An NEC Option A compensation event changes the Activity Schedule, because that's the form the Prices take under Option A. The assessment still comes from Defined Cost and Fee. Once it's accepted, the Contractor is paid the resulting lump sums, whatever the changed work actually costs.
That makes Option A the Option in which assessment has the sharpest effect on the Contractor's margin. The general rules are in the compensation events guide; this page covers what's different. For Option A in general, see the Option A guide.
How the Prices change
The Contractor assesses the event on the normal basis and then shows the result as changes to the activities. In NEC3 ECC this is clause 63.12. NEC4 has the same rule among its Option A clauses, numbered differently from NEC3: check your contract for the reference. A quotation usually does one or more of these:
- Adds a new activity for the new work, with its own lump sum.
- Changes the price of an activity not yet completed.
- Removes or reduces an activity if work is omitted, where the contract provides for a reduction.
Don't change the price of an activity that's complete unless the event relates to it. If the cost has already been incurred and the activity has been paid, adding a new activity for the effect is clearer. Activities should also fit the programme, so that the link between each lump sum and the Accepted Programme remains clear. See the Activity Schedule guide.
A worked example
A fictional Option A contract for a substation, with illustrative figures. An instruction adds a second cable route. Assessed Defined Cost and Fee come to £48,000.
| Activity | Before | After |
|---|---|---|
| 410 Cable route A | £62,000 | £62,000 |
| 415 Cable route B (new) | None | £44,000 |
| 420 Testing and commissioning | £30,000 | £34,000 |
| Total of those activities | £92,000 | £140,000 |
The Contractor is paid each lump sum when that activity is complete. If route B costs £52,000 in reality, the Contractor bears the excess. If it costs £39,000, the Contractor keeps the difference. See implementing a compensation event.
Why this differs from a variation at rates
Someone used to measured contracts might expect the extra route to be priced at the cost per metre of route A. Unless both agree to that, it won't be. Agreed rates and lump sums are available (63.2 in NEC4; A63.14 in NEC3), but the default is the effect on Defined Cost. Tender pricing isn't protected. If the Contractor underpriced route A, the new work isn't dragged down with it, and it can't inflate route B if it overpriced.
The same point applies to work that's removed. An omission is measured by the effect on cost, not by the price in the Activity Schedule, so the saving may be more or less than the lump sum listed. In practice, that's the reason for many Option A disputes.
When the Prices go down
| NEC3 ECC Option A | NEC4 ECC Option A | |
|---|---|---|
| Instruction reduces total Defined Cost | Prices reduced (A63.10) | Prices reduced (63.4), with the exception below |
| Corrected assumption reduces it | Prices reduced (A63.10) | Prices reduced (63.4) |
| Contractor's own proposal to change the Client's Scope, once accepted | No special treatment under Option A | Reduced only by the assessed effect multiplied by the value engineering percentage |
The NEC4 row is taken from the NEC4 subcontract, which has this rule for Options A and B; check your own ECC and its Contract Data for the percentage. In short, NEC4 gives the Contractor a reward for ideas that save money on a lump sum contract, and NEC3 gave it little incentive.
Common mistakes
- Not revising the Activity Schedule. A change agreed in a letter but not reflected in the schedule causes problems at the next assessment.
- Adding contingency to a lump sum and hoping. A risk allowance needs a basis, as clause 63 requires.
- Relying on actual costs afterwards. The Contractor bears a poor forecast. Hold your forecast to the same standard you would apply to a tender.
- Thinking records don't matter. Under Option A, Defined Cost isn't paid month by month, but it still drives every assessment, so a Contractor with poor cost records has a weak hand.
Related guides
- NEC Compensation Events: The Complete Guide
- Compensation Events Under Option C
- Compensation Events Under Option E
- Can a Compensation Event Be Notified Without an Early Warning?
- Assessing Delay to Completion
- Implementing a Compensation Event
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This guide is general information in our own words, not legal advice. Your contract and its Contract Data always govern. NEC, NEC3 and NEC4 are trade marks of Thomas Telford Ltd; Contract Status is not affiliated with or endorsed by NEC.