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NEC3 - What is all the fuss about? Peter Cousins , 13th November 2007 At a well attended joint meeting with the Institution of Civil Engineers at the Rose & Crown, Tonbridge, on 13 November 2007, Peter Cousins delivered a talk entitled "NEC3 - What is all the fuss about?" Peter is a Chartered Civil Engineer, Chartered Arbitrator and Registered Adjudicator, and is well placed to talk about NEC3, having been a member of the Drafting Committee, and having led the team that drafted the Guidance Notes. Peter opened by claiming that NEC contracts are now used in about 80% of civil construction in the UK, and he attributed this popularity to the fact that NEC contracts rather uniquely facilitate the implementation of sound project management principles and practices. This sets them apart for other Standard Forms, and their ethos was captured in the following statement by Professor John Uff in 1990: "At the heart of the NEC is a new creed that Project Management techniques can be successfully written into a main contract to produce more co-operation, more efficiency and fewer disputes. There is also, of course, the implicit assumption that the terms of the contract can affect the way in which the contractor performs the work. The boldness of the new approach cannot be overstated." Peter suggested that experience during the intervening 17 years has shown this to be an approach that works. The NEC started out as a contract for the execution of physical work, but has now grown into a family of contracts to cater for the entire life cycle of a facility, from initial business case stage, through design and construction, to operation and maintenance, and for varying degrees of project complexity. In an interesting graphic, Peter plotted the areas occupied by each of the NEC family of contracts on the Project Complexity/Life Cycle chart. The Professional Services Contract (PSC), the Adjudicator's Contract and the Framework Contract cover all time phases irrespective of complexity. The Engineering and Construction Contract (ECC) and Subcontract (ECS) are intended for the design and construction phases of complex physical works, while the Engineering and Construction Short Contract (ECSC) and Short Subcontract (ECSS) are intended for the same phases of less complex physical works. At present the Term Service Contract (TSC) is available for use during the operation and maintenance phase, regardless of complexity. A shorter form of Term Service Contract (TSSC) is in course of preparation, and a Supply Contract for major items of Plant and Equipment is currently out for consultation. Both are planned for publication in 2008. The NEC publishes an "NEC Procurement and Contract Strategies" document, which is a guide to the selection of an appropriate NEC3 form. Each NEC3 Form is accompanied by Guidance Notes and Flow Charts, which are intended as an aid to understanding. The Flow Charts were originally prepared to enable the drafting committee to test the logic of its drafting. It was however quickly realised that the parties to a contract would also find the Flow Charts useful in their administration of the contract, so they too have been published. Peter advised us that the Objective of NEC, as expressed by the original author Dr Martin Barnes, is the better delivery of projects. NEC believes this objective can be achieved by the creation of a family of contracts that:
The stimulus to good management is seen as the most important objective, which is promoted by ensuring that procedures are designed to contribute to, rather than detract from, the effectiveness of the parties. There are two guiding principles, namely that:
Thus, while other contract forms tend to focus mainly on the allocation of blame when things go wrong, NEC attempts in addition to prevent things from going wrong in the first place by means of early warnings and a collaborative approach to problem solving. Clarity and simplicity are achieved by using ordinary language and short sentences. Sentences are not permitted to exceed 40 words, and text is broken up by the use of lists and bullet points. Legalistic phrases are kept to a minimum, as are subjective phrases such as 'fair', 'reasonable' and 'opinion'. The active voice, rather than the passive voice, is used to describe the duties and responsibilities of the participants, and the reasons for negative decisions by the Project Manager (PM) have to be stated in his responses to the Contractor. In addition, the procedural logic is further explained by means of flow charts. Wide application and flexibility are achieved through the structure adopted by NEC. There are standard core clauses that apply in all cases, but flexibility is achieved by the manner in which the main and secondary option clauses are mixed and matched. There is no restriction on the type of work that can be specified in the Works Information. Responsibility for design can be set with either party, or allocated between both. The choices of pricing mechanisms range from high price certainty Lump Sums with Activity Schedule or Bill of Quantities, through Target Cost with Activity Schedule or Bill of Quantities, to low price certainty Cost Reimbursable and Management Contracts. As a guide to user preferences, Peter advised us that 60% of contracts are let on a Target Cost plus Activity Schedule basis, 20% are let on a Lump Sum plus Activity Schedule basis, with the remaining 20% spread amongst the other Main Options. Secondary Options allow the contract to be tailored even further to suit its international or domestic nature and the Employer's policies in relation to risk and risk transfer. There are two dispute resolution options, namely W1 for international use when the Housing Grants, Construction and Regeneration Act 1996 does not apply, and W2 for domestic use when that Act does apply. Other secondary option clauses applicable worldwide are prefixed with the letter X, jurisdiction specific secondary options are prefixed with the letter Y, and additional bespoke clauses are prefixed with the letter Z. There are currently 15 no. X options covering such topics as price adjustment for inflation, parent company guarantees, sectional completion, delay damages, performance bond, advance payment and retention, to name but a few. There are currently 2 no. domestic Y clauses. Y(UK)2 relates to the Housing Grants, Construction and Regeneration Act 1996 (Y(UK)2), which cannot be contracted out of, and Y(UK)3 relates to The Contracts (Rights of Third Parties) Act 1999, which can be contracted out of. Peter counselled very strongly against inserting additional bespoke Z clauses into NEC contracts unless they have been well thought through and are absolutely necessary. The danger is that the additional Z clause may inadvertently break some of the standard logic links within the flow charts, which can lead to ambiguity, uncertainty and disputes. It is thus a wise precaution for the drafters of Z clauses to check their logic by means of flow charts before finalising the text. Peter identified what he considers to be the more important parts of the Contract under the following headings: Actions of the Parties; PM & Supervisor; Managing Risks; Time & Programme; Dealing with Change & Compensation Events. In respect of the actions of the parties, NEC requires the Employer, the PM, the Supervisor and the Contractor to act in a spirit of mutual trust and co-operation. Whilst this is stated as an obligation, it has an important bearing on the attitude the parties are expected to adopt under an NEC contract. In addition, to be of effect, their communications need to be in a form that can be read, copied and recorded. The PM manages the contract, and the Supervisor is responsible for overseeing the quality of the Works. Both act for and on behalf of the Employer. Thus, unlike the Engineer under a traditional Civils contract, it is not intended that the PM should be independent. Although the PM and the Supervisor may delegate their powers to others by written notice to the Contractor, and may revoke such delegation, the PM is the only person empowered by the contract to vary the scope of works by giving an instruction to the Contractor that changes the Works Information or a Key Date. The PM is constrained by the need to give reasons for his negative decisions in respect of the Contractor's applications. If the PM's reason for refusal is not a reason stated in the Contract, then the Contractor will be entitled to be compensated. NEC manages risk by means of a Risk Register. The Register does not allocate risk, but rather lists those various risks that will be managed by applying collaborative foresight. Each party lists in the Contract the risks that it wants to see managed within the Risk Register. The PM compiles the Register, and it is kept up-to-date by means of early warnings, which are a vital part of NEC. The Contractor and PM have a duty to notify each other if they become aware of any matter that may have an impact on price, time or quality, and either may instruct the other to attend a Risk Reduction meeting. Those attending such meetings co-operate in making and considering proposals to avoid or reduce risk. The PM updates and revises the Risk Register to record the issues discussed and the decisions taken. Programme is of particular importance in NEC. The Contract specifies in considerable detail what it should contain, and the Contractor is required to submit it at an early stage for the approval of the PM. It is not simply a bar chart, as for each operation the Contractor is required to include a statement of how it plans to do the work, and to identify the principal equipment and other resources that it plans to use. The PM has 2 weeks from receipt of the Contractor's programme to accept it or notify the Contractor of his reasons for not accepting it. The Contract gives the PM only four valid reasons for not accepting the Contractor's programme. Once accepted, and subject to regular updating to record actual progress on site, the accepted programme becomes the yard-stick against which the time effects of variations and delays are measured. Change on an NEC project is dealt with by means of a Compensation Events procedure. A Compensation Event can be any one of a number of events listed in the Contract. If they occur, they entitled the Contractor to be compensated in time and money, provided the event did not arise from the Contractor's default. All Compensation Events need to be notified either by the Contractor to the PM or by the PM to the Contractor, depending on how they arise. Where the Contractor is obliged to notify the PM, it must do so within a strict time frame to preserve its rights. The notification phase is followed by a quotation phase by the Contractor and an Assessment phase by the PM. Both phases are run to tight time scales to ensure that the time and money consequences of the Compensation Event are rapidly determined, usually within 6 to 9 weeks of initial notification, and often well in advance of completion of relevant work scope. Thus assessments are expected and intended to be based on forecast additional cost and time, rather than historical cost and time. The justification for this is that it facilitates early resolution of the financial and time effects of change and enables better management of budgets. Peter concluded his animated and entertaining talk by glossing over the following advantages and focussing on the following disadvantages of NEC contracts: Advantages:
Disadvantages:
However, Peter asked us to ponder if the disadvantages listed are really disadvantages? Report by Derek Ross |
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