In the NEC (New Engineering Contract) family of contracts, a compensation event refers to an event or circumstance that has occurred, entitling one of the parties to the contract to compensation for the impact of that event on time, cost, or both.

Key points regarding compensation events in construction contracts include:

1. Definition of Compensation Event:
   In NEC contracts, a compensation event is defined as an event that is listed in the contract as giving rise to the contractor's entitlement to additional time and/or money. These events may include changes in scope, unforeseen ground conditions, or other specified occurrences.
2. Notification Requirements:
   NEC typically includes strict notification requirements for compensation events. The contractor is required to notify the project manager when a compensation event occurs or is likely to occur within five weeks. Failure to provide timely notice may impact the contractor's ability to claim compensation.
3. Assessment and Agreement:
   Once a compensation event is notified, the project manager assesses its impact on time and cost in line with the timeframe stated in the contract (clause 64). The project manager and the parties involved then collaborate to agree on the necessary adjustments, which may include extensions of time, adjustments to the contract sum, or both.
4. Pricing Mechanism:
   NEC contracts often include a defined pricing mechanism for compensation events which can be a mix of actual costs or contracts plus fee depending on what option is chosen.
5. Contract Price and Completion Date:
   The compensation event may result in an adjustment to the contract price and/or an extension of the completion date. This ensures that the contractor is compensated for additional costs incurred or time lost due to the event.

The use of compensation events in NEC contracts reflects a collaborative approach to managing change and unforeseen events during the course of a construction project. It provides a mechanism for addressing the impacts of these events on time and cost while maintaining transparency and accountability. They are often found in UK government projects and are gaining in popularity internationally.