2.11 As shown in Figure 5, settlement of the compensation events with contractors resulted in nearly £1 billion of cost increase between 2013 and 2018, nearly £800 million of which occurred between 2015 and 2016. Under the terms of the target price contracts that Crossrail Ltd agreed with most of its main contractors, where cost increases occur due to events outside contractors' control, contractors issue notification of a compensation event to Crossrail Ltd. Examples of such events might include access to a work site being delayed, or a design change being instructed by Crossrail Ltd. The compensation event notice requires Crossrail Ltd and the contractor to reach agreement about the nature of the change and any increase to the contractor's target price for the contract.
2.12 By January 2015, contractors had raised 16,000 notices with a backlog of 1,000 yet to be assessed. By January 2016 the number of notices had increased to 21,000, with 1,800 yet to be assessed. Some uncertainty due to commercial discussions is manageable and inevitable on major programmes, but high levels can lead to time being absorbed managing commercial elements of the contract, rather than carrying out productive work. The build-up of compensation events on Crossrail are an indication of the high numbers of interfaces between contractors on the programme, and the prevalence of delays and change caused by poor integration of the work of multiple contractors.
2.13 In 2015 and 2016, Crossrail Ltd negotiated supplemental agreements with contractors, with the aim of settling the backlog of compensation events to increase certainty about the cost of the programme. With these agreements, Crossrail Ltd also aimed to address the build-up of delays that had led to cost increases by resetting the commercial terms and incentives in the contracts. However, the underlying complexity of the challenge to deliver the programme on schedule remained and compensation events continued to accumulate. As shown in Figure 5, during 2017 and 2018, the settlement of further supplemental agreements resulted in a further increase in costs of £148 million.
2.14 As part of its renegotiation of contracts, Crossrail Ltd decided to change the payment terms and allocation of risk on some contracts in an attempt to focus contractors on meeting the December 2018 opening date for the central section. For example, it changed the terms of key contracts to install track and systems and communications and control equipment from target price contracts with financial risk shared between Crossrail Ltd and the contractor, to cost reimbursement contracts with incentive fees for contractors to meet milestones. This change meant that outturn contract costs were inherently less certain and that the financial risk sat with Crossrail Ltd because, while some incentives remained, the main financial incentive for the contractor to control costs was removed.