TL;DR

NEC4 Clause 63 sets out how compensation events are valued using **Defined Cost**, **Fee**, and **forecast** — not actual costs.

The assessment is based on the effect on Defined Cost plus Fee, not on lump sums or rates in the contract unless the event changes quantities.

You must assess the change to the total Defined Cost (including subcontractor costs) and apply the Fee percentage — no mark-ups, no overheads, no profit beyond the Fee.

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NEC4 Clause 63: How Compensation Events Are Assessed — Defined Cost, Fee, and Forecast

If you manage NEC4 ECC contracts, you already know that compensation events (CEs) are the engine of change management. But how you assess them is where most disputes start. Clause 63 is the rulebook for that assessment. It is not about what you *spent* — it’s about what you *forecast* you will spend, using Defined Cost and Fee. Get this wrong, and you’ll either under-recover or over-claim, both of which create friction on site.

Let’s break down how to apply Clause 63 in practice, with real examples.

The Core Principle: Forecast, Not Actual

Clause 63.1 states: *“The assessment of a compensation event shall be based on the effect of the event upon the Defined Cost of the work already done and the forecast Defined Cost of the work not yet done.”*

This is the single most important sentence. You are not reimbursing the Contractor for what they actually spent. You are assessing the *change* in Defined Cost caused by the event, using a reasonable forecast. For the Project Manager (PM), this means you must verify the forecast, not the final invoice. For the Contractor, it means you must provide a forecast, not a retrospective cost report.

**Example from site:**

A ground condition CE delays excavation by two weeks. The Contractor submits a quote showing the actual cost of the extra labour and plant hire they incurred. That is wrong. The correct approach is to forecast the additional Defined Cost for the two-week delay, including the cost of the excavator standing idle (if it cannot be redeployed) and the labour, then add the Fee. The PM should challenge any claim based on actual costs without a forecast.

Defined Cost: What Counts?

Defined Cost is defined in the contract data and the Scope (or Works Information). For Main Option A (priced contract with activity schedule), Defined Cost is the cost of people, equipment, plant, materials, and subcontractor costs, as stated in the Schedule of Cost Components (SCC). For Main Option B (priced contract with bill of quantities), it’s the same. For Options C, D, and E (target cost or cost-reimbursable), Defined Cost is the actual cost recorded in the Contractor’s accounts, but still subject to the SCC.

**Key point:** The SCC lists what is and isn’t included. For example, head office overheads are not part of Defined Cost — they are covered by the Fee. Similarly, profit is not in Defined Cost. You only get profit through the Fee percentage.

**Example:**

A CE requires the Contractor to bring in an extra welder. The welder’s hourly rate from the SCC is £45/hour. The Contractor also needs to hire a welding machine at £200/week. Both are Defined Cost. But the Contractor cannot add 10% for “management time” or “small tools” — those are included in the Fee or not at all.

The Fee: Your Only Mark-Up

Clause 63.12 reminds us that the assessment includes the Fee. The Fee is the percentage stated in the Contract Data — typically 8-12% for main contractors, sometimes higher for subcontractors. This Fee covers overheads, profit, and risk. You do not add any other mark-up.

**Critical distinction:** If the Contractor uses a subcontractor, the subcontractor’s Defined Cost is assessed using the subcontractor’s own SCC, and then the Contractor’s Fee is applied on top of that subcontractor cost. Do not double-count overheads.

**Example:**

A subcontractor quotes £10,000 for extra work. The subcontractor’s Defined Cost is, say, £9,000 (after applying their SCC), and their Fee is £1,000. The Contractor then adds their own Fee (say 10%) on the £10,000 subcontractor cost — so the total becomes £11,000. This is correct. But if the Contractor tries to add a second layer of overheads, challenge it.

Changes to Quantities or Rates

Clause 63.13 deals with changes to the Scope that alter quantities. If a CE changes the quantity of work that is priced in the activity schedule or bill of quantities, you assess the effect on Defined Cost and Fee — not the original rates. This is a departure from traditional contracts where you might use bill rates for variations.

**Example:**

The Scope changes the number of manholes from 10 to 15. The original activity schedule had a lump sum for manholes. The CE is assessed by forecasting the additional Defined Cost (extra materials, labour, plant) plus Fee. You do not simply multiply the original lump sum by 1.5.

Time-Related Defined Cost

Clause 63.6 covers time-related Defined Cost — the cost of resources that are on site for a longer period because of a CE. This is where most errors occur. You must assess the cost of people and equipment that are *directly* affected by the delay, not the entire site overhead.

**Example:**

A CE delays the project by one month. The Contractor claims the cost of the project manager, site office, and all site staff for that month. Wrong. The PM should only allow Defined Cost for resources that are *specifically* delayed or disrupted by the event. If the project manager can work on other tasks, their cost is not fully allowed. The SCC defines what counts as “time-related” — typically direct labour and plant, not general overheads.

The Role of the Supervisor and PM

As a PM, you have the right to ask for more information under Clause 63.2. The Contractor must submit a quotation within the period stated in the contract (usually three weeks). You can request breakdowns of Defined Cost, including timesheets, plant hire invoices, and subcontractor quotes. If the quotation is not submitted on time, you can assess it yourself under Clause 64.

**Practical tip:** Always request a forecast breakdown. Do not accept a single lump sum. Ask for the number of extra hours, the hourly rates from the SCC, and the plant hire rates. This forces the Contractor to be transparent and makes your assessment easier.

Common Mistakes to Avoid

**Using actual costs instead of forecast.** You are not auditing the Contractor’s accounts; you are assessing a change.

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

**Assessing the entire site delay instead of the specific impact.** Only the resources directly affected count.

**Ignoring subcontractor Defined Cost.** You must assess the subcontractor’s cost through their SCC, then add the Contractor’s Fee.

**Forgetting time-related costs for plant that cannot be redeployed.** If a crane is idle because of a CE, its hire cost is a valid Defined Cost.

Real Scenario: A CE for Additional Pipework

**Situation:** The Scope changes, requiring an extra 200m of ductile iron pipe in a trench. The Contractor submits a CE quotation.

**Correct assessment:**

Forecast extra labour: 40 hours at £30/hour (SCC rate) = £1,200

Extra pipe and fittings: £4,000 (material cost at SCC)

Extra plant (excavator): 20 hours at £50/hour = £1,000

Subtotal Defined Cost: £6,200

Fee at 10%: £620

Total CE: £6,820

**Incorrect assessment:**

Contractor quotes £8,500 based on a lump sum rate from the bill of quantities, including 15% overheads and 5% profit.

The PM rejects this because it does not follow Defined Cost and Fee.

Key Takeaways

**Clause 63 requires a forecast of the change in Defined Cost plus Fee** — not actual costs or bill rates.

**Defined Cost is strictly defined in the SCC** — no head office overheads, no profit, no mark-ups beyond the Fee.

**Time-related costs must be directly linked to the event** — not the whole project delay.

**As a PM, always request a breakdown** and assess using the SCC rates and Fee percentage — do not accept lump sums.

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**Category:** Compensation Events

**Tag:** NEC4, Clause 63, Defined Cost, Fee, Forecast