Jacob Austin 00:00:00 Hi all, Jacob Austin here from QS.Zone and welcome to episode 100 of The Subcontractors Blueprint, the show where subcontractors will learn how to ensure profitability, improve cash flow and grow their business. For today's episode, I wanted to build on last week's episode about NEC4 program management to go into a bit of detail about the change management process under the neck for engineering and construction subcontract, so we'll be focusing on the early warning process and the compensation event process, and we'll pay special attention to the time bars and how they could trip you up if you're not managing the process correctly. Changes are an inevitable part of construction projects, whether it's unexpected underground conditions or client driven scope changes, the contract needs to be fair and clear in how it handles adjustments to time, cost and scope. The NEC four suite is known for its collaborative approach to managing changes proactively, so we'll explore how early warning notices help flag potential issues early. How compensation events formalise changes to the subcontract, and why strict notification deadlines are imposed, and how those deadlines can be a double edged sword for you as a subcontractor.
Jacob Austin 00:01:37 By the end of today's episode, you should have a solid understanding of those processes under the NEC for engineering and construction subcontract known as the X. So first off, early warnings. These are the one of the hallmarks of the NEC contract, and it underpins the collaborative ethos under clause 15.1. The subcontractor and contractor are required to give early warnings by notifying the other as soon as either becomes aware of a matter that could either affect the total cost, delay completion, or impair performance of the work. So this is a contractual obligation to give a heads up about potential problems. Crucially, this notice is given as soon as the party becomes aware of the issue. You don't wait until the problem is materialized. You warn as soon as you see a risk on the horizon. The purpose of early warnings is to reduce risk and try and mitigate it. Once an early warning is issued, the matter is recorded in the Early Warning Register. This was renamed from the Risk Register in the NEC three suite of contracts. The idea is to flag things up and start conversations about issues, and then there's actually a formal process as part of the contract called an early warning meeting.
Jacob Austin 00:02:59 That Was typically something the contractor arranges, and it's there to discuss notified risks and decide on actions to either prevent or reduce the impact. Under NEC four contracts, there's even an obligation that the contractor must issue the early warning register within a week of the starting date, and hold an initial early warning meeting within two weeks. This is to start the ball rolling. Start off on the right foot when it comes to managing risk on the job. After that early warning, meetings can be called as and when they're needed, or if there's a regular period stated in the contract, then they held at those intervals after each meeting. The early warning register should be circulated to everybody to get everybody on board with their actions. Now, it's important to note that early warnings are not the same as compensation events. It's a separate process with different purposes. An early warning doesn't automatically entitle anybody to any more time or money. is essentially a safety alarm, not a climb. Many early warnings will concern issues that might turn into problems, but could also be averted by raising them early.
Jacob Austin 00:04:11 The subcontractor and contractor can jointly find solutions or workarounds. For example, if you, as the subcontractor, see a design detail that causes some issues. Issuing an early warning allows the contractor and possibly the client and their designers to consider changes or mitigations before it actually causes impact. Early warnings should be given as soon as a risk is identified, even if the event hasn't fully occurred yet. In fact, it's preferable to do it before it occurs. The proactive stance is actually a contractual duty because in addition to the core principle of acting in a spirit of mutual trust and cooperation, it also obligates people to act as stated in the contract. So you're obligated to give early warnings and to have that cooperative and proactive mindset. Failing to give an early warning when required doesn't carry an immediate financial penalty, but it can affect the assessment of a compensation event later. So if a formal change later happens, which results in a compensation event, the contractor can note that the early warning wasn't given and they can actually change the assessment as if you had given an early warning.
Jacob Austin 00:05:26 And that means that if certain parts of the change could have been negated by a bit of forethought, then those can be disallowed or omitted from the compensation event. So failing to sound that early warning alarm can cost you money. To give an example of that, a contractor encountered an unforeseen buried structure on a site. A classic, unexpected physical condition. But they didn't raise an early warning. They dealt with it and notified it as a compensation event several weeks later. The actual removal costs were significant. But because no early warning was given, the project manager in that case treated those costs as having been unnecessary and essentially disallowed them. They'd failed to give the client the option of finding a cheaper solution, or of not actually removing the obstruction at all. As a result, the contractor recovered nothing for that work, even though they thought they needed to do it simply because the early warning obligation wasn't followed. So as collaborative as this contract is, parts of it actually have real teeth which can come back and bite you if you don't follow the procedures.
Jacob Austin 00:06:37 So this example underscores how critical it is for contractors and subcontractors to raise their early warnings promptly. It preserves your position and it keeps everyone aware of issues before they snowball. To summarize the early warning process, it's a case of notifying early and in writing of any potential problem as soon as you suspect it could affect time, cost or quality. The next step is discussing and cooperating in risk reduction meetings to find solutions or potential mitigations. Then document the outcomes in the early warning. Register and follow up and complete your agreed actions. Early warnings aren't about apportioning blame. They're about avoiding nasty surprises that cost everybody money. By using this process actively, you can protect yourself and the project, addressing issues sooner and hopefully more cost effectively. It's a win win tool, but it does require diligence. Next, let's move on to talking about the compensation event process, which is the formal mechanism for adjusting the contract when changes happen. While early warnings deal with potential issues, compensation events are the contract's way of handling issues that have happened or are definite changes that will happen.
Jacob Austin 00:07:57 A compensation event is basically any event defined in the contract that if it occurs and it's not the subcontractors fault entitles the subcontractor to compensation. And compensation in this context, is an adjustment to either the price or the completion date or any other affected dates. There is a list of compensation events set out in clause 60.1 of your subcontract. It mirrors exactly the main contract list of events, but with some adjustments for subcontract context. There are 21 standard compensation events in the core clauses, covering things like changes in scope, late access delays or instructions by the contractor or client, unforeseen physical conditions, extreme weather, and so on. The contract also allows additional bespoke events to be added into the contract data if needed. What's crucial to understand is that compensation events don't implement themselves automatically. The procedure in section six of the contract needs to be followed. Notification is the first critical step. A compensation event has to be notified by one of the parties to kick off that process. In many cases under X, it will be the subcontractor notifying the contractor of an event, especially if it's something that happened to the subcontract.
Jacob Austin 00:09:21 Works like a delay caused by the contractor or an unforeseen site condition. In some cases, though, the contractor is obliged to notify the subcontractor of a compensation event. For example, if the contractor gives an instruction to change the subcontract scope or other actions on their part cause a change, they should notify it as a compensation event at the same time. For events that aren't an instant instruction, let's say the subcontractor encounters some unforeseen obstacle or some delay caused by late information, the onus is on the subcontractor to notify the compensation event. The contract says that you should notify when the event happens, or as soon as you have become aware of it. That's in the case of it being some foreseeable but impending event. There's also a very important deadline, which is a time bar on notifying certain compensation events, and we'll discuss that in detail next. But in short, if you wait too long to notify an event, you could lose your right to any compensation. Assuming the event is notified in time, the contractor has to then respond.
Jacob Austin 00:10:30 They've got three potential responses. They either confirm that it's a valid compensation event, they reject it and give reasons why they're rejecting it, or they request more information. If the contractor fails to respond within the time and no extension is agreed, then the event is deemed to be accepted as a compensation event. So in this context, silence can mean yes, it's one of the only times in contracting that it can. It's part of the Knicks philosophy to keep things moving, and it prevents the contractor from just ignoring a claim. So as a subcontractor, if you've notified a compensation event and a week passes with no answer, then the contract lets you proceed as if it's agreed as a key. Once a compensation event is acknowledged either by the contractors agreement or by the timeout provision, the contractor will usually instruct the subcontractor to submit a quotation. Sometimes that instruction is given simultaneously whilst acknowledging the compensation event. The quote should detail the estimated impact on time and cost, including any time impact to key dates. It also should outline any other effect on the subcontract works, which might mean an interface with a different contractor, or it might mean a quality change with the final finish.
Jacob Austin 00:11:53 The subcontractor typically has two weeks to submit this quotation. That period is slightly shorter than the main contract period, so that the contractor can receive a compensation event themselves and notify you of it so that you can price it, return your documents to them, and they can review it before they submit things upstream to the client. So it's really important that those timescales are upheld. Of course, these are the standard timescales and timescales can be amended by both the client and the contractor. So it's important for you to read the document and understand your project specific timescale. After the subcontractor has submitted its quote, the contractor has to then respond and it's typically within four weeks. The contractor can either accept the quote and that agrees the time and cost adjustment. They can request a revision, perhaps if something is unclear or seems a little bit off. Or they can make their own assessment of the compensation event giving their reasons for doing so. And one reason might be the subcontractor failing to quote on time. If the quote is accepted, then the compensation event is then implemented, meaning the changes to the price and the completion date are formally made.
Jacob Austin 00:13:07 In NEC4, implementation is recorded by notification of the accepted quote, and the contract states that prices and dates are changed when that notification of acceptance is issued. The same applies if the contractor makes their own assessment as soon as it's assessed and notified to the subcontractor, it gets implemented throughout this process. Keeping your program updated is important. We went into detail on that last week. Neck contracts tie the program to the compensation event process, meaning that your quotation for time impact should be against your latest accepted program. Any delay is calculated as how much later planned completion becomes because of that event. And that does make it important for you to demonstrate the effects of a change. It's clear that you need an up to date and realistic program, otherwise you've got no baseline to measure against. Another feature of the NEC4 is that if the contractor is considering a major instruction, but wants to know the cost and time impact before deciding, there is now a proposed instruction process. There was the same in NEC three, but it was a little bit more discreet and therefore didn't get used as much.
Jacob Austin 00:14:24 But it is now formalised in section 65 of the NEC4. I'm saying a lot of letters today. The contractor can issue a proposed change and ask for a quotation without committing to it. The subcontractor again provides the quote within two weeks of that request, and the contractor can then decide they either drop it, in which case no compensation event happens, or they go ahead and issue the actual instruction along with accepting the quote, assuming they don't ask for a revised quote If they eventually decide not to proceed, then clause 60.1 20 makes that non-acceptance a compensation event. So if there's some significant cost of you doing, say, design work for a proposed instruction that's not accepted, then you, as the subcontractor can be compensated for the time and effort pricing that change. One thing to be clear of throughout the compensation event process is that time is of the essence. Both sides have clear duties. The subcontractor must notify and submit quotes on time, and the contractor must respond within set times. Those timescales are designed to keep the project moving and ensure changes are dealt with as and when.
Jacob Austin 00:15:40 Everybody's got all the information and they're thinking about them. They're not saved up for end of the project claims. If you realize you're no longer making any money. And to prevent exactly that scenario, we have the good old time bars. Perhaps the most debated feature of NEC's compensation event process is that the subcontractor must notify the compensation event within seven weeks of becoming aware that the event has happened. In the main contract, the contractor is given eight weeks to do the same, allowing for that same overlap of the contractor to receive your notification. They've got an intentional one week buffer to be able to tell the client about it. Crucially, if that seven week window is missed, the contract states that the prices, the completion date and any key dates will not be changed as a result of that event. So in plain words, fail to notify in time and you lose your entitlement to extra time or money. The event might still have happened and impacted you, but contractually the matter is closed. No compensation will be granted and that is why time bars are described as a double edged sword.
Jacob Austin 00:16:52 They force you to act. They punish you if you don't. The time bar doesn't necessarily apply to everything. NEC four exempts the seven week rule, mainly from events that the contractor has to notify you about. So if the contractor issues you an instruction but then doesn't notify a compensation event alongside it, there is no time bar. For example, if the contractor issues an instruction to stop work, the onus is on them to notify it immediately. So there's no point in penalizing the subcontractor if it somehow isn't notified in practice. Scope changes. Client and contractor breaches and general acts of prevention by the higher parties in the contract aren't supposed to be time barred against the subcontractor and penalize them, since the contractor should have known about these events already. But many, many events are the subcontractors to spot and to notify unforeseen physical conditions and weather delays caused by others on site failures by the contractor that the contractor might not formally acknowledge unless you tell them about it. These events must be notified within seven weeks. The rationale behind the time bar is to encourage prompt notification and avoid claims being raised long after the fact.
Jacob Austin 00:18:09 It's about keeping everybody informed in real time. One neck expert noted that the time bar reinforces the principle of collaboration. It forces everyone to continually review the project and address compensation for issues as they happen. It also arguably gives the contractor an ultimately the client a chance to mitigate or reduce impact if they know about the problem sooner. So in theory, nobody is ambushed by a large claim at the end because everything has to be flagged early. The reality is that time bars can feel very harsh, especially to subcontractors who are unfamiliar with the NEC's strict regime. A typical nightmare scenario might be that the contractor fails to do something saying, giving access to part of the site on time or providing design information late, which then delays the subcontractor. The subcontractor, perhaps being cooperative or not wanting to rock the boat, doesn't submit a formal compensation event immediately. Time is slipped by where now, 12 weeks after the fact, and eventually the subcontractor tries to claim for the extra time or cost involved. The contractor then says nope, sorry, you're out of time, no compensation, and they can enforce that time bar clause.
Jacob Austin 00:19:31 This means the subcontractor ends up bearing the cost of a delaying event, which was actually the contractor's fault, simply because they didn't give notice in time. Now, many would consider that to be unfair. And surveys show a significant portion of NEC users are uneasy about the fairness of the time bar clauses, but that is a perfectly valid action from the contractor in the eyes of the contract. So to protect themselves. Subcontractors must be vigilant about that seven week deadline. The clock starts ticking from when you became aware of the event. That can be a point to debate sometimes, because what counts as becoming aware? For instance, if a problem unfolds over time, like a series of client delays, you might argue that you weren't aware of the full impact on it later, but pushing the awareness date is risky and can lead to disputes. Awareness might be when it's apparent that the project will be affected, it might be when it should have been apparent, or it might be when it actually first affected the project.
Jacob Austin 00:20:38 There's a bit of a legal mess that you probably don't want to get involved in there, so the safest course is to ensure your notices are not time barred by issuing them as soon as possible. But seven weeks does give you a little bit of time to see how things unfold and see whether you need to notify something. You might think if you're not sure how something is going to turn out. Of putting a notice in your diary to remind you of when that seven weeks is going to elapse, or you might just on the side of caution and submit a notice whenever you become aware of something. It's better to submit a notice and withdraw it later than actually miss a chance of securing a compensation event altogether. And that aligns with the NEC's philosophy, which is notify early even if all details aren't known yet. You can always put in an early notice to say that event has happened and maybe a compensation event detail quote to follow. The contract expects notification when the event occurs, not after you've figured out all the details.
Jacob Austin 00:21:41 Use early warnings as well as a safety net. Whilst an early warning isn't a compensation event, raising it and doing it promptly at least flags the issue. So that's in the project records and you can formalise it later if it turns into an issue. The fact is, well, that you've notified it early is good for your relationship with the contractor. But just be clear if it does turn into an issue, you must notify within seven weeks of when it definitely becomes that issue, because an early warning alone isn't going to stop the clock. Watch out for contractor caused events as well. If the event arises from the contractors actions or inactions, then don't rely on the other side to notify it. For example, if the contractor fails to provide information by a key date, you should still notify that as a compensation event and do it within seven weeks to protect yourself. To put it on record. And in case of any doubt later, you completely avoid that debate about whether a time bar should apply. Also, be really clear to check for z clause amendments, so any amendments under the X and the wider NEC contracts are termed z clauses.
Jacob Austin 00:22:54 So this is where any amendments that the contractor or the client want to make are listed under the contract. They may well amend those timescales to make them more rigid, to make them harder to achieve or to comply with internal procedures, perhaps on behalf of the client. That might change the need and the timing of your submitting notices. So read those z clauses carefully. And for general good practice, make sure that all of your site team supervisors, project managers, QS, working foreman they all need to understand that the NEC is very much a notify, notify, notify contract. It's far better to potentially over notify than miss a critical notification. Many contractors new to NEC get caught out simply because they didn't follow the contracts process, and then they seek help when it's too late to do anything about it. So you need to generate a proactive culture within your team to make sure that any events that might hurt you. I'll thread back so that you can notify them to your contractor. And that pretty much brings us to the end of this deep dive into early warnings, compensation events and time bars under NEC4.
Jacob Austin 00:24:08 So I hope you've taken something useful away from today's episode. My mission with this show is to help the million SME contractors working out there in our industry. If you taken some value away from today's episode, I'd love it if you'd share the show and pass that value on somebody else who might need to hear it. And of course, subscribe yourself if you haven't already. Remember, also, you can log on to www.QS.Zone if you want to learn more, and we're also on all your favourite socials again at @QS.Zone. Thanks again for tuning in. I've been Jacob Austin and you've been awesome!