Jacob Austin (00:00:17) - Hi all, it's Jacob Austen here from QS.Zone. And welcome to episode 41 of The Subcontractors Blueprint, the show where subcontractors will learn how to ensure profitability, improve cash flow and grow their business. Today's episode, number 41, is about handling change under the neck for suite of contracts. I've done a lot of neck work at various points in my career, and it is a contract that I'd like to see used a hell of a lot more. It's a lot more straightforward to understand and operate, but there are some pitfalls within it. I have sadly seen it done really badly on more than one occasion, and whilst I was willing to take a pragmatic view, if you follow the wording of the contract to the letter of the law, I could start applying time bars absolutely all over the place and do away with all manner of costs for changes. And actually the case law about some of the principles involved actually support the use of things like time bars as a means to encouraging people to investigate issues whilst they're still current and apparent, and the financial impact of them can all be understood.
Jacob Austin (00:01:27) - And that is sort of what the neck for suite of contracts is all about. It's there to try and get you to act proactively, to manage the job properly and to do the right things at the right times. And if everybody gets on board with it, it runs really, really well. So as I said, I want to talk to you about changes today under those contracts. If you're new to the show, please do subscribe for more user friendly advice on all things subcontracting. So let's start by talking about some of the terminology, because I frequently would see people administering whatever subcontract they end up on in the same way, and coming with a variation for this, that and the other. And there is no such thing as a variation under NEC4. There is no definition for a variation. Now you might think, well, who the hell cares? What does it matter if something has changed? I want to charge more money for it and it's going to take me longer. And I'm sure that is the case.
Jacob Austin (00:02:25) - So what you need to do in this instance is to present a compensation event, because the problem is that the contractor, under their upstream agreement, will be told that they must place all of their subcontracts on a matching or compatible document so they can't roll out JCT, subcontract under their neck type main contract, and have a story to tell about that. Because I sat in my site office with the client's project manager running through some compensation events, and he started to tell me that he couldn't accept this quotation from my bricklaying subcontractor because it wasn't a compensation event, because the bricklayer had put together a Vo, as he called it. And of course, I told him not to be so ridiculous and that this was just the way that this subcontractor puts all of their quotations together. But of course, the discussion wasn't as simple as that. He now wanted proof that we'd placed subcontracts on an NEC subcontract, and not on whatever other standard form that we might use. Otherwise I'd be in breach of contract. I'm not sure if it's possible to get to the end of a contract without being accused of being in breach of contract.
Jacob Austin (00:03:35) - It's one of those things that clients love to throw around, especially when they're trying to get something done for free and if not during the construction phase, then definitely during the defect period when somebody's been misusing a product and then they call you in under warranty to make it good. And quite clearly somebody damaged it. But now we've never touched it. We just walked in one day and it was in pieces. Now I'm saying this because people will pull you up on not using the right terminology, and the wrong people will also try and use that as a reason not to pay you for things. And all right, if you actually take this to dispute and you end up in front of the man with the crinkly wig, there's a good chance that he will side with you and instruct your contractor to pay you for whatever changes you've badged as variations, but then you're going to be thousands of pounds into the whole on a legal battle, all for the sake of not writing the right title at the top of a document.
Jacob Austin (00:04:30) - And maybe it might not take that much. You might have to stir up some director to help you out, but you're hoping that the director is going to help you out, whereas the easiest thing to do is to not need that help in the first place and simply administer the NEC contract as what it is. So all we're talking about here is administering your variations as compensation events. And there are two fold issues. One is in the name, the other is in that a compensation event covers both your time and your cost as one thing. Now it's written and evolved to be really helpful. So rather than the old JCT method of bombard your contractor with quotations for variations, there is a defined list of things that you can call a compensation event. And you want to look at clause 60.1 where you have 21 items. I'm not going to read them all out for the sake of not boring you to death. At this point, the majority of your compensation events all fall under the first item, which are instructions that change the scope of work.
Jacob Austin (00:05:36) - In older terminology, under NEC3, that used to be the work's information. And to simplify that, it's all now just been called the scope. So if you are instructed by your contractor to change the scope, then you become entitled to your compensation event. And the key thing here is that at the same time that you're putting together your price, you have to tell the contractor whether you're going to take any longer as a result of what's changed. And as ever, with changes, timing is everything. So simple changes in spec aren't usually the issue. It's where you're being asked to change something that you've already completed. And whereas under the JCT form, you could come back and assess that retrospectively. What you're needing to do now is to go right. This is the change. So much of this is rework where I'm taking something out and reinstalling it. How much time am I going to spend on that? Is it critical to me finishing the job? And if it is, now is the time to say I want x period and x amount of site management time and so on, because you will lose the right to do that if you don't include it.
Jacob Austin (00:06:42) - So it's vital that you get your head into the right frame on this from the start, because you don't want to come to the end of the job and realize, oh, I need another six weeks of time because of all of these instructions that have happened, the contract forces you to assess it with the change. And that's good because you're now not doing this retrospective analysis using the Society of Construction Laws Delay and Disruption protocol. What you're doing is you're looking at your program. You're saying this is going to take this much extra time, you're forecasting it and you're putting it in your change from the start. So everybody knows, right? If I instruct this, this is what it's going to cost. And this is the program effect of it. And remembering one particular contract that I worked on, there was quite a significant electrical change. We got it all priced up by the subcontractor. And prior to submitting it as our quotation, I had a chat with them to say, look, are you sure we're going to be able to achieve all of this in the same time? Because we were adding in so many extra sockets, so many extra data points, loads more trunking, and this Wi-Fi system that seemed to be quite convoluted.
Jacob Austin (00:07:50) - So we had a chat about, can you get this done in the same period that you had before? And the initial thought was, yes, we're going to add a couple of extra lads. It's not going to affect the overall progress, so we'll resource accordingly and we'll get the job done within the same period of time. And it's just one of those things where once you've spent a bit of time in the industry, you get a sense of whether something is going to take longer or not. And this definitely had that sense that it would. But my subcontractor seemed confident. And he can't argue with the confident man, as somebody always tells me. Eventually, some six, eight weeks later, he'd realised that he wasn't going to get done without also working some evenings and weekends. So he needed more acceleration. And what I ended up doing was having a discussion, not just with him, but also with the clients representative to say, look, we undercooked this change. Can we have a bit more money to do some of the work outside of regular time? And the client basically said, no, this was a one stop shop change, and if we'd have known it was going to cost this much more money, I think our board of directors wouldn't have instructed it, or certainly they would have watered it down so that it wasn't quite adding in as much of the extras.
Jacob Austin (00:09:04) - And at that point, their project manager piped up and said, you realize you had the opportunity to price in whatever prelims you wanted at the point of pricing your compensation event. If you'd have known there was extra time required, you should have told us then. And it's one of those things sometimes, you know, sometimes you don't know. Sometimes you have to trust your instincts on these things. But there is also another option within the NEC contracts. And this can work really well. And this is the assumption because you can have a proactive chat with your project manager. And at the point of instructing the change, they can tell you to price certain assumptions into the change. And this would be the time to say, look, this might well take us longer than we thought. So there's a risk here that we might overrun. And if we do, we're going to need to catch up by working evenings and weekends. This also works well for things like weather risk, because when the contractor extends the program, he's also exposing you to more weather risk, particularly if you're working outdoors, obviously.
Jacob Austin (00:10:05) - And is it reasonable for you to carry that extra risk when he's extending your programme? I would argue not. So what you can do is say, I think it's going to take me an extra ten weeks. But I can't account for the weather within that period. And rather than charge you more money for something that might not happen, why don't you instruct me to assume there won't be any bad weather? And then during that ten week period, if there isn't any bad weather, the contractor isn't paying you more for that. But then if there is bad weather, he can give you a further instruction that corrects that earlier assumption that there wasn't going to be that bad weather and we could have applied this to that electrical change. We could have said, look, we need to take a bit of a circuit and see approach to this change. There's quite a lot going on and quite a lot involved in it. We think we can just resource accordingly, but it might take us over the contract period. So can you instruct that we assume that this change won't prolong the program, and then we can revisit this a little bit further down the line to add in some time effects if we need to.
Jacob Austin (00:11:11) - And of course, all of the good stuff applies here because we're not saying right, we want an extra ten weeks now or we went ten weeks of out of hours working. Now we're saying we might need some. We don't want to burden you with ten weeks worth of out of hours costs. If we don't need IT instructors to make that assumption, and then we will only charge you for that extra time if it becomes an issue and what the project manager should then do, if he's got any ounce of sense in him, is add some money to the risk register for that out-of-hours working so we could guide him as to what that budget might need to be, and he could then add an instruction for it later. And this is a really important tool that you can use during pricing compensation events. And you can use it for almost anything, anything that you can think of that is a risk that you might otherwise put some money against. You can say within your instruction, I want you to state these assumptions.
Jacob Austin (00:12:08) - These are the kind of risks that I think may come off. I can include some money for them if you want me to, but it is going to push the price up and you will end up paying me those bits of money, whether I encounter those risks or not. So why don't we just agree that they're not going to happen? And then if they do happen, we can correct that issue. So you could apply that to ground conditions. You could apply it to substrate of the work that you're fixing to. When are you going to be able to gain access. Basically any little risk that you think might cost you more money. You can start by including risk sums for it, and then have a conversation about why those could be omitted. Or you can just have this proactive chat with your contractor and say, look, I think this is the best approach, but in order to do this, you need to have a bit of a brainstorm and think about what the kind of risks are that might affect your change.
Jacob Austin (00:13:01) - List them out and start talking about them now. Another issue with compensation events is timing. And this is a big issue because you have a defined period to submit a compensation event. And in your unamended subcontract that is seven weeks. Now, I need to caveat that because if the contractor issues an instruction to crack on and do a piece of work which they are entitled to do before the price is agreed, then that instruction isn't time barred unless they at the same time tell you that it's a compensation event, and this is a little way that the contract tries to force the contractor to do the right thing. Because what they want to see is that when the contractor knows they're issuing something, which is going to be a change, that they start the change procedure off at the same time as issuing the instruction. That doesn't always happen. And I would suggest that it's rare that it doesn't happen. So your best bet is to bank on that seven week period and make sure you're getting your quotations submitted within that time.
Jacob Austin (00:14:08) - Now, seven weeks is the standard under the NEC subcontract. But a word of warning sometimes main contractors shorten that, because what they have to do is they have a eight week standard period to comply with. And if the client chooses to reduce that period, which they often do, what the contractor will do is shave a week off the period that they give you, so that it gives them time to collect the information, send it over to you, request your price, it gives you the time to price it, and then they have to collate the quotes that they get back and populate their own quotation to the client. Now, if you can't get a quotation turned around within the timescale, you have to let the contractor know. And what you can do is you can mutually agree to extend the period that has to be done ahead of the period expiring. So you can't go the day after your seven weeks is up and say, sorry, I need eight weeks. I'm still waiting on this price coming back because what it means is upstream.
Jacob Austin (00:15:11) - They have to go and renegotiate with their client how long they've got to provide the quotation when. When these are done by an online admin system such as SYRPO or CEMAR. Effectively, the system time bars and locks you out of a change once the period has expired. And the first time that I used one of those systems, I came across on it. On the very first change I priced, I had to wait for a change quotation to be given to me, and that price was provided on time, but it was right at the last minute. And then I looked at the system and thought, oh right, it's due on this date, so I've got another couple of days to get my quote up and entered in the system, but I hadn't appreciated when it said whatever the date was, say the 5th of May, it would actually lock you out as soon as it becomes the 5th of May, i.e. midnight of the 4th of May, as it turns into the 5th of May. So I'd effectively time barred myself by not appreciating when the deadline run out.
Jacob Austin (00:16:08) - And you only need to learn these lessons once, but once in this instance did end up costing a bit of money. Now, hopefully the contractor won't be quite as officious as that in administering their timescales with you, but don't leave it to chance and try and work with the period that you've got, and let the contractor know if you've got any issues with it. Handily, there is a compensation event for if you price and you spend a lot of time collating a quotation, and that quotation then gets turned down because it's too much money or whatever other reason, then there is a compensation event for you to be able to claim back your lost costs in putting that together. So this is particularly useful if you have a lot of design work that you have to carry out in order to price a change. So if, say, you're a steel frame contractor and the client asks for an extension to the building, they might well do it at a time where it's still drawing stage and it's not going to impact the program too much, but you still have to put in quite a bit of time into engineering that frame, deciding what the size of the steel members are and the various connections that you need to design and make quite a lot of design decisions in order to put your quote together.
Jacob Austin (00:17:20) - And of course, you wouldn't want to go through all of that cost to then come away with, no, we don't want it. It's too much money. So that can then trigger entitlement to this other compensation event. Now the same thing applies in that you have to submit your request for a compensation event to recover those costs within the seven weeks that you normally would to reply. And this same period applies to anything else that you might encounter. So if you're working within the ground and partway through the site, you uncover a buried Spitfire which never appeared on any of the reports. It's completely unexpected. You have to document that, and within the seven weeks that you find it, you have to request your compensation event. Then the contractor has to accept that that's an issue, and then request a quotation that will then trigger your seven week pricing period for you to assess the program and cost impact. Now, again, this is something that gets amended. So a regular amendment that I've seen is that you have to notify any particular event that happens within the calendar month that you find out about it.
Jacob Austin (00:18:27) - And this is where you can get unstuck again, because sometimes it would make sense to raise an early warning, and sometimes it would make sense to raise a compensation event. And the difference between the two is that early warnings are flagging up a risk, something that might happen, and a compensation event is a notifying of something that is a definite. So either something that has happened or you can't prevent from happening, and you've got to get these forms right now. Again, I've sat in a meeting with a subcontractor, and this actually was a final account meeting, and it was for a package that had been managed by one of my assistants on a project, and we'd been going through this job. It was, what, an 18 month job to them. And throughout that 18 months, what they'd done is everything that they'd submitted to us, they'd submitted as an early warning. Now I pointed this out to them, and I had no intention of actually doing anything with that information, because in my book, that just wouldn't have been the right thing to do.
Jacob Austin (00:19:26) - But had I taken that approach with my client, I have no doubt whatsoever that they wouldn't have given me an extra penny. And this is an important thing in that you need to know who you're working with and how they're going to operate with you. Some people will be fair and some people don't know the meaning of fair. So I'm going to put you in the picture so that you know what you should be doing, and you can hopefully prevent these sort of things from happening to you. So let's make it really clear then. An early warning is exactly what it sounds like. It's a mechanism for you to give a heads up to your contractor, and hopefully if the issue is going to affect them upstream, they will pass that early warning on up to their client, and it's one of your obligations under your neck. Subcontract that the contractor and the subcontractor should notify each other as soon as. Practicable of any matter which can affect either the cost, the completion, i.e. the program or progress, or the quality of the work.
Jacob Austin (00:20:26) - So it's your same old time, cost and quality trifecta. If you've got an issue, you can see something might become a problem and it's going to affect any of those three things time, cost or quality. You have to put your hand up and submit an early warning notice. Now there's a bit of a bite to this, because the compensation event process says that if you fail to give an early warning for something that later turns into a compensation event, or you plow on and do something that you could have given early notice about and submitted that early warning, then the contractor can assess that compensation event as if you had provided an early warning notice. Now there's limited applications to this, but I've had it happen on a couple of occasions. To me, one was on a civil engineering project where we found that the level of the topsoil wasn't consistent, and some areas that were far more topsoil than there were supposed to be, and some areas there was next to nothing. And this was because there had been some kind of archaeological dig happen before we got to site.
Jacob Austin (00:21:34) - So for the majority of the area, there was this consistent level of topsoil, but in some pockets there was more and some pockets there was less. But what had happened was the topographical survey had been done and captured the levels, and then a large cut and fill exercise had been done to inform the design. And when we scraped off the areas where there were next to no topsoil, we were finding that we would then have to excavate subsoil to then achieve the levels that we needed to in the finished design. It doesn't sound like a big deal, but because of the large area involved in the work, it actually ran to several thousand pounds and we just cracked on with that and submitted a compensation event. And within the assessment period, the project manager came back to us to say, hold on. If you had told me about this with an early warning notice, I would have just tweaked the levels. I didn't need to achieve that finish design level as long as we could keep within, say, 500mm of the finished design, nobody would have cared.
Jacob Austin (00:22:36) - And this then turned into a bit of an argument because as we saw it, it's something that wasn't caused by us. It was a difference in the scope, basically unexpected ground conditions. And so we cracked on with the design as it was. But what they said is you should have come to us and said, this is an early warning. We've encountered something different. It may impact the cost. And what we would have done with that is we could have made a decision for you to carry on and incur that cost, or what we would have done is redesign the levels and avoid any extra money being spent. So it is always worth submitting early warnings. And I'll give you a positive example of an early warning working well as well. And that happened on an RAF project. And what we had was a small amount of perimeter fencing that we had to buy, but it was a really bespoke type of fence with particular cranked posts that would then accept razor wire and a particular specification of panel. It had to be sourced from the specified manufacturer, and its typical leading period was six weeks.
Jacob Austin (00:23:40) - Now, when we got to about eight weeks out from completing that work, we went to call it off so that there was a bit of extra time allowed, a little bit of float, but the manufacturer said to us, hold on, we can't give you any for 16 weeks. So we raised this as an early warning to our client, thinking that we've got a time issue to make them aware that we might have to come and do this as a retrospect visit to site, and that completion would be delayed. And we'd enjoyed quite a good relationship on this project, albeit there were some ups and downs, as there always are. But it came as a complete surprise to us when we had an answer to that early warning from the clients project manager, who was aware that actually, elsewhere within the Mod, they had ordered thousands and thousands of meters of this particular fence and the reason for it being delayed or the lead in period going out, was because the factory now had to fulfill that order. And within a couple of days, we were able to get an email from our project manager on behalf of the Mod, emailing the fencing supplier to say that however many meters we'd ordered could be taken from their overall quantity or their allocation, and to prioritize delivering it to us.
Jacob Austin (00:24:53) - And what that meant was we actually ended up getting the materials early. So two weeks after raising this early warning, we took delivery of the fencing and were able to get it installed, and that actually took that element off the critical path. Clearly that is a bit of a one off, but it just goes to show that it is good to talk, it's good to raise issues and try and mitigate them as a. So hopefully you now know what the early warning process is about. And you know, the pitfalls of submitting compensation events and how you should best address that. My mission with this podcast is to help the million SME contractors working out there in our industry. If you've taken some value away from today's episode, I'd love it if you'd share that value and pass on the show to somebody else who would benefit from hearing it. And of course, subscribe yourself if you haven't already. And thanks for tuning in. If you like what you've heard and you want to learn more, please do find us at War Zone where you can subscribe to our training and support system for like minded subcontractors.
Jacob Austin (00:25:56) - In there you'll find templates, how to videos, interviews, and more. And it's less than the price of a daily cup of coffee. Of course, you can cancel any time or also on all your favorite socials at zone. Let me know what you thought of the show and if there's anything you would like me to talk about in a future episode. Thanks again! I've been Jacob Austin and you've been awesome.
