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'The line in the sand'

What is the ‘dividing date’, referred to in the NEC4 contract, and why is it so important?

The contract does not refer to the ‘dividing date’ as an ‘identified and defined term’ but its function can be easily determined from Clause 63 which sets out the procedure for assessing compensation events. Briefly summarised, this comprises the actual defined cost of the work done at the dividing date, the forecast defined cost of the work not done by the dividing date, together with any fee. The dividing date therefore delineates ‘actual’ costs from ‘forecasted’ costs in the assessment of a compensation event – it is the ‘line in the sand’.

Author: Andy Smith, Technical Director, Bristol, Driver Trett UK

It logically follows that the dividing date is of significant importance. Again, Clause 63.1 provides the necessary guidance and states that for a compensation event that arises from the Project Manager or the Supervisor giving an instruction or notification, issuing a certificate or changing an earlier decision, the dividing date is the date of that communication. For other compensation events, the dividing date is the date of notification of the compensation event.

Therefore, all compensation events may contain an element of actual cost and an element of forecast cost of the work yet to be done as at the dividing date. This is reinforced by the NEC User Guide, Volume 4, ‘Managing an engineering and construction contract’ [1 June 2017],  which states: “Nevertheless, for most cases, the inclusion in the clause of a dividing date set early in the assessment process reinforces the point that compensation events are not cost-reimbursable but are assessed on forecasts with the Contractor taking some risk.”

But how does this sit with the ethos of NEC4 Option E – Cost Reimbursable contract? Under Option E, ‘Defined Cost’, as described at Clause 52, “includes only amounts calculated using rates and percentages stated in the Contract Data and other amounts at open market or competitively tendered prices with deductions for all discounts, rebates and taxes which can be recovered.”

In addition, the contractor is specifically required to keep the following records:

• Accounts of payments of Defined Cost.
• Proof that payments have been made.
• Communications about, and assessments of, compensation events for subcontractors; and  
• Other records as stated in the Scope.

Ordinarily, this would not be an unreasonable requirement for a cost reimbursable contract. However, this approach would appear to be at odds with the ‘forecast’ element of a compensation event and for which there can be no accounts of payments or proof that payments have been made. Furthermore, if the contract is premised on the reimbursement of all costs – providing they have been incurred in accordance with the contract – what is the purpose of attempting to value and agree compensation events in advance of them actually occurring?

From an employer’s perspective, the argument would be that an early forecast of cost is necessary for the employer to make an informed decision as to whether or not it should proceed with a change or to take measures to reduce the impact of a change. However, a contractor may prefer the certainty of cost reimbursement and this may have an impact on any contingency it may otherwise build into the contract. The principal reasons for using an Option E is the absence of work scope definition and the requirement for an early start to construction. As a consequence, the contractor’s risk is – deservedly - minimised through cost reimbursement and a lower Fee.

On that basis, it appears somewhat unfair to require a contractor to forecast cost without having an adequate provision for risk. Therefore, when Option E is selected, it may be in both parties’ interests to consider amendments through the Z clauses.    

This article was written for issue 26 of the Driver Trett Digest. To view the publication, please visit: www.driver-group.com/digest-issue-26