Why you need reasonable time risk allowances in NEC contracts

Key Points

• ‘Time risk allowances’ are mentioned only once in NEC4 contracts but project managers should not accept a contractor’s programme without reasonable such allowances.
• Time risk allowances should be clearly shown on the programme for each operation, not lumped together at the end.
• Contractors need to have clear methodology for including reasonable time risk allowances in the programme and continually discuss this with the project manager.

This article is written for the NEC4 Engineering and Construction Contract (ECC), but the principles apply to the NEC4 Professional Service Contract (PSC) and to programmes required for a task order in an NEC4 Term Service Contract (TSC) and a project order in an NEC4 Facilities Management Contract (FMC). It will also apply in the subcontract versions of all the above contracts.

The phrase ‘time risk allowances’ appears in just one place in the NEC4 ECC. The concept is not explicitly used in any other standard forms of contract that the authors are aware of. This is not surprising as NEC deals with programme in much more detail than any other standard form.

Clause 31.2 includes:

The logic is that the contractor uses time risk allowances to show the provision in its programme for events that are at its risk. The main – perhaps only – reason is that, without reasonable time risk allowances, the project manager should not accept the programme under clause 31.3 as ‘it does not represent the Contractor’s plans realistically’. If the programme does not include time risk allowances at all, the project manager should also not accept the programme as ‘it does not show all the information which the contract requires’.

The NEC user guide states only: ‘The Contractor’s time risk allowances are to be shown on its programme as allowances attached to the duration of each activity or to the duration of parts of the works. These allowances are owned by the Contractor as part of its realistic planning to cover its risks. They should be either clearly identified as such in the programme or included in the time periods allocated to specific activities. It follows that they should be retained in the assessment of any delay to planned Completion because of a compensation event’ (NEC 2017).

Showing allowances on the programme

Contractors sometimes include a ‘lumped’ provision for time risk allowances at the end of the programme as a single operation, just before planned completion. This is not logical and wholly misrepresentative. Time risk allowances need be shown as part of the duration of specific operations on the programme that they is applicable to so that the reasonableness of the allowances can be agreed with the project manager.

However, the NEC conditions do not explicitly stop the contractor lumping the time risk allowances at the end. To promote more effective clarity, mutual understanding and trust for the allocation of time risk allowances in a programme, it is suggested that the scope includes the words: ‘The Contractor shows the time risk allowances included in specific operations on the programme.’

Time risk allowance assignment should always be readily identifiable and verifiable in the contractor’s programme. Typically it is not shown as a separate bar on the programme. Instead, a column field is included showing the time risk allowance included in the duration of the operation in the programme. The programme narrative should also include a section on time risk allowance.

This level of clarity promotes transparency and trust and allows the contractor and project manager constructively to review the amount of time risk allowance in the programme.

Setting a reasonable time risk allowance

There is no hard science for setting a reasonable time risk allowance but there must be some logic applied to demonstrate that it is realistic. Each allocation of time risk allowance in a programme should not be a generic percentage or ‘guesstimate’. Time risk allowance assignment should always be measurable and verifiable when assigned to individual operations that warrant its inclusion.

In preparing an invitation to tender, the client should request bidders to explain their methodology in assigning time risk allowances to the programme. This should then be mandated in the scope for all programme submissions.

Time risk allowances should not be considered static: they are variable. For example, if a contractor was starting bulk earthworks in November, it would be appropriate to include a time risk allowance for rainfall interruption (less that the 1-in-10-year event which triggers a compensation event).

However, should that period unexpectedly receive no rainfall, the appropriateness of the time risk allowance originally applied should be discussed by the contractor and project manager as part of the required contractor’s next programme update.

Commercial considerations

Under NEC, time risk allowances are clearly owned by the contractor. For example, during the update of a contractor’s programme, the finish of a critical path operation with a time risk allowance assigned may be achieved earlier than planned if the risk did not occur. In the next programme update, planned completion will come forward accordingly. This will result in additional terminal float which is retained by the contractor in the assessment of any future compensation event.

Even though time risk allowances are clearly required, it is in the contractor’s commercial interest to show as few as possible in operations on the critical path of a programme. This is because the time risk allowances will bring forward the planned completion and so increase the terminal float between planned completion and the (required) completion date (which is owned by the contractor).

Furthermore, planned completion is used in the assessment of compensation events and so this will make a compensation event more likely to delay planned completion and so result in a delay to the (required) completion date. The project manager needs to be aware of this and ensure that the time risk allowances included within the contractor’s programme are reasonable from the outset and in each revised programme.

In contrast, contractors sometimes overstate durations and time risk allowances in operations that are not on the critical path. This is to minimise the level of total float that is shared with the client and means that compensation events are more likely to delay planned completion.

When it comes to the assessment of compensation events, clause 63.8 states, ‘The assessment of the effect of a compensation event includes risk allowances for cost and time for matters which have a significant chance of occurring and are not compensation events.’ Hence the contractor should include any relevant time risk allowances related to the compensation event in the mark-up of the accepted programme at the dividing date that it is required by clauses 62.2 and 63.5 to include in its quotation for the compensation event.

Conclusion

The NEC is probably the only contract suite that requires the contractor’s time risk allowances to be shown in the programme. This is appropriate as the NEC puts much more emphasis on the programme than any other standard form of contract.

As with many aspects of managing an NEC contract, it will help if the contractor and project manager are regularly, openly and constructively discussing time risk allowances. 

Reference

NEC (2017) NEC4 User Guide: managing an Engineering and Construction Contract, Volume 4, NEC Contracts, London, UK.