmatic approach on revising Project Manager’s Assessments under NEC

By June 9, 2020 Articles

Following the Covid-19 impacts Project Managers and Employer’s may have different and competing objectives under NEC form of contract. It may be worth considering the position both from a contractual and from a pragmatic commercial position.

Contractual position

Under the NEC form of contract, a Project Manager is not able to revise a Project Manager’s assessment of a compensation event (“PMA”) after notifying it to the Contractor. However, if the PMA was made subject to stated assumptions and it subsequently transpires that a stated assumption was wrong, the Project Manager may notify the Contractor of the correction to that assumption and that notification is a compensation event in its own right for which a time and/or target adjustment may be made.

If a Project Manager considers that there are valid grounds for a PMA because new information has emerged or the Project Manager has changed his opinion or his understanding of the facts or the contract, there is no mechanism under the NEC contract to enable him to revise the PMA.

To recap, the contractual mechanisms are as follows:

  1. Clause 62 of the conditions of contract outlines the process for the Contractor submitting quotations.
  2. Clause 64 of the conditions of contract outlines the grounds for which a Project
    Manager can determine an assessment of a compensation event.
  3. Once a quotation is accepted or a Project Managers Assessment is formally notified to the Contractor, the compensation event is implemented on this basis (clause
    65.1);
  4. The assessment of a compensation event is not revised if a forecast upon which it is based is shown by later recorded information to have been wrong (clause 65.2);
  5. However, if before assessment is made the Project Manager decides that the effects of a compensation event are too uncertain to be forecast reasonably, he states assumptions about the event…and the assessment of the event is based on these assumptions. If any of them is later found to have been wrong, the Project Manager notifies a correction (clause 61.6) and the consequent effects are treated and assessed as a separate compensation event (clause 60.1(17)).
  6. If the Contractor is dissatisfied with the decision of the Project Manager, then he can invoke Option W clause(s) and engage with the Employer in managerial discussions.
  7. Such option clauses that permit engagement from the Contract to the Employer are common practice in public procurement of infrastructure. The parties may use reasonable endeavors to resolve any dispute through bona fide managerial discussions, albeit this is subject to the right to adjudicate at any time.

Commercial position

The Employer recognizes the significant contractual importance of the clear demarcation in roles and decision-making powers as between the Project Manager and the Employer. The mechanism by which the Project Manager is obliged to accept quotations and/or make assessments on a prospective basis using forecasts and assumptions is key to the underlying intent of NEC3. It is important that the Project Managers manage the contract only within their contractual powers unless the Employer agrees otherwise.

In this regard, the Employer may recognize that there may be situations whereby further significant information is provided after a compensation event has been implemented, or opinions may validly change, or mistakes may emerge. Rather than leaving Contractors only with the remedy of triggering a formal Dispute, the Employer accepts that a more pragmatic approach would be for the Project Manager to notify the Employer of any case where the Project Manager considers that a suitable adjustment should be made. Such notifications should be made by the Project Manager to the Employer.

In these cases, the Employer may review the recommendations and reasons given by the Project Manager and discuss the matter informally with a view to identifying the commercially pragmatic way forward. In appropriate cases, the Employer will seek to agree a full and final settlement of the compensation event with the Contractor.

It is often the case, that on large programs of work, some compensation events quotations are subject to no agreement between the Project Manager and the Contractor. In these cases, a supplemental agreement between the Employer and the Contractor may be an efficient way to bundle a number of contentious compensation events into a single agreement to form a “hard edge” and move the program forward from that position.

A Contract Commercial Status Dashboard is often a useful tool to identify the overall variance from the PM assessment. A sample dashboard formed around NEC3 Option C is presented below, which tracks pain/share on periodic basis and highlights commercial tensions. By understanding the commercial outturn position on a periodic basis, all parties can navigate the best outcomes. The benefit of a negotiation settlement between the employer and contractor, is that the relationship is preserved, rather than an imposed decision of an adjudicator. Expert services can support and give an independent opinion to both employers and contractors during a negotiation procedure, which can either help resolve or crystallize the dispute.

Given its opening emphasis on “a spirit of mutual trust and co-operation” (clause 10.1) it is perhaps surprising that NEC3 has not built in any forms of alternative dispute resolution. Reference to a dispute board or mediation might be welcome future additions and, in the meantime, parties may consider taking these routes by consent. One of the amendments to the NEC3 made by the Olympic Delivery Authority (ODA) was the addition of an eleven-member Independent Dispute Avoidance Panel. Resolving disputes expeditiously was key for the ODA in view of the desirability of completing work in time for the 2012 Olympics.

NEC4 options W1 and W2 now include referral to senior representatives of the parties prior to the appointment of an adjudicator. A new option W3 provides for the use of a ‘Dispute Avoidance Board’ as an alternative to adjudication for contracts not subject to the UK Construction Act which is a welcome development.

Example Summary of Variants from PM Assessment (PDF)