Risk Allowances in Compensation Event Quotations: What NEC Allows and How to Price It
By Sheldon Wright MCICES. Last reviewed October 2026. Covers NEC3 and NEC4 ECC.
Quantity surveyors trained on traditional forms are taught to take contingency out of a valuation. You value the work that was done, at the rates in the contract, and a sum "for risk" has no place in it. Bring that habit to an NEC compensation event and you will assess it wrongly, because the contract says in terms that the assessment includes allowances for risk.
Contractors make the opposite mistake. They know risk is allowed, so they add ten per cent to the bottom of the build-up and call it a risk allowance. The assessor strikes it out, usually rightly, and both sides conclude that the clause does not work.
It does work, provided the Contractor prices risks and the assessor tests them. This article covers what the contract allows, how to build an allowance that survives assessment, and how to assess one fairly.
The clause is 63.6 in NEC3 and 63.8 in NEC4. I paraphrase both.
What the clause says
The assessment of the effect of a compensation event includes risk allowances for cost and time, for matters that have a significant chance of occurring.
The editions finish the sentence differently. NEC3 says the matters are those at the Contractor's risk under the contract. NEC4 says they are matters that are not compensation events. The two come to the same thing, since under NEC anything that is not a compensation event is the Contractor's risk. I find NEC4's wording easier to apply. If the risk, should it occur, would be a compensation event in its own right, it does not belong in the allowance, because the Contractor would be paid for it then.
Four points come out of the words.
- The allowance is part of the assessment. It sits inside the change to the Prices and the delay, and it applies whether the Contractor quotes or the Project Manager assesses. A Project Manager's own assessment that leaves out risk has not followed the clause.
- It covers cost and time. Time risk belongs in the durations of the event activities in the programme, and cost risk belongs in the build-up.
- The matter must have a significant chance of occurring. "Significant" is not defined. I read it as a real and appreciable chance, which is a lower bar than "more likely than not" and a higher one than "conceivable".
- It must be the Contractor's risk. Weather below the one-in-ten-year threshold, plant breakdown, ordinary variation in output, material wastage, a supplier delivering late and minor re-work all qualify. Unforeseen physical conditions do not, because if they arise they are a separate compensation event.
Why the contract allows it
A compensation event is assessed on a forecast, and the assessment is final. It is not revised when the forecast proves wrong. The Contractor is therefore quoting a fixed price, and a fixed time, for work that has not been done, often at short notice and in conditions it did not choose.
Anyone quoting a fixed price includes risk. The Contractor did so in its tender, across the whole of the works, in competition. The compensation event clause asks it to do the same for the changed work, without competition, and the risk allowance provision gives it the right to be paid for that. If you take the allowance out while leaving the finality in, the Contractor carries the Client's change at the Contractor's risk for nothing.
The provision is even-handed. If the risk does not occur, the Contractor keeps the allowance. If it occurs and costs more than the allowance, the Contractor bears the excess. The Client has bought certainty, and the allowance is the price of it.
This is also the reason the dividing date matters. Risk is judged as at the date from which the forecast is made. A risk that was real on that date belongs in the assessment even if everyone knows, by the time the assessment is carried out, that it did not happen.
Where the uncertainty is too great to price
Some uncertainty is too large to price sensibly. If nobody knows whether contamination extends to 10 m³ or 20 m³, a risk allowance is a guess, and if the risk occurs the allowance will not cover it. For that situation the contract provides a different tool. The Project Manager states an assumption under clause 61.6, the quotation is priced on it, and if it proves wrong the correction is a new compensation event.
The division of labour is this. Things an experienced contractor can reasonably estimate, such as outputs, durations, weather downtime and wastage, are forecasts, and the uncertainty in them is covered by risk allowances. Things nobody can reasonably estimate are dealt with by stated assumptions. A Contractor that is facing an enormous risk allowance should take it as a sign that it ought to be asking for an assumption.
How to build an allowance that survives
Name the risk. Each allowance attaches to an identified matter. "High river levels preventing access to the outfall" is a risk. "General contingency" is not one.
Show the probability. Say why the chance is significant, using evidence where you have it: records from this project, seasonal data, the supplier's history, the ground investigation. "We lost six days in the last twenty to river levels on the adjacent structure" is evidence.
Show the consequence. State what happens if the risk occurs: which resources stand, for how long, at what Defined Cost, and what happens to the programme.
Size it openly. The simplest defensible method is probability multiplied by consequence, line by line. For example:
| Risk | Probability | Cost if it occurs | Cost allowance | Time if it occurs | Time allowance |
|---|---|---|---|---|---|
| River level stops work at the outfall | 20% per working day over a 15-day operation | £2,400 per day standing | 3 days, £7,200 | 1 day per occurrence | 3 days |
| Pump failure during over-pumping | 10% | £1,800 | £180 | 1 day | Nil (within the river allowance) |
| Precast unit delivered late | 15% | 2 days' standing, £4,800 | £720 | 2 days | Nil (float available) |
The figures are invented. A table like this gives the assessor something specific to agree or disagree with. They may argue that the river risk is 15 per cent and not 20, which is a useful argument to have. A flat percentage gives them nothing to engage with except the fact that it is there.
Put time risk in the programme. Time risk allowances sit in the durations of the event activities, in the same way that they sit in the Accepted Programme for the original work. State them, so that the Project Manager can see that a twelve-day activity is nine days of work and three of allowance. The programme and the cost build-up have to agree with each other. If the programme carries three days of river risk, the build-up should carry the resources for the same three days.
Do not double count. If outputs already reflect winter working, do not add a separate weather allowance. If the Accepted Programme durations already contain time risk allowance for the same activity, explain why the event needs more.
Take account of the effect on the rest of the programme. A compensation event can change the risk carried by work that is not itself changed. If the event pushes weather-sensitive work from September into December, the time risk allowance for that work may properly increase, and that increase is part of the effect of the event. Assessors often resist this. It is legitimate, provided the shift is demonstrated on the programme.
How to assess one
If you are the Project Manager or on the Client's commercial team, the question is whether the amount is reasonable. Whether risk should be included at all is already answered by the contract. Test it as follows.
- Is it a Contractor's risk? If it would be a compensation event if it occurred, take it out and say so.
- Does it fit this compensation event? Each risk should arise from the work this event changes or adds, not from the job in general.
- Is the chance significant? Ask for the evidence. Remote risks come out.
- Is the consequence priced at Defined Cost? Standing time should be built from the same people and Equipment as the rest of the build-up.
- Is it counted twice? Check outputs, durations and the Accepted Programme's existing allowances.
- Has mitigation been considered? Ask what the Contractor proposes to reduce the risk, if anything. There may be a chance to spend a little money to save a lot.
- Is it proportionate? A risk table totalling forty per cent of the base cost suggests that the event needs a stated assumption.
- Does the time match the money? Time risk in the event activities should have matching resources in the build-up, and the reverse.
Then accept the allowance, or instruct a revised quotation, and explain which lines you disagree with and why. The arguments tend to cluster around three subjects: delay, disruption and winter working. Routine estimating allowances such as wastage and ordinary weather downtime rarely cause trouble.
A disagreement about the size of an allowance is a reason for a revised quotation. It is a poor reason for the Project Manager to take over the assessment, because the Contractor carries the risk and should not be bound by someone else's view of it. Removing the whole allowance as a matter of policy is not an assessment under the contract. It is also commercially short-sighted. A Contractor whose open allowances are always deleted will stop showing them. It will put the risk into its outputs, where it is harder to find, and the quotations will become less transparent without becoming any cheaper.
If you make your own assessment under clause 64, the same clause applies to you. Include the allowances you think are reasonable, and show them.
After the event: hindsight
When an assessment is made late, it is tempting to look at what happened and delete the risks that did not occur. I think that is wrong in principle. The allowance is payment for carrying a risk over a period, and the Contractor carried it whether or not it occurred. The right question is whether the chance was significant as at the dividing date.
The converse also holds. A Contractor quoting after the work is finished cannot add an allowance for a risk that, by the dividing date, had already passed.
Target contracts
Under Options C and D the Contractor is paid Defined Cost plus Fee in any case, and the compensation event adjusts the target. Some Project Managers conclude that risk allowances are unnecessary on a target contract, because the Client pays if the risk occurs. That misses what the target does. It sets the share. A target adjusted without risk is too low, and the Contractor then pays a share of an overrun on work it was instructed to do. The clause applies under every main Option.
Common mistakes
By Contractors
- A flat percentage with no named risks.
- Risk hidden in low outputs and long durations, where it cannot be defended when it is found.
- Including risks that would be compensation events.
- Time risk in the programme with no matching cost, or the reverse.
- Using a risk allowance where an assumption was needed.
By assessors
- Deleting all risk as "contingency".
- Deleting risks because, with hindsight, they did not occur.
- Accepting the principle and offering a token amount with no reasoning.
- Leaving risk out of the Project Manager's own assessments.
Where Clause 60 fits
Risk is one of the places where a quotation's internal consistency gets tested. Clause 60 reads the quotation and cost build-up, the contract with its Z-clauses, and the native programme — Primavera P6 or Microsoft Project — together. It identifies stated risk allowances, flags lump-sum or percentage additions with no named risk behind them, and flags allowances for matters that are not the Contractor's risk. Each finding is cited to its source document and labelled Fact or Inference, and the review takes about ten minutes. It does not decide whether a chance is significant or an amount reasonable. That is the assessor's judgement, and the tool is assistive, not advisory.
There is a full sample review at clause60.com/demo, with no sign-up needed.
This article is general guidance on the standard NEC3 and NEC4 ECC forms, written from professional experience. It is not legal advice, and it does not account for the amendments in your contract. NEC is a registered trade mark of its owner; Clause 60 Limited is not affiliated with or endorsed by NEC.