How to Manage Compensation Events and Assessments

In this article we explain the following:-

• What are Project Manager's Compensation Events
• What are Contractor’s Compensation Events
• How to manage Compensation Events (Training Video included)
• How to create a Proposed Instructions
• How to accept a Contractor’s Compensation Event
• How to submit a quotation (Training Video included)
• How to Accept a Contractor’s Quote (Training Video included)
• How to Implement a Compensation Event
• How to make a Project Manager’s Assessment (Training Video included)

This articles explain each of the key steps in the Compensation Events process from both Parties' perspective.  This article is based on the NEC3 ECC Contract.

Introduction

What are Project Manager's Compensation Events

If the Project Manager is aware something is a Compensation Event, then they should notify that fact to the Contractor. Of course, this could be for a “negative” Compensation Event where they may be expecting a saving e.g. an instruction to omit works. It is in the Project Manager's interest to notify this and get it into the system, otherwise it could be raised by the Contractor several weeks or months later (and they are not time barred on ones the Project Manager is obliged to notify – numbers 1/4/7/8/10/15/18 in clause 60.1).

Where the Project Manager can see that an event is a Compensation Event then they should notify accordingly that it is one. The Compensation Event template requires the Project Manager to fill in:

• Subject title
• Compensation Event type— select the appropriate Compensation Event clause from a drop-down list. The list will be configured for each individual contract incorporating in any Z clauses
• Description of the event – a concise yet precise description of the event so that the receiver fully understands why the Project Manager believes this to be a Compensation Event
• Assumptions— the Project Manager can, if necessary, add any assumptions for which the Contractor is to the base their quote on
• The associated early warning or PM Instruction can also be selected from dropdowns. These are optional fields.  They can also be removed if the compensation event is still in draft, ie not communicated.  Once communicated no further changes can be made. 

What are Contractor’s Compensation Events

When a Contractor is notifying a Compensation Event it is essential that they present it in such a way that gives the Project Manager no choice but to accept. It should be concise yet sufficiently convincing that they can give a definitive answer. If the Project Manager does not agree it is a Compensation Event they should respond with a clear written response as to why they do not believe it to be a Compensation Event.  If the Project Manager agrees it is a Compensation Event, they request a quote and have the chance to state any assumptions on which the Contractor should base the quotation upon. This is a good chance to ring-fence any risk or unknowns that otherwise the Contractor could price excessively.

Contractor’s CE Notifications – The Contractor can notify a Compensation Event by completing the following information:

• Subject – the title of the event
• Compensation Event type – selecting the contractual reason that makes this a Compensation Event
• Project Manager Instruction – here if applicable, a relevant PMI can be selected to associate with this event
• Description of the event – a concise yet precise description of the event so that the receiver fully understands why the Contractor believes this to be a Compensation Event
• The associated early warning or PM Instruction can also be selected from dropdowns. These are optional fields. They can also be removed if the compensation event is still in draft, ie not communicated.  Once communicated no further changes can be made. 

Upon creating the form, it is possible to attach any relevant document(s) that will help justify that it is a Compensation Event.

How to manage Compensation Events

To create a Compensation Event, the Project Manager can either select the Project Manager Compensation Events notification from the green Create New button in the top bar of the page or by going into the appropriate module “Project Manager Compensation Events” and by selecting the Create New button. This will take you to the Compensation Events template.

Fill out all the fields and click the Create button at the footer of the form which will take you the draft Compensation Event page.

Training Video: How to Create a Compensation Event:

How to create a Proposed Instructions

If the Project Manager wants to get a quotation from the Contractor for an item that they MAY want to instruct then they can use this form. They would instruct the quote, and then once the Contractor has submitted the quotation which would demonstrate cost and time effects, they then decide if they wish to instruct it or not.  A Project Manager should use these infrequently, as they will very quickly lose their effectiveness if they regularly request quotes that do not go ahead. The Contractor will spend less time on the quote and just add significant risk each time.

The Project Manager should state when they plan to give the instruction by, and also any PM assumptions the quotation should be based upon, so that the Contractor can put in a more definitive quotation with sensible risk allocation.

The Project Manager can raise a proposed instruction either by selecting the green Create New button at the top left and select Project Manager Proposed Instruction or click on Compensation Events at the left hand side and then Project Manager Proposed Instruction and Create New.  A Compensation Event number is automatically allocated to the instruction.  

The Project Manager is to complete the subject title and details of the potential instruction. They also need to state the date by which the Contractor is to assume an instruction will be given, otherwise, it will be difficult to give a definitive quote. There is an option for the Project Manager to state any assumptions the quotation will be based upon – again so the Contractor can give a more definitive quote.

 

How to accept a Contractor’s Compensation Event

After receiving a Compensation Event Notification from the Contractor, the Project Manager can determine as to whether they think it is a Compensation Event. If the Project Manager selects the PM Reply tab from the Contractors CEN they can select that the CE “Is a Compensation Event” which will request the Contractor to submit a quote or  “Not a Compensation Event” which will end the process.

How to submit a quotation

When the Project Manager has requested a quotation from the Contractor either via a Compensation Event, Proposed Instruction or accepting the Contractors Compensation Event, the Contractor can select the quotes tab from the applicable notification which will now show the “Create Quote” button which once clicked will pop up with the Quote creation form.

When submitting a quote through the Contract Management Platform the Contractor is required to fill out the following information:

• Subject – the title of quote
• Amount— the value of quotation
• Quotation summary – summary of the quote, the Contractor can upload a detailed quote as an attachment
• Effect to accepted Programme—if the Contractor selects “There is an effect on the Accepted Programme but this has been mitigated by measures as detailed:” or “There is an effect on the Accepted Programme which we are unable to mitigate” then the Contractor will be required to provide details on what has changed on the Programme and with the latter they will also need to enter in the impact to the completion date

Training Video: How to raise a Compensation Quote:

How to Accept a Contractor’s Quote 

After the Contractor has submitted a quote, the Project Manager will receive an email notification. The Project Manager can then access the quote by going to the corresponding CE/Proposed Instruction and selecting the CE/PMI. The Project Manager can then fill out their response by selecting the Reply tab. The Project Manager will have the option to Accept the quote, ask the Contractor to submit a revised quote or decide to make their own assessment.

It may be the case that multiple quotes have been submitted within one Compensation Event. If this has occurred, all parties must be aware that when the PM communicates a particular decision on a quote, it changes the status of the Compensation Event, and therefore the status of all quotes within the Compensation Event.

For example, if the PM wishes to accept one quote but not the others, they will find that once they accept the quote it automatically updates the status of the other quotes to "Not accepted - other quote approved".  Verbal communication between the two parties is advisable to ensure the PM knows there are multiple quotes, and doesn't respond before all quotes have been submitted.

Training Video: How to Accept or Not Accept Compensation Event Quote:

How to Implement a Compensation Event 

It is very important to get a Compensation Event implemented so both Parties understand their liability in terms of time and cost, and indeed if (from a Contractor’s perspective) they wish to dispute this further in terms of raising this to “senior representative” level or even to adjudication.

Compensation Events are implemented in the platform when:-

• The Quotation is accepted by the Project Manager automatically
• The Project Manager notifies his own assessment automatically
• The Project Manager notifies his own assessment manually when the Quotation is deemed accepted by the contracts. The Project Manager must manually mark these Compensation Events as accepted if this happens

How to view implemented Compensation Events 

Select the “Implemented CE Register” module from the Navigation menu. The implemented Register shows a summary of the implemented CE’s.  Each quote can be accessed from the Register to see the detailed history of quote/responses.

How to make a Project Manager’s Assessment 

The Project Manager should make their own assessment in accordance with 64.1 which is where:

• The Contractor has not submitted a quote on time
• The Project Manager does not agree with the Contractor’s quotation
• The CE affects remaining works and no Programme has been submitted with a quote
• The Latest Programme has been rejected or not issued for acceptance

Once implemented it is final, so it is important the Project Manager makes sure they make a correct assessment in accordance with the contract.  It is deemed good practice to informally share a draft with the Contractor so they have the last chance to try to convince the Project Manager that they are wrong – which they can consider before implementing into the system.

The Project Manager can make their own assessment of a quotation if the Contractor has not submitted one or they do not agree with the quotation submitted (and the Contractor has not been asked to resubmit a new one). They will have to identify which CE they are assessing, what their assessment is in terms of Price and Programme effect and then describe in detail how they got to their assessment. There is the option to attach further substantiation before implementing.

 

Training Video: How to create an Assessment of a Compensation Event: