NEC3 vs NEC4: Option A vs Option B 💼
Option A uses a lump-sum contract based on a Contractor-prepared Activity Schedule. Payments are tied to completed activities, not quantities. Perfect for clearly scoped projects. 💰
😊 NEC4 update: Introduced “Defined Cost” refinement and better clarity on “Payment Assessment Dates”.
📋 Pricing Model
Fixed prices per activity. Less flexibility for changes.
🔁 Compensation Events
Handled through adjustment of Activity Schedule.
🕒 Payment Logic
Paid on completion of each activity – clean milestone-based approach.
🏗️ See Example: Hospital Build Phase A
Contractor completes “Foundation Phase” in Activity Schedule → Paid in full for that item, even if material costs fluctuated. Easier cash flow, harder to revise.
Option B is based on a client-provided Bill of Quantities (BoQ). It’s ideal where quantity risk lies with the Employer. Useful for re-measurable works. 🧮
😊 NEC4 improvement: Enhanced definition of “Price for Work Done to Date” + clearer linkage to BoQ revisions.
📋 Pricing Model
Measured quantities × rates. Greater flexibility for varying site conditions.
🔁 Compensation Events
BoQ is updated; event rates can be derived from the BoQ or new quotations.
🕒 Payment Logic
Paid for actual work done (quantities installed × agreed rates).
🏞️ See Example: Highway Widening Project
Quantity of road base increased by 25%. Under Option B, client pays for actual quantity laid, using original BoQ rate.
Terminology & Structural Changes in NEC4 📜
NEC4 refined the NEC3 framework with cleaner, clearer, and more consistent language. Below are key terminology upgrades and structural refinements:
- 🔄 “Employer” → “Client” (used consistently across all NEC4 contracts)
- 📘 “Works Information” → “Scope” (simpler, more intuitive)
- ⚠️ “Risk Register” → “Early Warning Register” (more proactive risk handling)
- 🧍 Gender-neutral language adopted throughout
- 🧩 New contract forms introduced like Design, Build and Operate
Clause References and Practical Implications 🧐
Clause 20.1
NEC3: “Employer provides Works Information”
NEC4: “Client provides the Scope”
NEC3: “Employer provides Works Information”
NEC4: “Client provides the Scope”
Clause 11 (Definitions)
Introduced clearer definitions, including “Defined Cost” and “Assessment Interval”
Introduced clearer definitions, including “Defined Cost” and “Assessment Interval”
Clause 60 & 63
Compensation event assessments more formula-driven in NEC4
Compensation event assessments more formula-driven in NEC4
📖 Click to Compare NEC3 vs NEC4 Structural Format
Both NEC3 and NEC4 maintain Clauses 1–9 (covering General, Time, Quality, Payment, CE, etc.), but NEC4 adds clearer headings and more modular secondary options. Clause titles are harmonized across the NEC suite.
Clause 11 – PWDD & “The Prices” Explained 📖
Price for Work Done to Date (PWDD) in Option A means the sum of completed activities – no payment for partial progress. Each activity must be fully completed without defects delaying next steps.
📌 NEC4 defines “completed” as free from delaying Defects per the Scope. No partial payment means high certainty but tight cash flow for contractors.
🔐 Lump Sum Logic
Activity 5 – “Install Roof” priced at $80,000. Contractor receives full amount only once roof is done and defect-free.
📉 No Part Payments
Even 90% progress earns nothing until the activity hits 100% completion.
🧾 The Prices
Total of all activity prices = The Prices. Adjusted via compensation events if scope changes.
🏗️ Example: Activity 6 – “Lay Foundation Slab” ($60,000) is 90% complete but has minor water drainage defect → Payment = $0 until rectified and completed.
PWDD in Option B is based on measured quantities × rates in the BoQ. Partial payments are allowed as quantities progress. Lump sums are also paid pro-rata.
🧮 NEC4 subtly improves NEC3 by defining that only “notified Defects” delay payment – not hypothetical or unreported ones.
📊 Rate-Based Logic
Concrete item in BoQ: 200 m³ × $200/m³. If 100 m³ done → Payment = $20,000.
💵 Proportional Payment
Partial completion = proportional payment. Supports better cash flow during long projects.
📄 The Prices
Sum of BoQ rates × estimated quantities. Subject to remeasurement.
🏞️ Example: Drainage trench in BoQ: 500 m at $80/m. Contractor completes 200 m → Paid $16,000. Remeasurement adjusts later.
📌 Note: BoQ is not part of the Scope. If the Scope (NEC4 term) requires a task omitted from BoQ, contractor must still perform it. BoQ adjusted via Clause 60.6 compensation event.
Other Definitions – Clause 11 🔍
Both Option A and Option B in NEC3 and NEC4 share common definitions in Clause 11, many of which were retained with slight refinements in NEC4. Below are some of the most relevant shared terms:
Defect
Work not meeting the Scope. In NEC4, “notified” defects are those formally identified.
Completion
The point when all work is complete and free of delaying defects.
Key Date
Milestone by which certain conditions must be met (e.g., service availability).
Defined Cost
Actual cost used in CE evaluations using SSCC.
Scope
Formerly “Works Information”, this defines what work must be done.
Client
Formerly called “Employer” in NEC3.
💡 NEC4 Enhancement: Preparing a quote for a compensation event can now count as part of the Defined Cost—and may even trigger a compensation event itself.
🧾 What is “Defined Cost”?
In both Options A & B, Defined Cost helps calculate changes via the SSCC (Shorter Schedule of Cost Components).
✨ NEC4 Upgrade
NEC4 clarified that quote preparation costs can be included in Defined Cost.
Also simplified cost component schedules.
Clause 50 – Payment Assessments & Timing 💰
How Payment Works in Option A: Contractor is paid for completed activities only. Payments are “lumpy”: each interim payment is made once an activity is fully finished (not partially).
Assessment Date
→
(Monthly/As stated in contract)
Check Completed Activities
→
Payment =
Sum of Completed Activities
Sum of Completed Activities
NEC4 Enhancement:
i
Under NEC4 Clause 50.2, the Contractor must submit a payment application before each assessment date (not just rely on Project Manager’s review).
Clause 53 introduces a final account and certificate process after project completion—this was missing in NEC3. Payment only for finished activities means contractors may face delayed cash flow, but the Client gets strong cost control.
Clause 53 introduces a final account and certificate process after project completion—this was missing in NEC3. Payment only for finished activities means contractors may face delayed cash flow, but the Client gets strong cost control.
Programme Withholding: If the Contractor doesn’t submit an updated programme (Clause 32), the Project Manager may withhold a percentage (e.g. 25%) from the payment due (still in NEC4).
How Payment Works in Option B: Contractor is paid monthly (or as stated) for measured quantities of work completed. Payment flows smoothly as work progresses.
Assessment Date
→
(Monthly/As stated in contract)
Measure Completed Quantities
→
Payment =
Measured Qty × Rate
+ Lump Sums Pro-Rata
Measured Qty × Rate
+ Lump Sums Pro-Rata
NEC4 Enhancement:
i
Payment application now mandatory (Clause 50.2), reducing ambiguity.
Final account process (Clause 53): Ensures all parties agree on the final sum and closes out disputes. Payment is proportional to progress—better for contractor cash flow, but the Client takes quantity risk if actuals exceed BoQ.
Final account process (Clause 53): Ensures all parties agree on the final sum and closes out disputes. Payment is proportional to progress—better for contractor cash flow, but the Client takes quantity risk if actuals exceed BoQ.
Admin Tip: BoQ progress must be measured and agreed every period, so Option B needs more admin than Option A. Composite items? Break down the rate for easier agreement.
Clause 60 – Compensation Events (Risk, Changes & Relief) 🔀
Compensation Events = Relief for Contractor
If the Scope changes, unforeseen conditions arise, or the Client/PM causes delay, the Contractor may be compensated for time/money.
If the Scope changes, unforeseen conditions arise, or the Client/PM causes delay, the Contractor may be compensated for time/money.
Event Occurs
→
Contractor Notifies
(within 8 weeks)
→
(within 8 weeks)
Assessed for Relief:
Time and/or Money
→
Time and/or Money
Client Carries Risk i
In both NEC3/4, listed CEs shift the risk for the event to the Client—if it’s in Clause 60, the Contractor gets compensation or time.
NEC4 Improvements:
- New CE: Cost of Quotes i If the Project Manager asks for a quote for a proposed change (Clause 65), but then cancels, the Contractor is paid for the cost/time of quoting (new in NEC4).
- Custom CEs in Contract Data i NEC4 lets parties pre-list extra compensation events (like “third-party delay” or “archaeology”) in Contract Data—no need for amendments.
- Time Bar (8 weeks): Contractor must notify within 8 weeks or lose entitlement (same as NEC3).
- Deemed Acceptance: If PM does not respond in time, event is accepted by default (Clause 61.4).
What events are CEs under Option A?
▶
- Changes to the Scope (PM instruction)
- Unforeseen physical conditions
- Client/PM-caused delays
- Exceptional weather, artifacts, legal changes, etc.
- But: No CEs for quantity overruns or errors in Activity Schedule—Contractor takes the risk for activity pricing!
The Activity Schedule can be revised for practicality (Clause 54.2) after a CE, but that itself is not a CE.
Option B: CEs for Measurement Risk
Under BoQ, the Contractor is protected from extreme quantity risk and BoQ errors, since BoQ is Client’s document.
Under BoQ, the Contractor is protected from extreme quantity risk and BoQ errors, since BoQ is Client’s document.
Measurement-related CEs (NEC3 & NEC4)
▶
- 60.4: Significant difference between final and BoQ quantity for an item (impacts unit cost & exceeds 0.5% of Prices)
- 60.5: Quantity difference delays Completion/Key Date
- 60.6: BoQ mistakes (missing/erroneous items)
- 60.7: Discrepancy between BoQ & Scope/drawings
These CEs shift major quantity risk to Client; routine quantity variation is not a CE—just paid at the BoQ rate.
All Other CEs (Same as Option A)
▶
- Changes to the Scope
- Unforeseen conditions
- Delay/obstruction by Client or PM
- Legal, regulatory, or third-party issues
- Weather, artifacts, and more
NEC4 Clarifies:
- Change in quantity alone ≠ CE—unless it impacts cost/unit or causes delay
- CE for “mistakes” in BoQ, not in Scope
- Early warning still required: Notify events ASAP!
Clause 63 – Assessment of Compensation Events 🧮
Dividing Date
The “cut-off” date for assessing actual vs forecast costs.
NEC4: If a CE is due to a PM/Supervisor instruction, the dividing date is the communication date; otherwise, it’s the CE notification date.
NEC4: If a CE is due to a PM/Supervisor instruction, the dividing date is the communication date; otherwise, it’s the CE notification date.
Defined Cost
The actual and forecast cost of work done, used to build up compensation event assessments (plus fee).
No Gain/No Loss
The Contractor should be “no better, no worse off” after a compensation event.
Prices are not reduced unless the contract says so.
Prices are not reduced unless the contract says so.
How CEs are assessed (Option A):
- Impact on time: Assessed as the extra time needed (using the Accepted Programme at dividing date).
- Impact on cost: Lump-sum increase to Prices, calculated using actual + forecast Defined Cost (plus Fee).
- NEC4 clarifies dividing datei Now spelled out: For PM/Supervisor instructions, it’s the instruction date; otherwise, the notification date. Ends confusion from NEC3.
- Principle: Contractor “no better, no worse off” (No Gain/No Loss).
CE Identified
→
Find Dividing Date
📅
→
📅
Assess
Actual Cost
(before)
+ Forecast Cost
(after)
→
Actual Cost
(before)
+ Forecast Cost
(after)
Add Fee
→
Prices
Adjusted
Adjusted
Omissions: Prices only reduced for CEs if contract allows (e.g. Scope omission). Otherwise, reductions are not automatic.
Option B: Special rules for BoQ contracts:
- If CE adds/removes work with BoQ rates, use those rates for assessment (NEC4/NEC3 Clause 63.13+).
- If no suitable rate, build up a new rate/lump sum from Defined Cost + Fee.
- For work already done, assess as a lump sum at actual cost.
- PM/Contractor can agree ad hoc rates or lump sums (flexibility remains).
- NEC4 refined the wording and process, but basics are unchanged.
CE Identified
→
Dividing Date Set
→
If in BoQ:
Use BoQ Rate × Qty
→
Use BoQ Rate × Qty
If no BoQ Rate:
Build New Rate
→
Build New Rate
Add Fee
(or agreed lump sum)
→
(or agreed lump sum)
Prices Adjusted
Note: BoQ rates used only if suitable. “No gain/no loss” principle: Contractor compensated to neutral (never windfall/profit unless contract says so).
Contractor’s Cash Flow vs Employer’s Risk: Option A vs Option B 💱⚖️
Option A
(Activity Schedule – Lump Sum)
(Activity Schedule – Lump Sum)
✔️ Predictable Price for Client
⏳ Less flexible cash flow for Contractor
⏳ Less flexible cash flow for Contractor
- Best for clearly defined projects (e.g. office building with full design).
- Contractor bears risk for own activity pricing/quantities.
- Client’s cost is fixed (unless scope changes or CEs).
- Contractor gets paid on full completion of each activity – fewer but larger payments.
- Simpler admin (no regular measurement).
🏗️ Example: Building Project (Tap to expand)
Client builds a small office. Each stage (foundation, structure, roof) is a lump sum. Contractor paid only after fully finishing each stage. Client has price certainty, but if the Scope misses something, they must pay for changes.
Option B
(Bill of Quantities – Remeasurement)
(Bill of Quantities – Remeasurement)
💧 Flexible cash flow for Contractor
⚠️ Variable cost for Employer
⚠️ Variable cost for Employer
- Suited for projects with uncertain or variable quantities (e.g. road, drainage, earthworks).
- Client carries risk of quantity increases or BoQ mistakes.
- Contractor is paid monthly for actual measured work – steady cash flow.
- BoQ needs to be accurate; discrepancies are CEs.
- More admin (monthly measurement, progress agreement).
🚧 Example: Civil Works (Tap to expand)
Client lets a contract for highway excavation. Contractor is paid per m³ actually dug each month. If more is needed, they’re paid more; if less, the Client saves. Final cost is not known at award, but BoQ gives transparency.
Lump Sum
A fixed price for a whole item or activity. Paid only when completed, regardless of actual costs or quantities.
Remeasurement
Payment is based on actual quantities of work completed, measured on site (not estimated).
Compensation Event (CE)
An event that shifts risk/cost to the Client and allows an adjustment to price/time (e.g. scope change, error in BoQ).
Scope
The full description of what the Contractor is to provide (called “Works Information” in NEC3).
Examples in Practice 🏗️🌉
Example 1 – Simple Building Project (Option A)
🔒 Price certainty for the Client. Contractor manages activity risk and cash flow.
- Activity Schedule: Site setup $50k, Foundations $120k, Superstructure $200k, Roof $80k, etc.
- Payment made only upon full completion of each activity.
- Extra works (e.g. a new room) = compensation event and new activity (price added).
- If actual quantities increase (e.g. more concrete in foundations), Contractor bears extra cost unless Scope changes or CE applies.
- Failure to update programme = up to 25% payment withheld (Clause 50.3).
📋 Tap to see Payment & Risk Breakdown
How it plays out:
- Client knows exact cost for each milestone (cash flow is predictable).
- Contractor finishes foundations → $120k paid. 90% done = $0 until 100% is reached.
- Unexpected client change (extra room) is a CE, paid as an added activity (e.g. +$20k).
- Contractor funds ongoing work until each chunk is 100% finished. Strong incentive to complete each stage efficiently!
Example 2 – Complex Civil Project (Option B)
📏 Payment tracks actual measured progress. Quantity risk lies with the Employer.
- BoQ: Excavation 100,000 m³ @$10/m³; Rock breaking 5,000 m³ @$50/m³; 1mØ pipe 2,000 m @$300/m, etc.
- Monthly payment: Measured quantities × BoQ rates (e.g. 8,000 m³ excavated = $80k paid).
- Significant overrun (e.g. 110,000 m³ instead of 100,000) triggers CE to adjust rates (Clause 60.4) or grant time (60.5).
- Missing BoQ items but present in Scope = CE (Clause 60.6); Employer pays for required work not in BoQ.
- Client must actively manage and agree measurements each period (joint survey).
💵 Tap to see Payment & Risk Breakdown
How it plays out:
- Contractor is paid for exactly what’s done, month by month (better cash flow).
- Quantity overruns: paid at BoQ rate unless impact is extreme (then rate can be adjusted via CE).
- Scope rules: if BoQ undercounts work, CE claim corrects it—client pays for the true requirement.
- Client faces uncertain total outturn cost but pays only for real work delivered.
- System encourages transparency, collaboration, and fairness.
Key NEC4 Updates/Improvements over NEC3 🔧
Evolution, not Revolution
Terminology & Clarity
i
“Employer” → “Client”, “Works Information” → “Scope”, gender-neutral. Consistent wording makes all NEC4 contracts easier to use together and reduces confusion.
Simpler language and harmonized terms throughout.
Less legalese, more clarity!
Less legalese, more clarity!
Payment Process
i
Contractor must now submit payment applications before each assessment (Clause 50). Final Account & Certificate (Clause 53) bring certainty at project close.
Payment discipline: applications required, and a formal closure for all accounts.
No more “indefinite limbo” on payments!
No more “indefinite limbo” on payments!
Compensation Events & Risk
i
Two new CEs: cost of quote prep, and custom CEs in Contract Data. Dividing date for CE assessment is now crystal clear, removing ambiguity for both parties.
New and clarified CEs mean Contractors don’t lose out, and Clients can plan for special risks up front.
Programme & Dispute Avoidance
i
Deemed acceptance if PM fails to respond to a programme. New Dispute Avoidance Board option (W3) lets issues be resolved before they escalate.
Smoother administration and fewer disputes, helping both Contractor and Client.
Cost Components Simplified
i
Schedules of Cost Components merged/clarified; “Defined Cost” is simpler. Less admin burden and clearer cost justification for CEs.
Pricing changes is now easier and more transparent for all sized contracts.
Conclusion: Option A vs Option B Under NEC4
Option A: Activity Schedule
- Simple, milestone-based payment (each activity).
- Best for clear scope, predictable quantities.
- Strong price certainty for Client.
- Contractor manages activity/cost risk.
- Contractor’s cash flow can be less flexible (waits for activity completion).
- Low admin burden.
Option B: Bill of Quantities
- Continuous, measured payments (per BoQ item completed).
- Suited to uncertain or variable quantities.
- Employer takes quantity risk; final price may vary.
- Contractor enjoys steady cash flow.
- Higher admin: regular measurement, more records.
NEC4’s Real Win: More collaborative, clearer, and easier to manage than ever. Align your contract choice with your project’s needs – and use the contract as a tool to stimulate “good management,” not just document the deal.
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