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Compensation events are the mechanism within NEC4 contracts that allows the contractor to adjust prices, the Completion Date, or Key Dates when certain specified events occur that are not the contractor's fault. The standard NEC4 Engineering and Construction Contract (ECC) lists 21 compensation events under Clause 60.1. These include instructions that change the Scope, failure to provide site access, physical conditions the contractor could not have reasonably foreseen, and weather measurements exceeding defined thresholds. The contractor must notify most compensation events within eight weeks of becoming aware that the event has occurred, or they lose their entitlement to additional time and money.

Under Clause 61.3 of the NEC4 ECC, if the contractor does not notify a compensation event within eight weeks of becoming aware that it has happened, the prices, Completion Date, and Key Dates are not changed. This time bar is strict and has been upheld consistently. However, it does not apply to compensation events that arise from the Project Manager or Supervisor giving an instruction, issuing a certificate, or changing an earlier decision. In practice, this means the time bar applies to events such as unforeseen physical conditions, weather, and access issues, but not to scope changes instructed by the Project Manager.

Under Clause 15.1 of the NEC4 ECC, both the Contractor and the Project Manager must give an early warning by notifying the other as soon as either becomes aware of any matter that could increase the total of the Prices, delay Completion, delay meeting a Key Date, or impair the performance of the works in use. Early warnings are recorded in the Early Warning Register, maintained by the Project Manager, and discussed at regular early warning meetings at intervals set in Contract Data Part One. Early warnings are not compensation events, but failure to give an early warning that an experienced contractor could have given may reduce the assessed value of a subsequent compensation event under Clause 63.7.

NEC4 contracts require robust contemporaneous records to support virtually every contractual process. At a minimum, contractors should maintain daily site diaries recording labour, plant, materials, weather conditions, progress achieved, instructions received, and any events that could affect time or cost. These records directly support early warning notifications, compensation event evidence, programme updates under Clause 32, payment applications, and defence against Disallowed Cost under Options C, D, E, and F. The quality of your records determines the quality of your commercial outcomes.

The dividing date is a key concept introduced in NEC4 for assessing compensation events. It separates actual work done from forecast work not yet done. For compensation events arising from Project Manager instructions, the dividing date is the date of the instruction. For other events, it is the date of the compensation event notification. The accepted programme current at the dividing date forms the baseline for assessment: actual costs before the dividing date are used as recorded, while costs after the dividing date are forecast. This prevents assessments from becoming moving targets as administrative delays occur.

Disallowed Cost is a concept specific to NEC4 target cost and cost-reimbursable contracts (Options C, D, E, and F). It refers to costs that the client will not include in the assessment of the contractor's share, even if they were genuinely incurred. Grounds for Disallowed Cost include costs arising from the contractor not following a contractual requirement, not giving an early warning that an experienced contractor could have given, or costs that cannot be justified with records. Maintaining detailed, traceable records of all resources and their usage is the primary defence against Disallowed Cost.