Early Warning Notices
What are early warning notices?
Early warning notices and compensation events are specific features of the NEC form of contract. They have detailed procedures which must be carefully followed.
Those procedures are simple enough once you understand them, but they are time-consuming. The risk of not following them properly is high. Failing to issue the right notices at the right times can mean that rather than being entitled to an extension of time and additional payment, you are instead liable for damages.
Who issues early warning notices?
The NEC contract requires that both parties issue early warning notices when required to do so.
When should early warning notices be issued?
Early warning notices are to be given either party when it becomes aware of any matter that could:
- increase the total of the Prices,
- delay Completion,
- delay meeting a key date, or
- impair the performance of the works in use.
What is the benefit of the early warning notice procedure?
The early warning notice procedure is intended to encourage good management and reduce risk. When used properly it is hugely beneficial to projects. More and more bespoke contracts require that similar notices be given, even if they aren’t based on the NEC contract.
The idea is that notifying such issues early means that mitigating actions can be taken to manage and reduce their impact.
Risk reduction meeting
Often an early warning notice will be followed by a risk reduction meeting to attempt to mitigate its effects. Either party can instruct the other to attend a risk reduction meeting.
Compensation Events
What are compensation events?
Compensation events are the grounds for claiming additional time and money under NEC contracts. Carefully following the compensation event notice process is essential to preserving entitlements to additional time and money. Failing to issue the right notices at the right time will often mean that you lose those entitlements.
The JCT form of contract has separate provisions and procedures for claiming variations, extension of time and loss and expense. These allow parties to claim entitlements to additional money and time.
The NEC recognises that such entitlements are often linked, so instead deals with them all under the compensation event mechanism.
List of compensation events
An NEC contract will contain a list of compensation events. You should check the specific list of compensation events in your contract as they are often amended. They will frequently include:
- Instructions which change the Scope.
- The Client/Contractor not providing access.
- The Client/Contractor not providing something by the date it was supposed to do so under the Accepted Programme.
- Changes in physical conditions.
- A weather measurement occurs, the value of which, by comparison with the weather data, is shown to occur on average less frequently than once in ten years.
- Breach of contract by the Client/Contractor.
When do you have to give notice of a compensation event? What happens if you do not give notice of a compensation event?
The Contractor must give notice of a compensation event under the Contract within 8 weeks of becoming aware of it. The Sub-Contractor must give notice within 7 weeks under the Sub-Contract.
Giving notice within those periods is a ‘condition precedent’. In other words, if notice is not given in time, the claiming party loses its entitlements to additional time and money, just because it did not give the notice.
Assessing compensation events
Different main option provisions (main options A, B, C, D and E) provide for compensation events to be assessed in different ways.
Part of the ‘philosophy’ of the NEC is that change should be cost-neutral. This is to provide as much cost-certainty as possible and prevent parties from winning a project at a low price and then making margin through expensive change. Compensation events will therefore generally be assessed based on their cost implications on the list of items included in a schedule of cost components. In other words, the actual cost of the items listed in the schedule of cost components will be used, although parties can agree that rates and prices can be used instead.
The time effects of a compensation event are assessed against the Accepted Programme at the date of notification of the compensation event.
The NEC intends that compensation events are assessed at the time of the instruction or event. While the actual cost of the event to date is taken into account, future effects are therefore forecast. The assessment is accordingly often a ‘prospective’ assessment of what is likely to happen, rather than a ‘retrospective’ assessment of what actually happened. The rationale is that parties should have certainty as to the time and money effects of change. There is case law on this point however, which suggests that in some instances this is not appropriate.
What happens if a compensation event notice is not responded to? What happens if a quotation for a compensation event is not responded to?
Under the unamended NEC contracts, where a party fails to respond to notice of a compensation event or a quotation for a compensation event, the other party can give a notice alerting them of that failure. If they still fail to respond, then the compensation event and the quotation are deemed to be accepted (as applicable).
Do I have to issue a notice for a compensation event if I have already issued an early warning notice?
There is a common misunderstanding that a party does not need to issue a compensation event notice if it has already given early warning of an event.
An early warning notice only gives the parties the opportunity to mitigate a potential compensation event. It does not stand as a compensation event notice or give any entitlement to additional time or money. Therefore, if a party issues an early warning notice only and does not follow it up with a compensation event notice within the applicable time limit, its claim for a compensation event is likely to be time-barred.
You may ask yourself, what the point of issuing an early warning notice is in that case? The sanction for failing to give an early warning notice which should have been given is that a resulting compensation event is assessed as if the early warning notice had been given. In other words, it is assessed as if the other party had been given the opportunity to mitigate (reduce) its loss. This can dramatically reduce the amount of time or money a party is entitled to under a compensation event.
Can I still claim additional time and money if I have not issued notice of compensation events in time?
If you have not issued a compensation event notice in time then you may still be able to claim additional time and money. It depends on what the precise terms of your contract are and what has in fact happened.
Does a reference to a compensation event in another document, such as meeting minutes, count as notice?
The NEC requires notices or certificates to be communicated separately from other communications. This means that it is very difficult to argue that notice of a compensation event was given by other means (e.g., as part of the minutes of a meeting).
Free initial enquiry
We have helped many contractors and sub-contractors deal with early warning notices and compensation events so that their position is protected.
We offer a free one hour consultation for new clients. Please do not hesitate to contact us to discuss how we can help you. We can help ensure that you issue the correct early warning notices and compensation events at the correct times and protect your entitlements.
