TL;DR

NEC4 Clause 63 sets out how compensation events are assessed. Clause 63.1 is the core rule: the change to the Prices is the effect of the event on (a) the actual Defined Cost of work done by the dividing date, (b) the forecast Defined Cost of work not done by the dividing date, and (c) the resulting Fee.

For Options A and B (priced contracts), the quotation is based on the rates and lump sums in the Activity Schedule or Bill of Quantities, with the People Rates in the Contract Data as the fallback. For Options C, D, E and F, the assessment is based on Defined Cost plus Fee.

Delay is assessed under Clause 63.5 against the Accepted Programme current at the dividing date.

The Fee is the only mark-up — Defined Cost excludes head office overheads and profit.

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NEC4 Clause 63: How Compensation Events Are Assessed

If you manage NEC4 ECC contracts, compensation events (CEs) are the engine of change management. Clause 63 is the rulebook for assessing them. Get the assessment wrong and you will either under-recover or over-claim — both of which create friction on site.

This guide explains what Clause 63 actually says: the dividing date, how the change to the Prices is assessed, how delay is measured, and when the Prices may be reduced.

The Core Rule: Clause 63.1 and the Dividing Date

Clause 63.1 states that the change to the Prices is assessed as the effect of the compensation event upon:

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.

The **dividing date** is critical. 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 the notification of the compensation event.

Work done up to the dividing date is assessed on actual Defined Cost; work not yet done is assessed on a forecast. This is why the assessment is a forecast exercise for the remaining work — not an audit of the Contractor's final accounts.

Defined Cost: What Counts?

Defined Cost means the cost of the components in the Schedule of Cost Components (or the Short Schedule of Cost Components for Options A and B) — the cost of people, equipment, plant, materials, charges and subcontractors as stated in those schedules, less Disallowed Cost. Head office overheads and profit are not part of Defined Cost; they are covered by the Fee.

For Options C, D, E and F, the Contractor records actual Defined Cost in its accounts and the assessment uses those amounts. For Options A and B, the quotation for a compensation event is based on the rates and lump sums in the Activity Schedule or Bill of Quantities, or — where those do not cover the work — the People Rates stated in the Contract Data. Clause 63.2 also lets the Project Manager and the Contractor agree rates or lump sums to assess the change to the Prices, which is often the most practical route.

The Fee: Your Only Mark-Up

The Fee is the percentage stated in the Contract Data, applied to Defined Cost. It covers the Contractor's overheads, profit and risk. You do not add any other mark-up on top. If the Contractor uses a Subcontractor, the Subcontractor's Defined Cost is assessed first and the Contractor's Fee is applied to it — but the Fee is not applied twice.

Assessing Delay: Clause 63.5

Delay is assessed separately. Clause 63.5 states that a delay to the Completion Date is assessed as the length of time that, due to the compensation event, planned Completion is later than planned Completion as shown on the Accepted Programme current at the dividing date. The same approach applies to a delay to a Key Date, measured against the planned date when the Condition stated for the Key Date will be met.

Clause 63.6 adds that the assessment takes into account any delay caused by the compensation event already in the Accepted Programme and events which have happened between the date of the Accepted Programme and the dividing date — so delay already allowed for is not double-counted.

When the Prices Are Reduced: Clauses 63.3 and 63.4

If the effect of a compensation event is to reduce the total Defined Cost, the Prices are **not** reduced unless the contract states otherwise. The Prices are reduced only in two situations under Clause 63.4: where the event is a change to the Scope (other than Scope provided by the Client) which the Contractor proposed and the Project Manager accepted, or where the event is a correction to an assumption stated by the Project Manager when assessing an earlier compensation event.

Other Assessment Rules Worth Knowing

**Clause 63.7** — the rights to changes to the Prices, the Completion Date and the Key Dates are the only rights in respect of a compensation event.

**Clause 63.8** — if the Project Manager stated in the instruction to submit quotations that the Contractor did not give an early warning which an experienced contractor could have given, the event is assessed as if the early warning had been given.

**Clause 63.9** — the assessment includes risk allowances for cost and time for matters which have a significant chance of occurring and are not compensation events.

**Clause 63.10** — the assessment assumes the Contractor reacts competently and promptly and that Defined Cost and time are reasonably incurred.

**Clause 63.11** — an instruction to change the Scope to resolve an ambiguity or inconsistency is assessed as if the Prices, Completion Date and Key Dates were for the interpretation most favourable to the Party which did not provide the Scope.

**Clause 63.12** — if a Scope change makes the description of a Key Date Condition incorrect, the Project Manager corrects it and the correction is taken into account in the assessment.

The Role of the Project Manager and Contractor

The Contractor submits a quotation when instructed (Clause 62 — normally within three weeks, with the Project Manager replying within two weeks). If the Contractor does not submit a quotation in time, or the Project Manager decides the assessment is incorrect, the Project Manager may assess the event themselves under Clause 64. The Project Manager notifies the Contractor of its assessment and gives details (Clause 64.3).

Common Mistakes to Avoid

**Using actual costs for work not yet done.** The forecast Defined Cost of work not done by the dividing date is a forecast, not a retrospective cost report.

**Adding overheads or profit outside the Fee.** The Fee is the only mark-up.

**Assessing the whole site delay instead of the specific impact.** Only the resources and time directly affected by the event count, measured against the Accepted Programme at the dividing date.

**Forgetting the reduction rules.** A compensation event that reduces Defined Cost generally does not reduce the Prices — check Clauses 63.3 and 63.4 before assuming it does.

**Applying Defined Cost plus Fee to an Option A or B contract without checking the rates.** For priced contracts, the quotation is based on the rates and lump sums in the Activity Schedule or Bill of Quantities (with People Rates as fallback) — Defined Cost plus Fee is the basis for Options C, D, E and F.

Worked Example (Option C)

**Situation:** Under an Option C (target cost) contract, a change to the Scope requires an extra 200m of ductile iron pipe in a trench.

**Assessment:**

Defined Cost of work already done to the dividing date: £1,200 (40 hours at the people rate of £30/hour)

Forecast Defined Cost of work not yet done: £5,000 (pipe, fittings and plant)

Subtotal Defined Cost: £6,200

Fee at 10%: £620

Change to the Prices: £6,820

**The same event under Option A** would be priced using the rates and lump sums in the Activity Schedule (or the Bill of Quantities under Option B), not by building up Defined Cost from scratch.

Key Takeaways

**Clause 63.1 is the core assessment rule** — actual Defined Cost of work done by the dividing date, plus forecast Defined Cost of work not done, plus Fee.

**Options A and B are priced on rates and lump sums** (Activity Schedule / Bill of Quantities / People Rates); Options C, D, E and F on Defined Cost plus Fee.

**Delay is measured under Clause 63.5** against the Accepted Programme current at the dividing date, without double-counting.

**The Fee is the only mark-up**, and the Prices are reduced only in the limited situations in Clauses 63.3 and 63.4.

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**Category:** Compensation Events

**Tag:** NEC4, Clause 63, Defined Cost, Fee, Delay, Dividing Date