The NEC Compensation Event Quotation: How the Money Is Built
Updated: 2 days ago
By Roman Bazelchuk | NEC Accredited Project Manager | APMG Project Planning and Control
Founder, NEC Planning Solutions Ltd
An NEC compensation event quotation has two limbs. The change to the Completion Date, and the change to the Prices. The money limb is assessed from Defined Cost plus the Fee under clause 63.1, not from your tendered rates, and once the event is implemented the forecast is never revisited.
Almost everything written about compensation events, including most of this library, is about time. The dividing date, the delay analysis, the effect on planned Completion. The money gets far less attention, and it is the limb most contractors price worst.
Not because the work is hard. Because the rules are not what a contractor coming from a traditional contract expects, and the gap between the expectation and the contract is where margin quietly disappears.
This guide takes the money limb in full: how the change to the Prices is built, what Defined Cost actually is, where your overhead and profit sit, why the forecast you agree is the number you live with, and the specific points at which valid entitlement leaks away. If your question is about the time side, start with NEC delay analysis and extension of time.
The two limbs of an NEC compensation event quotation
Every quotation contains a change to the Prices and a change to the Completion Date and any Key Dates. The two are assessed by different rules and they fail in different ways.
The time limb runs off the Accepted Programme at the dividing date, through clause 63.5, and it is well served already. For the build, see how to structure a time impact assessment, for the practical method see assessing delay impacts, and where events stack up, multiple compensation events covers the sequencing.
What follows is the money. It is the half contractors are least confident on, and the half that decides whether a change leaves you whole or quietly out of pocket.
How the change to the Prices is built, under clause 63.1
Clause 63.1 assesses the change to the Prices as the effect of the compensation event on the actual Defined Cost of the work done by the dividing date, the forecast Defined Cost of the work not done by the dividing date, and the resulting Fee.
Three things sit inside that sentence and each one carries money. The dividing date splits the assessment, so everything before it is actual and everything after it is forecast. Defined Cost, capitalised, is the basis, and it is a defined term rather than your actual spend. And the Fee is added on top, by percentage, to cover what Defined Cost leaves out.
The dividing date is fixed by the contract, not chosen. For an event flowing from a project manager's or supervisor's instruction, notification, certificate or changed decision, it is the date of that communication. For any other compensation event it is the date the event was notified. On most live jobs the work is still ahead of you when the event is assessed, so most of a quotation is forecast, and forecasting it well is most of the job.
Defined Cost, and why your tendered rates usually do not apply
This is the most expensive misunderstanding on NEC projects, and it costs contractors money in both directions.
Defined Cost is built from the Schedule of Cost Components. On the priced options, A and B, it is the Short Schedule. On the cost-reimbursable options, C, D and E, it is the full Schedule. Either way the starting position is that the change to the Prices is built from Defined Cost from first principles, not lifted from the rates in your activity schedule or bill.
Your tendered rates apply only if the project manager and the contractor agree to use them, under clause 63.2. Absent that agreement the activity schedule rate is irrelevant to the assessment, and the new lump sum is built from the cost components and substantiated.
NEC's own worked example makes the point. On an Option A job the project manager omits type A shelving carrying a tendered price of sixty thousand pounds and instructs type B instead. With no agreement to use rates, the sixty thousand does not drive the answer. The type B work is priced from first principles through the Short Schedule at a forecast Defined Cost of eighty thousand, and the omitted work comes out at its Defined Cost, not its tendered price. The tendered figure, the one most contractors instinctively reach for, never appears.
It cuts both ways. A contractor who tendered keenly and assumes the thin rate carries into the change under-recovers, because Defined Cost would have paid more. A contractor who tendered comfortably and assumes the generous rate carries over loses the argument, because the project manager is entitled to first-principles Defined Cost. The discipline is to decide, on each event, which basis leaves you better off, and to do it before you submit.
The Fee is where your overhead and profit live
Defined Cost does not include everything the work costs you. Whatever it leaves out is recovered through the Fee, and the Fee is a percentage you fixed at tender.
It covers the costs deemed not to be in Defined Cost: head office overhead, insurance premiums, the people whose normal place of work is outside the Working Areas, and, on the cost-reimbursable options, Disallowed Cost. It also carries your profit. The contractor agrees two fee percentages, one for subcontracted work and one for other work, and the Fee is that percentage applied to the Defined Cost of the event.
The commercial consequence is the part contractors miss. If the percentage was tendered low to win the job, every compensation event recovers those off-site overheads and that profit at the low percentage, for the life of the contract. You cannot top it up event by event. A change that adds real management load back at head office is still only compensated at the percentage on the page. The Fee is a tender decision that keeps being paid, or underpaid, on every change that follows.
Forecast is final: the number you agree is the number you live with
NEC is built to settle changes as the job runs rather than true them up at the end, and that design has a sharp edge on the money.
Once a compensation event is implemented, by acceptance of the quotation or by the project manager's own assessment, the agreed forecast is not revisited. If the work later costs more than you forecast, you carry the difference. If it costs less, you keep it. Across a job you win some and lose some, which is the contract's intent, but you cannot reconcile a quotation to actuals because the outturn moved against you.
That single rule should change how a quotation is built. Because the forecast is final, an incomplete forecast is a permanent loss rather than a timing difference. It is why clause 63.8 lets you include allowances for cost and time risks that have a significant chance of occurring and are at your risk, and why leaving them out is not prudence. It is also why padding fails: the assessment is made on the basis that costs are reasonably incurred and that the contractor reacts competently and promptly, so an inflated forecast gets stripped just as surely as a thin one gets locked in.
Where the money limb meets the time limb: prolongation
The two limbs are one quotation, and the join is where time-related cost is won or lost.
When a compensation event delays the works it does not just add the cost of the changed activity. It extends the time-related resources that have to stay on site: the preliminaries, the site team, the supervision, the accommodation and the plant that are there by the week rather than by the task. That extended cost is part of the effect on Defined Cost and it belongs in the quotation. Contractors routinely price the direct work of the change in full and forget the prolongation the same change causes, which is often the larger number.
This is why the two limbs cannot be done in separate rooms. The delay assessment establishes how much longer the time-related resources are needed, and the cost assessment prices them.
Disallowed Cost, and the Options C, D and E trap
On the cost-reimbursable options the assessment has an extra gate. Disallowed Cost is deducted from what would otherwise be Defined Cost, catching cost not properly incurred, cost not in accordance with the Accepted Programme or the Scope, and cost the contractor cannot show was correctly assessed. NEC4 tightened the test so a disallowance has to be made clinically against the stated headings, which helps the contractor, but only where the records keep cost on the right side of the line. On a target-cost job Disallowed Cost also feeds the pain and gain share, so a pound disallowed can cost more than a pound. The interaction between cost record and programme is covered in the QS and planner bridge on Defined Cost recovery.
Records: the substantiation that holds the price up
A Defined Cost assessment is only as strong as what you can evidence, and the priced options hide a trap.
On Options C, D and E the cost records run from day one because they drive routine payment, so substantiation is usually to hand. On Options A and B, Defined Cost only matters when a compensation event arises, so the records to justify it may never have been set up. Subcontracted cost is often the largest single component, and NEC4 added payments to subcontractors as a cost component on the priced options too, so the subcontract has to oblige the subcontractor to provide the same substantiation you will be asked for. Where substantiation is thin the project manager strips what cannot be evidenced, or assesses the event themselves under clause 64, and that is rarely the generous reading. The packaging that keeps a submission defensible is covered in how to get quotations agreed.
Where contractors lose money on a compensation event quotation
The money leaks at a small number of recurring points, and every one of them is avoidable.
Assuming tendered rates carry over
They do not, unless agreed under clause 63.2. Reaching for the activity schedule rate when Defined Cost would pay more is a straight under-recovery, and it is the most common of all.
Living with a low tendered fee percentage
Off-site overhead and profit come back only at that percentage, on every change, for the whole job. The recovery has to be right in the Defined Cost build-up, because it will not be right in the Fee.
Under-forecasting a final number
The forecast is not revisited, so anything left out is lost for good. Clause 63.8 risk allowances exist precisely for this, and omitting them is not caution.
Forgetting prolongation
The time-related cost of the delay the event causes is often larger than the direct cost of the change itself, and it belongs in the same quotation rather than in a later conversation.
Thin substantiation
Especially on Options A and B, and especially on subcontract cost, which lets the project manager strip the quotation or assess it under clause 64.
Loose Disallowed Cost discipline
On the target-cost options a disallowed pound can cost more than a pound through the share. The seven failure modes on the time and process side sit alongside these in seven ways contractors lose entitlement on NEC4 compensation events.
The practitioner view
Everything above is how the contract works. This part is where I think the money actually goes, after enough years of building these quotations and being asked to rescue them.
The largest single cause of lost compensation event money is not technical. It is organisational. On most projects the time limb is built by the planner and the money limb by the quantity surveyor, in separate files, on separate rhythms, meeting only when the quotation is finally assembled. That seam is where the money falls through. The prolongation the delay analysis should drive never reaches the surveyor's cost build-up. The cost assumptions the surveyor makes are never tested against the programme logic. Both halves come back internally tidy and jointly wrong, and nobody owns the whole number.
The contract does not see it that way. It treats the quotation as one assessment with two outputs, and the organisation that prices it well treats it the same. On a small contractor that is one person wearing both hats. On a larger one it is two people in the same room, not two functions handing artefacts across a wall. Get that one thing right and most of the leak points above close on their own, because somebody is finally looking at the whole number.
Summary
The change to the Prices is built from Defined Cost plus the Fee under clause 63.1, actual up to the dividing date and forecast beyond it. Tendered rates apply only where the project manager and contractor agree them under clause 63.2, so the activity schedule rate is usually irrelevant to the assessment. The Fee carries your off-site overhead and profit at a percentage fixed at tender that cannot be topped up event by event.
Once implemented, the forecast is final, which makes an incomplete quotation a permanent loss and makes clause 63.8 risk allowances part of a competent submission rather than an optimistic one. The recurring leaks are tendered rates assumed, a thin fee percentage, an under-forecast number, forgotten prolongation, thin substantiation, and loose Disallowed Cost discipline on the target-cost options. None of them is a failure of entitlement. All of them are failures of how the quotation was built.
How NEC Planning Solutions helps
NEC Planning Solutions Ltd is a UK-registered project controls consultancy, director-led and QA-governed, with senior NEC-accredited review on every output. The firm builds and assures quotations on both limbs: the time impact off a defensible Accepted Programme, and the change to the Prices built properly from Defined Cost and the Fee, with the substantiation an assessment needs. That includes independent review before a quotation is served, so the number that goes to the project manager is complete, evidenced and hard to strip. See compensation event and change support, and the same discipline applied on a live carbon capture project.
Download the CE Quotation Pricing Checklist
The money limb as a pre-submission gate, in two pages: the basis decision, the Defined Cost build and its substantiation, the Fee, the time-related cost, and forecast completeness before the number becomes final. Free, direct download, no sign-up.
Frequently asked questions
Can I use my tendered rates to price a compensation event?
Only if the project manager and the contractor agree to, under clause 63.2. Without that agreement the change to the Prices is built from Defined Cost and the Fee from first principles, and the rate in your activity schedule or bill has no bearing on the assessment. Decide deliberately which basis leaves you whole on each event.
What is Defined Cost under NEC4?
A defined term built from the Schedule of Cost Components, not your actual spend. On Options A and B it uses the Short Schedule of Cost Components; on Options C, D and E it uses the full Schedule. It excludes anything the contract deems recovered through the Fee, such as head office overhead and profit.
What does the Fee cover in a compensation event quotation?
Everything Defined Cost deliberately leaves out: head office overhead, insurance premiums, people whose normal place of work is outside the Working Areas, Disallowed Cost on the cost-reimbursable options, and your profit. It is applied as the tendered percentage, with separate percentages for subcontracted and other work.
Can a compensation event quotation be revisited if the work costs more?
No. Once the event is implemented, the assessment is not revised because the forecast turned out wrong. The contractor carries an overspend and keeps an underspend. That is why clause 63.8 risk allowances and a complete forecast matter: anything omitted is lost permanently, not deferred.
Should prolongation cost be included in a CE quotation?
Yes, where the event delays the works. The extended time-related resources, preliminaries, site team, supervision, accommodation and time-related plant, are part of the effect on Defined Cost. It is frequently the largest number in a quotation and the one most often left out of the submission.
About the author
Roman Bazelchuk is the Founder of NEC Planning Solutions Ltd, a UK project planning and controls consultancy supporting contractors with NEC programme compliance, compensation event assessments and live project controls. He is an NEC Accredited Project Manager and holds the APMG Project Planning and Control qualification, with a BEng in Mechanical Engineering and postgraduate training in Planning and Control.
NEC Planning Solutions provides contract-aware planning support through a QA-governed delivery model, helping project teams keep programmes accepted, current and commercially useful from tender through to live delivery.
Is your next quotation leaving money behind?
If a compensation event quotation is being built now, or a run of events has stalled in revision, NEC Planning Solutions will review where the time and the money are exposed before it goes to the project manager.
