An NEC risk allowance in a compensation event quotation is an amount of cost or time for matters that have a significant chance of happening and aren't themselves compensation events. It's allowed under clause 63.8 of NEC4 (63.6 in NEC3), and it's the Contractor's main protection, since an implemented assessment isn't normally revisited if the forecast proves wrong.
This guide looks at how to use them well. The wider topic of NEC risk and liabilities has the rest of the picture.
What qualifies
| Test | Question to ask |
|---|---|
| Significant chance | Is it realistically likely? "It could happen" isn't enough, and remote risks don't qualify |
| Not itself a compensation event | If it would be its own event when it happens, leave it out and deal with it then |
| Linked to this event | Is it a risk of carrying out the changed work, and not a general project risk already in the Prices? |
NEC3 words it a bit differently, referring to matters at the Contractor's risk under the contract. The practical result is usually the same.
Other rules that interact with it
- Reasonable contractor. The assessment assumes the Contractor reacts competently and promptly, and that its cost and time are reasonable (63.9 in the NEC4 subcontract text). An allowance doesn't pay for avoidable inefficiency.
- Finality. An implemented assessment isn't revised except as the contract provides. See implementing a compensation event.
- Assumptions. If something is too uncertain to forecast, the Project Manager can state assumptions. A wrong assumption is corrected as a later event at 60.1(17). So you may not need an allowance for it.
- Time. The time risk allowance on the programme is the Contractor's own. A delay assessment can include a time allowance for the changed work too.
A worked example
A fictional instruction to add 200 metres of new duct across an old industrial yard, with illustrative figures. The Site Information shows some old foundations, but not exactly where. The team looks at three possibilities.
| Risk | Chance (judgement) | Cost if it happens | Allowance |
|---|---|---|---|
| Hand-digging near live services takes longer than planned | 50% | £12,000 | £6,000 |
| Spoil is contaminated at the level shown by the Site Information | 30% | £20,000 | £6,000 |
| An unforeseeable obstruction, so unlikely that it would be a compensation event | Excluded | Not applicable | £0 |
The quotation shows: direct Defined Cost of £85,000, risk allowance of £12,000, plus the Fee. Time: 3 weeks of planned duration and 2 days of risk. The list also shows what's excluded, so everyone can see the third item is left for its own notification if it arises.
How to show it
- List each risk separately. A single line reading "risk 15%" invites rejection. The contract doesn't ban percentages, but they're hard to justify.
- Give the reasoning behind the chance and the cost. Past jobs, ground investigation data and subcontractor prices all help.
- Show the Fee correctly. The allowance is part of the forecast cost, so it's handled in the same way as other Defined Cost in the quotation.
- State what you've left out. Explicit exclusions and assumptions reduce later arguments.
For the Project Manager
A blanket refusal of risk allowances is a mistake, as the contract allows for them. Test them on their merits:
- Is the risk really a matter already covered in the Contractor's Prices?
- Would it be its own compensation event?
- Is the chance and value credible, or just a round number?
- Could the risk be reduced by a different method, or an early warning and a meeting?
- Would an assumption be fairer? See quotations for compensation events.
On each Option
On Option A, a realised allowance becomes margin and a shortfall a loss, as the Prices are fixed. On Option C or D the allowance increases the target, while the actual cost is what's paid, so an unused allowance flows through the share. On Option E the assessment only updates the forecast. So target-cost Clients often scrutinise allowances most closely, and a Contractor should expect that.
Related guides
- NEC Risk, Liabilities and Insurance
- Limiting Liability Under NEC
- Force Majeure and NEC
- Indemnities Under NEC
- Risk Allocation by Main Option
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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.