NEC 3: when is the project manager obliged to notify a compensation event, and what 
       are the effects of his failure to do so? 
         
       Introduction  
       Time bar clauses that are found in the standard form construction contracts (almost) always 
       operate against the contractor. Hopefully we are all aware of the consequences of failing to 
       comply with a time bar clause/s in a construction contract. However, the NEC is a change 
       from this norm and it exonerates the contractor in certain circumstance and then shifts some 
       risks onto the shoulders of the project manager for failing to respond to the contractor. 
        
       The relevant provisions of the NEC3 
       Compensation events are events stated in the contract, which, if they occur, entitle the 
       contractor to be compensated for any effect, which the compensation event has on the 
       prices and / or the accepted programme.  Compensation events, therefore, represent risks 
       borne by the employer.  The principle function of the compensation events is to reduce the 
       incidence of the risks highlighted by application of collaborative foresight. This is, amongst 
       several  other  things,  reflected  in  the clauses addressing  the  project  manager’s  and 
       contractor’s  duty  to  notify  the  other  of  a  compensation  event.  The  NEC3  lists  the  19 
       compensation events in clause 60 and the duty to notify the compensation event in clause 
       61. To understand the mechanics of the NEC3 we will take a look at the duties of the project 
       manager  and the contractor to notify the  other  of  a  compensation  event  and  the 
       consequences of the project manager failing to do so where he should have.  
        
       Sub-clause  61.1  places  a  duty  on  the  project  manager  to  notify  the  contractor  of  a 
       compensation event in the following instances: (i) if the compensation event in question 
       arises from the project manager or (ii) where the supervisor gives an instruction or changes 
       an  earlier  decision.  Moreover,  the  second  bullet  point  in  sub-clause  61.3  imposes  an 
       obligation  to  notify other compensation  events that the contractor  would  normally  be 
       expected to notify. This argument is supported by the early warning clause in 16.1 which 
       requires that the project manager must have his finger on the pulse of everything that may 
       have an impact on time and money. 
        
       The  following  compensation  events  arise  from  the  project  manager:  sub-clause  60.1(1) 
       being an instruction changing the works information, (4) instruction to stop or not start work 
       or change a key date, (6) failure to reply to a communication with the period for reply, (7) 
       instructions for objects of value or of historical content, (8) changes a decision, (9) withholds 
       an acceptance, (10) search for a defect and no defect is found, (11) test or inspection done 
        by the supervisor causes an unnecessary delay, (15) the project manager certifies take over 
        or a part of the works before both completion and the completion date, and (17) the project 
        notifies a correction to an assumption stated about a compensation event.  
         
        Sub-clause  61.3  places  a  duty  on  the  contractor  to  notify  the  project  manager  of  a 
        compensation event which has happened or which he expects to happen as a compensation 
        event if (i) the contractor believes that the event is a compensation event and (ii) the project 
        manager has not notified the contractor of the event. Even if the compensation event does 
        not strictly originate from the project manager, he has an obligation to notify these also, like 
        a  weather  delay in terms of the early warning procedure and then also a subsequent 
        compensation event as the project manager cannot argue that didn’t know that it may or may 
        not have a  time and cost impact 
         
        The consequences of the engineer’s failure to notify a compensation event 
        Sub-clause  61.3  goes  on  to  set  out  the  consequences  for  the  contractor  if  one  of  the 
        following two situations occur. Firstly, if the contractor does not notify the compensation 
        event within eight weeks of becoming aware of the event, it would not be entitled to a 
        change in the prices, the completion date or a key date. This means that the contractor is 
        time barred. However, the clause goes on to state as follows: “...unless the Project Manager 
        should have notified the event to the contractor but did not.”  
         
        Therefore, the contractor cannot be time barred if the compensation event arises from the 
        project manager (or any other cause of which he could or should have been aware) and he 
        failed to notify the project manager thereof within eight weeks of becoming aware thereof.  
         
        The project manager’s failure to reply to a quotation for a compensation event 
        It is important to bear in mind that there is a further time bar provision in the NEC3 against 
        the project manager. This time bar relates to the failure of the project manager to respond to 
        the contractor’s quotation for a compensation event.  Clause 61.4 provides that, should the 
        project manager fail to reply to a compensation event notification within a further 2 weeks, 
        the  quotation is treated  as  being  accepted.   The  following  diagram  illustrates  this 
        schematically: 
             
             
             
                                  
                                  
                                     Project Manager replies to 
                                     quotation 
                                     •    instructs revised quotation                     2 weeks             Contractor submits quotation as 
                                     •    accepts quotation                                                   requested within 3 weeks 
                                     •    decision not to proceed 
                                     •    Project Manager makes own 
                                          assessment                                                              Contractor notifies Project 
                                                 No reply.                                                        Manager of failure to 
                                                                                                                  reply within agreed time 
                                                                                                                                 2 weeks 
                                                                                                           Deemed acceptance of 
                                                                                                           quotation.  
                                                                                                                                                                         
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
       Becoming aware of the event  
       We believe it is necessary to examine what the NEC3 means by the words in sub-clause 
       61.3 ‘...of becoming aware of the event...”. In other words, when does the clock actually start 
       ticking before the contractor will be time barred and not be entitled to a change in the prices, 
       the completion date or a key date, bearing in mind the project manager’s duty to notify a 
       compensation event.  
       The intention is clearly to establish a contractual time bar.  However, this does not in our 
       view succeed.  It is a requirement that the contractor became aware of the event, which is 
       when the time period of eight weeks start within which to notify the project manager. The 
       NEC3 does not state that the eight week period starts running when the contractor ‘ought to 
       have  become  aware’  of  the  event. There is nothing to  stop  the  Contractor  saying, 
       legitimately or otherwise, on the last day of the project: “I have now become aware of these 
       circumstances that pertained two years ago” and then submit a compensation event to the 
       engineer. 
        
       Dispute resolution time bar 
       Option  W1 in the NEC3 applies where a dispute arises in connection with the contract and is 
       referred to and decided by an Adjudicator. Set out in the adjudication table are the time 
       periods within which a dispute may be referred to the adjudicator and the consequences of 
       such failure are stipulated in sub-clause W1.3(2). Either party may refer a dispute to the 
       adjudicator  but  this  must  be  done  between  two  and  four  weeks  after  notification  of  the 
       dispute to the other party and the project manager. It is interesting to note that a referral prior 
       to the two weeks will be premature and of no effect and after the four week period will be out 
       of time and time barred. 
        
       Conclusion 
       From  the  above  we  note  that,  where  the  project  manager  should  have  notified  a 
       compensation event and did not, the contractor is exonerated from the time bar provisions 
       and it may still claim a change in the prices and/or the completion date. This gives action to 
       the  above  stated  principle  function  of  the  compensation  events  which  is to reduce the 
       incidence of the risks by application of collaborative foresight. 
        
       Where the project manager fails to respond to a quotation for a compensation event from the 
       contractor within two weeks after a further notice from the contractor, it bears the risk that