Take Notice! – A Brief Guide to NEC Contract Notices

Take Notice!

A Brief Guide to NEC Contract Notices

Author: Eugene Lenehan

May 2022

This Guide identifies the numerous types of notice to be issued under the NEC4 Engineering and Construction Contract (“ECC”). Notices have to be issued by the Client, Contractor, Project Manager and Supervisor.

This Guide also focuses on how confusion often occurs in respect of two of the most frequently issued NEC notices, in respect of early warnings (refer to clause 15.1) and compensation events (refer to clause 61.3).

Notice Requirements

Parties frequently fail to follow the NEC’s notification requirements. This is sometimes because the parties are familiar with each other and have developed ‘usual’ methods of dealing with each other.

The NEC’s notice requirements are contained at clause 13, which stipulates that each notice must be issued separately (clause 13.7), in writing (clause 13.1) and to the right address (clause 13.2). The Project Manager may be aware of matters from discussions on site, or at meetings. However, in terms of the notice provisions, references to such matters in meeting minutes would not constitute proper notice of the event.

Problems can also occur when using cloud-based project communication systems for sharing, organising, and collaborating on project documents (refer to clause 13.2), as a communication only has effect when it is sent in accordance with the specified system. Arguments sometime occur over whether a communication has been issued fully in accordance with the specified system, such as whether the correct folder was selected for depositing the communication.

To avoid such technical disputes, it is vital that:

  1. the Scope clearly sets out the requirements of the communication system: and
  2. users of the system fully understand what is required. Training is essential for cloud based project communication systems. No matter how simple the process is made, users always find ways to be confused. A confused user will soon become a non-user, or even worse, a messy user.

Notices from Client

The NEC4 ECC contract includes the following clauses in respect of contractual notices from the Client:

Clause 14.4: The Client may replace the Project Manager or Supervisor after notifying the Contractor of the name of the replacement.

Clause 28.1: Transferring the benefits of the contract or any rights under it. Unusually, this clause provides that the Client is not to assign if the party receiving the benefit of that assignment does not intend to act in a spirit of mutual trust and cooperation.

Clause 90.1: If Client wishes to terminate the Contractor’s obligation to Provide the Works, he notifies the Project Manager and Contractor. If the Project Manager agrees that the reason given complies with the contract, he promptly issues a termination certificate. This involvement from the Project Manager should provide some protection from repudiation resulting from invalid termination.

Clause Y2.3: Intention to pay less. Any pay less notice must be issued not later than 7 days before the final date for payment.

Option W1.1(2): If the Client wishes to notify a dispute to the Senior Representatives, it also sends the notification to both the Contractor and Project Manager, identifying the nature of dispute. Each Party then submits to the other their statement of case, within one week of notification. Unless the parties agree otherwise, the statements of case are limited to ten sheets of A4 paper, plus supporting evidence.

Option W1.3(1): If the Client disputes any issue not agreed by the Senior Representatives, it can issue a notice of adjudication (to both the Contractor and the Project Manager), followed by Referral notice to Adjudicator within 7 days.

Option W2.1(2): If the Client wishes to notify a dispute to the Senior Representatives, it also sends the notification to both the Contractor and Project Manager, identifying the nature of dispute. Each Party then submits to the other their statement of case, within one week of notification. Unless the parties agree otherwise, the statements of case are limited to ten sheets of A4 paper, plus supporting evidence.

Option W2.3(1): Before commencing an adjudication, the Client must issue a notice of adjudication to the Contractor, with a brief description of the dispute and the decision which it requires the Adjudicator to make. If the Adjudicator is already named in the Contract Data, they also receive a copy of the notice.

Option W2.3(2): Within 7 days after issuing a notice of adjudication, the Client issues his referral notice to the Adjudicator and Contractor.

Option W3.2(3): Potential disputes referred to Dispute Avoidance Board, 2 – 4 weeks after notification of the issue to the Contractor and Project Manager.

Notices from Project Manager

The NEC4 ECC contract includes the following clauses in respect of contractual notices from the Project Manager:

Clause 13.5: The Project Manager may extend a period of reply if it is agreed with the Contractor prior to when the reply is due. The Project Manager is obliged to notify the Contractor of the agreement. Note that this clause only applies to the period for reply timescale(s) stated in Contract Data Part One, so does not apply to specific timescales stated within clauses.

Clause 14.2: This clause allows the Project Manager to delegate some of his actions, but only after issuing the appropriate notice, so the Contractor is clear on who has authority. The duties of a Project Manager involve a varied skill base, including contract administration, design, planning, estimating and quantity surveying. Hence, Project Managers will often require some assistance. This might be especially so on large / complex projects. Use of this clause could result in the Project Manager becoming a management team.

Clause 15.1: Early warning notification is required to be issued as soon as the Project Manager (or Contractor) become aware of any matter that could cause delay, increase cost, or impair the performance of the works in use.

(See further below for detail regarding early warnings).

Clause 17.1: Notification is required as soon as becoming aware of any ambiguity or inconsistency in or between contract documents. Where the Project Manager issues an instruction to resolve the ambiguity / inconsistency, it is a compensation event. The NEC does not include a clause that deals with the priority of contract documents. If there was such a clause, there would be a reduced need to operate clause 17.1.

Clause 17.2: Notification is required as soon as becoming aware that the Scope an illegal or impossible requirement. Once notified, the Project Manager gives an instruction to change the Scope appropriately.

Clause 31.3: Acceptance / Non-acceptance of contractor’s programme. The Project Manager must notify either his accept or non-acceptance of a programme within two weeks of submission. If the response is non-acceptance, it should include reasons in sufficient detail to allow the Contactor to correct the submission.

Clause 36.1: Upon receipt of a Contractor’s acceleration quotation, the Project Manager sends a notification as to whether the quotation is accepted or not. The Project Manager cannot simply instruct acceleration and enforce the Contractor to accelerate.

Clause 50.9: (Options C, D, E and F only). This is a Contractor led process, enabling it to progressively close out its Defined Cost. After the Project Manager has reviewed the Contractor’s records in respect of part of the Defined Cost, the Project Manager can notify:

  • acceptance of that part of the Defined Cost
  • further records are needed
  • there are errors in the contractor’s assessment

After the Contractor provides any further records, or advises of a correction of errors, the Project Manager can notify:

  • acceptance; or
  • a corrected assessment.

Clause 51.1: The Project Manager issues a payment certificate within 1 week of each assessment date.

Clause 61.1: The Project Manager notifies a compensation event notice that arises from the Project Manager (or Supervisor) giving an instruction, issuing a certificate, changing an earlier decision, or correcting an assumption. These are the events listed at 60.1(1), (4), (7), (8), (10), (15), (17) and (20), plus 60.6 in Options B and D. For these compensation events (which should be notified by the Project Manager), the 8-week time bar in clause 61.3 does not apply.

Clause 61.4: If the Project Manager fails to notify a decision in respect of a compensation event notified by the Contractor, the Contractor may notify the Project Manager of his failure.

Clause 61.5: Notification of Contractor’s failure to give an early warning. If the Project Manager considers that the Contractor did not give an early warning which an experienced Contractor could have given, then the Project Manager states this at the point of requesting a quotation. The significance of this is that the Project Manager can then assess the subsequent compensation event as though the Contractor had given the early warning, which might mean the assessment has a lower value (refer to clause 63.7).

Clause 62.3: Within two weeks of receiving a Contractor’s quotation, the Project Manager must respond. If the Project Manager accepts the quotation, he must issue a notification to confirm this. Alternatively, the Project Manager can notify he will be making his own assessment, or he could instruct the Contractor to submit a revised quotation.

Clause 62.5: The Project Manager has the power to grant more time for the submission of quotations. However, an extension can only be granted before the original time limit for submitting the quotation has expired.

Clause 62.6: If the Project Manager does not reply to a quotation within the time allowed, the Contractor may notify the Project Manager of his failure. If the Project Manager continues to fail to reply for 2 weeks after that notification, then the Contractor’s original quotation will be treated as accepted.

Clause 64.3: The Project Manager notifies the Contractor of his assessment of a compensation event.

Clause 65.2: Notification that a Contractor’s quotation for a proposed instruction is not accepted.

Clause X22.5: Notice to proceed to Stage Two.

Clause Y2.2: The Project Manager’s certificate is the notice of payment.

Notices from Supervisor

The NEC4 ECC contract includes the following clauses in respect of contractual notices from the Supervisor:

Clause 14.2: This clause does not relate only to Project Managers. Supervisors are also permitted to delegate some of their actions, but only after issuing the appropriate notice, so the Contractor is clear on who has authority.

Clause 41.3: The Contractor and Supervisor are each required to give the other notice of tests and inspections which each is to carry out. Notification from the Supervisor is required:

  • before the tests and inspections start; and
  • of the results.

Clause 43.2: The Contractor and Supervisor are each required to give the other notice as soon as they become aware of a defect.

Notices from Contractor 

The NEC4 ECC contract includes the following clauses in respect of contractual notices from the Contractor:

Clause 15.1: Early warning notification is required to be issued as soon the Contractor (or Project Manager) become aware of any matter that could cause delay, increase cost, or impair the performance of the works in use.

(See further below for detail regarding early warnings).

Clause 17.1: Notification is required as soon as becoming aware of any ambiguity or inconsistency in or between contract documents. Where the Project Manager issues an instruction to resolve the ambiguity / inconsistency, it is a compensation event. The NEC contracts does not include a clause that deals with the priority of contract documents. If there was such a clause, there would be a reduced need to operate clause 17.1.

Clause 17.2: Notification is required as soon as becoming aware that the Scope an illegal or impossible requirement. Once notified, the Project Manager gives an instruction to change the Scope appropriately.

Clause 28.1: Transferring the benefits of the contract or any rights under it.

Clause 41.3: The Contractor and Supervisor are each required to give the other notice of tests and inspections which each is to carry out. Notification from the Contractor is required:

  • before the tests and inspections start.
  • of the results.
  • before doing work that would obstruct tests or inspections.

Clause 43.2: The Contractor and Supervisor are each required to give the other notice as soon as they become aware of a defect.

Clause 50.9: (Options C, D, E and F only). The Contractor notifies when part of the Defined Cost has been finalised and records are available for inspection. This Contractor-led process enables the Contractor to progressively agree its Defined Cost.

Clause 61.3: This clause contains an obligation for the Contractor to issue compensation event notices. It primarily allows to those types of compensation events not covered by clause 61.1, for which the Contractor’s notice must be issued within eight weeks of the Contractor becoming aware of the event. Under this clause, the Contractor is also obliged to notify all compensation events that the Project Manager has failed to notify. It is worth noting that clause 61.7 prevents all compensation events from being notified after the issue of the Defects Certificate, which effectively acts as a long-stop date for notification of compensation events.

(See further below for detail regarding clause 61.3).

Clause 61.4: If the Project Manager fails to not notify a decision in respect of a compensation event notified by the Contractor, the Contractor may notify the Project Manager of his failure.

Clause 62.6: If the Project Manager does not reply to a quotation within the time allowed, the Contractor may notify the Project Manager of his failure.

Clause 64.4: If the Project Manager does not assess a compensation event within the time allowed, the Contractor may notify the Project Manager of his failure.

Clause 90.1: If Contractor wishes to terminate its obligation to Provide the Works, he notifies the Project Manager and Client. If the Project Manager agrees that the reason given complies with the contract, he promptly issues a termination certificate. This involvement from the Project Manager should provide some protection from repudiation resulting from invalid termination.

Clause Y2.2: If the Project Manager does not make an assessment after the issue of a Defects Certificate, the Contractor’s assessment is the notice of payment.

Clause Y2.3: Intention to pay less. The Contractor is entitled to serve a pay less notice in relation to a sum due by it to the Client.

Clause Y2.5: This clause refers to the Contractor’s right under the Act to suspend performance (which cannot be done without first giving to the Client at least 7 days’ notice, stating the grounds on which it is intended to suspend performance).

Option W1.1(2): If the Contractor wishes to notify a dispute to the Senior Representatives, it also sends the notification to both the Client and Project Manager, identifying the nature of dispute. Each Party then submits to the other their statement of case, within one week of notification. Unless the parties agree otherwise, the statements of case are limited to ten sheets of A4 paper, plus supporting evidence.

Option W1.3(1): If the Contractor disputes any issue not agreed by the Senior Representatives, it can issue a notice of adjudication (to both the Client and the Project Manager), followed by Referral notice to Adjudicator within 7 days.

Option W2.1(2): If the Contractor wishes to notify a dispute to the Senior Representatives, it also sends the notification to both the Client and Project Manager, identifying the nature of dispute. Each Party then submits to the other their statement of case, within one week of notification. Unless the parties agree otherwise, the statements of case are limited to ten sheets of A4 paper, plus supporting evidence.

Option W2.3(1): Before commencing an adjudication, the Contractor must issue a notice of adjudication to the Client, with a brief description of the dispute and the decision which it requires the Adjudicator to make. If the Adjudicator is already named in the Contract Data, they also receive a copy of the notice.

Option W2.3(2): Within 7 days after issuing a notice of adjudication, the Contractor issues his referral notice to Adjudicator and Client.

Option W3.2(3): Potential disputes referred to Dispute Avoidance Board, 2 – 4 weeks after notification of the issue to the Client and Project Manager.

Confusion

The NEC contracts includes some important provisions requiring the Contractor to issue notifications in relation to early warnings and compensation events. These two types of notice often cause confusion, but they have completely different purposes and the consequences of not issuing them can be quite different.

Both the Contractor and Project Manager have a duty to issue early warnings and notifications of compensation events, but we have frequently encountered situations where contractors (and subcontractors) have struggled to understand the difference between the two notices, sometimes with disastrous consequences.

Subcontractors

The rest of this article is generally written in terms of the main contract, involving the Contractor, and the Project Manager representing the Client. However, the problem is more acute with subcontractors working under NEC subcontracts.

From as early as the pre-start meetings between the main contractor and its subcontractors, the main contractor emphasises the importance of the subcontractor issuing early warning notices, to make sure that any cost and time issues are identified early. As a result, some subcontractors get fixated with early warning notices. When the project is well progressed, the subcontractor might find it is not being paid extra for delays suffered. When we are called in to help, and we ask to see the subcontractor’s ‘compensation event notices’, we sometimes hear: “What are those? We were only told to issue early warning notices”!

Early warning notices are undoubtedly an important management tool, but they do nothing to help obtain payment for variations and delays. Neither do they do anything to protect from being charged damages for late completion. It is only compensation event notices that do that.

Early Warnings 

Unlike other standard forms of contract, the NEC includes an early warning procedure, which serves as a risk management tool. An early warning is a warning of something that may happen in the future, but which may not occur at all. The objective is to ensure that matters are dealt with before they cause problems, rather than afterwards.

The early warning provisions is the best example of how the parties can act in accordance with the NEC’s underlying philosophy, ‘a spirit of mutual trust and co-operation’. In fact, the early warning provisions have done much to enhance the status of the NEC as a collaborative contract.

Early warnings (referred to at clause 16.1 of the NEC3 and clause 15.1 of the NEC4), are to be issued for potential problems. Both the Contractor and the Project Manager have obligations to issue early warnings, as soon as either becomes aware of any matter that could delay the works, increase costs, or impair quality. The purpose of the early warning process and risk reduction meetings is to allow the parties to foresee potential issues and minimise the impact, for the benefit of the project.

The Project Manager is motivated to give an early warning, to maximise the opportunity of involving the Contractor and finding the best solution to the problem and therefore keep the Client happy. It might be said that the Contractor’s motivation is similar – but he also has the potent incentive of protecting himself from the Project Manager imposing the sanction at NEC4 clause 63.7 (clause 63.5 in the NEC3) of the compensation event process, which provides:

If the Project Manager has stated in the instruction to submit quotations that the Contractor did not give an early warning of the event which an experienced contractor could have given, the compensation event is assessed as if the Contractor had given early warning”.

This clause highlights the importance of the Contractor issuing an early warning. If the Contractor fails to give a required early warning and a compensation event then ensues, the compensation event can be assessed “as if the Contractor had given early warning”.

This enables the Project Manager to consider the mitigation measures that could have been carried out. Had the early warning notice been issued, there might have been an opportunity to have taken more efficient action, which would have minimised costs and / or delays. The Project Manager is effectively allowed the benefit of hindsight when carrying out his assessment of delay and extra cost, reducing the Contractor’s entitlement.

So, the consequences of the Contractor failing to issue the appropriate early warning can theoretically be serious and substantial.

The NEC’s approach here is that the contractor would be motivated by the financial consequences of clause 63.7 to identify problems at the earliest possible opportunity, and then to actively contribute to providing solutions.

Any failure of a Project Manager to give early warning is not expressly referred to within the Contract. However, such failure could result in an increase in cost or time, or reduction in quality, all of which disadvantage Client. The NEC assumes that, as the Project Manager is acting for the Client, he is expected to be conscientious and give an early warning notice when matters arise.

Notices of Compensation Events

Compensation events deal with the effect of an event on time and money. In JCT parlance, compensation events equate to variations, extensions of time and loss and expense. Consequently, they are of great importance to contractors. However, to enable the Contractor to receive its entitlement to additional time and/or money, the compensation event must first be notified.

For compensation events that arise from an instruction by the Project Manager e.g., to change the Scope / Works Information (i.e., a variation), it is for the Project Manager to notify the Contractor of the compensation event (and instruct him to provide a quotation). The Project Manager is also primarily responsible for notifying compensation events that arise from him issuing a certificate, changing an earlier decision, or correcting an assumption. For numerous other categories of compensation event, it is for the Contractor to notify the Project Manager.

It is vital for the Contractor to be familiar with clause 61.3. Where a Contractor fails to notify the Project Manager of a compensation event within 8 weeks of becoming aware of the event, clause 61.3 prevents his right to claim an adjustment to the Prices and the Completion Date (unless it is an event which the Project Manager should have notified to the Contractor). Hence, clause 61.3 is a condition precedent, operating as a time bar to the Contractor’s entitlement to any time and cost consequences of the compensation event.

However, it must be remembered that this does condition precedent not apply to all categories of compensation event. The condition precedent does not apply to the compensation event categories listed at 60.1(1), (4), (7), (8), (10), (15), (17) and (20), plus 60.6 in Options B and D.

Practical Issue

It has been our experience that contractors are generally very thorough in issuing notices but have on occasion misunderstood their contractual relevance and incorrectly labelled them as ‘Early Warning Notice’, instead of ‘Compensation Event Notice’. Whilst the content of the notices often relates to a compensation event, the contractor sometimes incorrectly labels them as ‘Early Warning Notice’.

When the Contractor has discovered his mistake, often over eight weeks later, the Project Manager has pointed out that the Contractor is time-barred and, as a result, refused to accept that the Contractor has any entitlement to additional time or money.

Consequently, for all the Contractor’s efforts in promptly issuing written (early warning) notices, recording what can materially be described as compensation events, he has potentially lost his right to additional time and money because he has not labelled them as a notice of “compensation event”.

The Difference

One distinction between an early warning notice and a compensation event notice is that the early warning process typically deals with events that have not yet happened but have a strong possibility of occurring, whereas the compensation event process is usually for events that have already occurred or are definitely going to happen.

Did you hear the one about the girl who said to the guy ‘One kiss and I’m yours forever’? The guy replied: ‘Thanks for the early warning’! Extending this NEC analogy, if the girl subsequently moved in with the guy, it might be considered a compensation event, as it will likely increase his cost (or impair the quality of his life!). But the impending threat of a kiss has not yet cost the guy anything and consequently the early warning is sufficient.

Perhaps a construction example might be more apt: If the Contractor becomes aware that the Client’s choice of the floor tiling to be laid next to his swimming pool is not a non-slip tile it would be appropriate for the Contractor to issue an early warning. When the Project Manager subsequently issues an instruction to change to a non-slip tile it would then be appropriate for one of the parties to issue a notice of compensation event.

Importance

Both early warning notices and compensation event notices are important. Nevertheless, in our opinion one of them is of far greater importance to contractors (and subcontractors). Yet our experience is that sometimes more importance is placed on the wrong one. In one seminar given to contractors by the writer, a show of hands was asked for which notice was more important, and the vote was overwhelmingly in favour of the early warning notice. No! From a contractor’s point of view this is incorrect.

It is quite understandable that Clients encourage the early warning procedure. If the topic of an early warning is going to result in a compensation event it will invariably cost the Client time and or money. The earlier an event is notified the greater the opportunity for the parties to resolve the problem or minimise its impact.

The early warning procedure helps keep the project on track and is a great opportunity for both parties to demonstrate that they have embraced the spirit of trust and co-operation. Also, as mentioned above, the contractor has the incentive of wanting to avoid the sanction at clause 63.7.

However, when comparing the sanction at clause 63.7 for failing to issue an early warning, with the possible consequences of a failure to comply with the 8-week condition precedent at clause 61.3, it is abundantly clear which notice should be more important to contractors.

We have repeatedly encountered project managers impose the 8-week time bar, preventing contractors from receiving extra time and money. However, we have seen extremely few examples of project managers successfully imposing clause 63.7. Contractors may often fail to issue early warnings, but it is not often that a project manager can demonstrate that, had the early warning arrived, he would have taken some alternative action that would have resulted in a cheaper outcome.

Conclusions

  1. Read the contract and understand your obligations.
  2. Confuse compensation events and early warning notices at your peril! Ensure timely issue of well drafted compensation event notices, and never believe that early warning notices are sufficient to give entitlement to additional time and money.
  3. Clause 61.3 contains an 8-week (7 weeks in the NEC subcontract) time bar, which is a condition precedent to additional time and money arising from some categories of compensation event.
  4. The NEC philosophy of dealing with events immediately creates a very significant administrative burden, which can lead to disputes if a party does not have sufficient resources to comply. This is especially the case where one party is sophisticated and deliberately overwhelms the other with contractual notifications. If the relevant clauses requiring notification are not complied with, significant adverse consequences will result. To help to avoid this, make sure:
    • You have allocated adequate resources; and
    • Training is provided, so that all team members fully understand:
      • what is required; and
      • the consequences of failing to comply.
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