An NEC Option E compensation event doesn't change what the Contractor is paid for the work, because Option E pays Defined Cost plus Fee whichever way the event goes. It still matters, for three reasons: it can move the Completion Date and Key Dates, it changes the forecast of the Prices, and it keeps the Client's budget honest.
Some teams let the process lapse under cost reimbursable contracts and find out too late what that costs. For the core rules, see the compensation events guide. The Option itself is covered in the Option E guide.
What each side stands to lose
| If events aren't processed | Who loses | How |
|---|---|---|
| The Completion Date doesn't move | Contractor | It carries exposure to delay damages if Option X7 applies, even when the delay wasn't its fault |
| Key Dates don't move | Contractor | The same risk applies to any cost the contract makes the Contractor pay for missing a Key Date |
| No forecast of the change | Client | Its budget lags behind reality, and a decision may have been made on a false picture of the cost |
| No record of what caused the increase | Both | Hard to explain the outturn, and harder to audit |
The eight-week time bar under clause 61.3 still applies to Option E. A Contractor who ignores a late-access event because "we'll get paid anyway" may be paid for the work, and still have no extension of time for it.
How the Prices work here
Under Option E in the NEC4 subcontract, the Prices are defined as a forecast of total Defined Cost and Fee for the entire works. NEC3 ECC defines them more simply as Defined Cost plus the Fee. Either way, a compensation event doesn't add money to a fixed figure: it updates an estimate. NEC3 E65.3 has the forecast change set out in the notice that implements the event. Check the definition and the matching wording in your own NEC4 ECC.
| Before | Event assessed | After | |
|---|---|---|---|
| Forecast of the Prices (illustrative) | £2,600,000 | +£140,000 | £2,740,000 |
| Payment for the event's work | Cost plus Fee as incurred | No change in the basis | Cost plus Fee as incurred |
| Completion Date (fictional) | Week 60 | +3 weeks | Week 63 |
If the event's work ends up costing £165,000 rather than £140,000, the Contractor is still paid its Defined Cost and Fee, subject to Disallowed Cost. The forecast being out doesn't change that. The time, though, stays as assessed.
How to run the process proportionately
Option E justifies a lighter touch on price, not on time. A sensible approach:
- Notify every event in the usual way, with the same discipline as any other Option.
- Agree a sensible level of detail on cost. There's no point in spending days on a forecast that doesn't change what's paid, so long as the Client's budget needs are met. A short forecast may be enough for a small change, and rates or lump sums may be agreed (63.2 in NEC4; E63.14 in NEC3).
- Give full attention to the programme. The delay assessment is the same as under any other Option, so use the proper baseline. See assessing delay to Completion.
- Keep the regular forecasts in step. Forecasts of total Defined Cost are due at intervals in the Contract Data (NEC3 20.4), and implemented events should be visible in them, with an explanation of what's changed.
Common mistakes on Option E
- Stopping quotations altogether. Without one, the Project Manager has grounds to assess the event itself under clause 64, and the time result may be less favourable.
- Confusing a change with permission to spend. A compensation event doesn't make every cost payable. Disallowed Cost rules still apply.
- Thinking the Client has no interest. It carries the cost risk under this Option, so accurate forecasts matter to it more than to anyone else.
- Dropping early warnings. On a cost contract, these are often the Client's main protection. An early warning may be the point at which the cost could still have been avoided.
Related guides
- NEC Compensation Events: The Complete Guide
- Can a Compensation Event Be Notified Without an Early Warning?
- Compensation Event vs Relief Event
- Keeping a Compensation Event Register
- Compensation Events Under Option A
- Compensation Events Under Option C
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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.