Introduction
At CCR Global, we often encounter situations where contract clauses significantly impact project outcomes and risk management. Recently, we faced a challenging situation involving a client’s Project Manager who was determined to use NEC4 Clause 60.1(4), which deals with compensation events when the Project Manager instructs a change to a Key Date.
Our team, representing the Contractor, was keen to reduce the risk associated with this clause. Drawing on our extensive experience, we knew that using Clause 60.1(4) could lead to increased risk for the Contractor due to the Project Manager’s ability to make their own assessment, potentially not in the Contractor’s favour.
This article details our approach and why we advocated for using Clause 36, the acceleration clause, instead.
The Challenge: Clause 60.1(4) and Its Implications
Clause 60.1(4) of the NEC4 contract allows the Project Manager to instruct a change to a Key Date, triggering a compensation event. While NEC4 provides clear guidelines for the timing of quotations and implementation of compensation events, the reality is often different.
In practice, Project Managers frequently request additional information, delaying the approval and implementation of the compensation event. This delay shifts the risk onto the Contractor.
From our experience, 9 times out of 10, this situation results in the Contractor having to go through an audit process to justify the compensation claim. If the Contractor fails to provide all necessary documentation, the Project Manager may ignore the well-known “on the balance of probabilities” and reduce the assessment.
Moreover, this process of assessing the compensation event later deviates from the contract’s definition, from the “cost incurred to the dividing date plus the forecasted cost plus fee” to an audit-focused review of actual costs incurred. This shift places the burden of risk squarely on the Contractor.
The Risks of Using Clause 60.1(4)
The use of Clause 60.1(4) presents several risks to the Contractor:
- Open-Ended Assessments: The Project Manager can make their own assessment, which might not be favourable to the Contractor.
- Delays in Approval: Frequent requests for additional information can delay the approval process, impacting the Contractor’s cash flow.
- Documentation Burden: The Contractor is often required to provide exhaustive documentation to support their claim.
- Shift to Actual Costs: The assessment process can shift from forecasted costs to actual costs incurred, leading to an audit-style review that places more risk on the Contractor.
Given these risks, our goal at CCR Global was to advocate for a different approach that would provide more certainty and reduce the Contractor’s exposure to risk.
The Strategic Shift to Clause 36: Acceleration
Despite the Project Manager’s contractual right to use Clause 60.1(4), we recognised that the Key Dates in question were on the critical path and would affect the anticipated Completion Date. This understanding was crucial to our negotiation strategy.
We argued that due to the critical nature of the Key Dates and their direct impact on the project’s timeline, the appropriate mechanism was not Clause 60.1(4) but rather Clause 36 — the acceleration clause.
By opting for Clause 36, we aimed to achieve several key benefits for the Contractor:
- Fixed Costs: Under Clause 36, the costs associated with acceleration are agreed upon upfront, providing a clear, set figure that is not subject to further assessment by the Project Manager.
- Reduced Risk: The Contractor is not exposed to the same level of risk as with Clause 60.1(4) because the Project Manager cannot make an open-ended assessment. The terms are fixed once agreed upon.
- Improved Cash Flow: With costs set in stone, the Contractor enjoys a more predictable cash flow, avoiding the uncertainty and delays associated with prolonged negotiations and documentation requirements.
- Avoidance of Audit Processes: Since costs under Clause 36 are agreed upon and fixed, there is no need for the Contractor to undergo extensive audit processes, reducing administrative burdens and potential disputes over documentation.
Outcome and Benefits for the Contractor
Through effective negotiation, CCR Global successfully established that despite the Project Manager’s option to instruct under Clause 60.1(4), the critical nature of the Key Dates necessitated the use of Clause 36. This approach aligned the interests of both parties as it allowed the project to proceed with a clear acceleration plan while ensuring that the Contractor’s risks were minimised.
By implementing Clause 36, the Contractor was able to:
- Secure a Closed Quotation: The costs associated with the acceleration were agreed upon upfront, eliminating the risk of future reassessments or disputes.
- Enhance Cash Flow Predictability: With a fixed acceleration cost, the Contractor could plan finances more effectively, avoiding the cash flow issues that often arise from delayed compensation event approvals.
- Reduce Administrative Burden: The Contractor did not need to provide exhaustive documentation or undergo an audit process, significantly reducing the administrative workload and allowing the team to focus on project delivery.
Conclusion
At CCR Global, we understand the complexities and nuances of NEC4 contracts. Our recent experience demonstrates the importance of strategic negotiation and understanding the implications of different contract clauses. By advocating for the use of Clause 36 over Clause 60.1(4), we were able to protect the Contractor’s interests, reduce risk, and ensure a more predictable and favourable outcome for all parties involved.
The key takeaway is that whilst NEC4 provides flexibility, understanding the implications of each clause and effectively negotiating their use can significantly impact project success and risk management.
At CCR Global, we are committed to leveraging our expertise to achieve the best outcomes for our clients.
This article reflects a strategic business experience from CCR Global, emphasising the importance of choosing the right contract clause to minimise risk and enhance project outcomes.
