Articles

Changes and innovations in ECC3
bY ROBERT GERRARD, CHAIRMAN NEC USERS' GROUP, and JEREMY DIXON, MOTT MacDONALD LTD

The 3rd edition of the NEC Engineering and Construction Contract (ECC3) was published as part of the revised and extended NEC3 suite of contracts on 14 July 2005. This article explains in more detail the key differences from the 2nd edition (ECC2) that were outlined in Issue 33.

Choice of dispute-resolution options

ECC2 always provided for adjudication as the first step which the parties had recourse to as an express contractual agreement. The ECC2 option Y(UK)2 statement of a 'notice of dissatisfaction', to be referred to the project manager by the contractor prior to an adjudication referral, has now been deleted.

A completely amended procedure is provided in ECC3 for resolving disputes, involving a choice between two options, W1 and W2.

Option W1
Should the UK Housing Grants, Construction and Regeneration Act 1996 (the 'Act') not apply, then it is anticipated the parties will use option W1. Option W1 is the standard NEC non-Act compliant approach to adjudication.

Some of the features of W1 are as follows;

• The adjudicator now 'decides' the dispute, not 'settles' it as in ECC2.
• It is not mandatory to identify the adjudicator in the contract data. Provisions are made for the parties jointly to choose a new adjudicator in certain instances and, if they do not, then a new provision exists for either party to ask the adjudicator-nominating body to choose an adjudicator.
• The latest version of the NEC Adjudicator's Contract is to used to appoint an adjudicator.
• In the adjudication table, there is a new provision allowing the employer to bring about adjudication on the new ECC3 provisions of quotations for compensation events having been treated as accepted.
• The subcontract conditions must allow for combining disputes to permit a multi-party adjudication between the employer, contractor and subcontractor.
• The adjudicator can take the initiative in ascertaining the facts and the law related to the dispute, should he or she choose to do so.
• The adjudicator's decision is binding on the parties, unless and until revised by a tribunal, and is enforceable as a contractual obligation.
• Either party can refer the adjudicator's decision to a tribunal but must notify to the other party of such dissatisfaction with the decision and an intention to refer the matter to a tribunal, again within the stated timescales. Failure to do this renders the adjudicator's decision final and binding.
• The adjudicator has a limited time period to correct a clerical mistake or ambiguity.
• Any dispute must be referred to an adjudicator before it can go to a tribunal.
• The adjudicator cannot be subsequently called as a witness in any tribunal proceedings.

Option 2
Should the Act apply, then it is anticipated the parties will use option W2. Option W2 is the Act-compliant NEC approach to adjudication.

Options W1 and W2 contain some similar provisions; other features of W2 are as follows;

• A dispute can be referred at any time to adjudication.
• Provision is made to alert the adjudicator early, giving pertinent information before the formal submission of the detail takes place.
• Any disputed matter which is also a matter disputed in a subcontract can also be referred to the adjudicator at the same time, but only with consent of the subcontractor.
• If a party does not comply with an adjudicator's instruction, the adjudicator may continue the adjudication basing his or her decision on the information and evidence received.
• In the event the adjudicator fails both to make his or her decision and notify this to the parties within the stated time, either the parties agree to extend this period or one party may act as if the adjudicator has resigned.

Optional key performance indicators

ECC3 introduces secondary option X20, key performance indicators, and a corresponding incentive schedule. The purpose of option X20 is to provide an incentive to the contractor only by the employer, outside a partnering arrangement between a number of parties, and therefore option X20 is not used where option X12, partnering, is to be used.

Key performance indicators were available in ECC2 option X12, but for use in multi-party partnering arrangements.

The focus in option X20 is the contractor achieving the targets stated in the incentive schedule and, in turn, receiving the associated payment accordingly. Regular reports are provided to the project manager together with proposals for improving performance where the forecast would not achieve the stated target.

Optional limitation-of-liability clauses

Option X18, limitation of liability, is an entirely new clause. The clause itself is optional, as are parts of it. Parties may therefore agree to include none, part or all of the provisions through completion of the contract data appropriately.

The matters of limitation include the employer's indirect or consequential loss, loss of or damage to the employer's property and employer's loss due to defects arising from the contractor's design. These are expressed as individual liabilities in the contract data but there is also a cap of total liability to the employer applying in contract, tort or delict - other than listed excluded matters, which sit outside this cap.

Risk-reduction meetings and risk register

To reinforce the pro-active approach that NEC contracts take to dealing with risk, the ECC now includes provisions for managing project risk through a 'risk register'. The risk register is not a compilation of contractual risks as between the parties - these are reflected through compensation events and subclause 80.1 - it is a complete list of all project risks.

The concept of the risk register, post contract date, is that it is now enshrined within the early-warning process at subclause 16.1. Early warning may lead to subsequent risk-register entries by the project manager. Thereafter, either the project manager or the contractor may instruct the other (with other interested parties) to attend a 'risk-reduction meeting' (subclause 16.2), with discussions taken as to how registered risks can be managed, avoided and finally removed from the risk register (subclause 16.3).

Where it is necessary to do so, the project manager changes the works information at the same time as revises to the risk register (subclause 16.4).

Introduction of 'key dates'

Another new ECC3 provision is a 'key date', which is not a part of the works that is contractually described as a section, but instead could be a key interface point in a project. Where these are incorporated, both the date and the condition must be clearly stated in the contract data.

ECC3 clause 16.1 now specifically states that a delay to meeting a key date triggers an early warning and risk-register notification.

Subclause 25.3 provides for the project manager to decide whether or not the contractor meets a key date and the resulting loss to the employer is to the contractor's account. The contractor is also obliged to include key date(s) on the programme.

New prevention event clause

New provisions for 'prevention' are included. This effectively is what practitioners would recognise as a 'force majeure' provision. The drafting extends beyond the normal concept of an unavoidable (catastrophic) event and beyond the contemplation of a contractor seeking to invoke the existence of such event, with no stated generic examples of what constitutes 'prevention'.

The subclause 19 'position of prevention event' - subject to the limited test of foreseeability - leads to a compensation event at subclause 60.1(19). It is the employer that takes the time and cost risk of any such event that stops the contractor completing the work.

Prevention is also a stated reason for termination of the contractor's obligation to provide the works.

Replies to compensation events

Subclause 61.4 now provides clarity to the position whereby when the contractor notifies the project manager of a notified compensation event, the project manager cannot remain silent or remain inactive.

The project manager is obliged to reply within (a longstop) of three weeks unless the contractor agrees to extend this. If the project manager does not reply, and the contractor then notifies to this effect, it is treated as acceptance by the project manager that the event is a compensation event and an instruction to submit a quotation.

Similar changes are made to subclause 62.6. Where the contractor submits a compensation event quotation and the project manager does not reply, despite further notification to this effect, the quotation is deemed to be accepted. This is finally cascaded into subclause 64.4, which provides similar provisions to subclause 62.6 for project-manager assessments of a compensation event.

Swifter compensation for options A and B

New option A subclause 63.14 and option B subclause 63.13 state that if the project manager and the contractor agree, rates and lump sums may be used to assess a compensation event, instead of defined cost. This provides for a swift assessment of a compensation event in appropriate circumstances.

Revised payment assessment for options C, D, E and F

In main options C, D, E and F, subclause 11.2(29) contains a revised defined term for the 'price for work done to date' (PWDD). PWDD now includes for forecasts of defined cost that will have been paid by the contractor before the next assessment date.

Changes have also been made to subclause 50.1 to provide for assessments to be made regularly after completion of the whole of the works and until four weeks after the supervisor issues the defects certificate.

Simplified schedule of cost components

The schedule of cost components (SCC) is part of the conditions of contract only when main option C, D or E is used. The shorter schedule of cost components (SSCC) is part of the conditions of contract only when option A, B, C, D or E is used.

When option C, D or E is used, the SSCC is used by agreement for assessing compensation events. The SSCC is only used for main options A and B and for price-of-work-done-to-date calculation (payment) the SCC is used for main options C, D and E.

SCC changes
Some specific SCC changes are as follows;

People

• The ECC2 second-bullet, five-day qualifying rule for payment of people who are directly employed by the contractor and whose normal place of working is not within the working areas has been deleted.
• A new provision is added covering the likes of labour-only subcontractors. ECC2 provisions meant pairing back the invoiced cost of such labour to comply with people costs recoverable under 11, 12 and 13. Such information was not readily forthcoming in practice. This approach takes the amount paid by the contractor as the basis of cost.

Equipment

• The ECC2 equipment provisions have been substantially amended in ECC3 leading to a more practical application. ECC2 necessitated a quite complex calculation of depreciation and maintenance for contractor-owned, bought or internally hired plant. This is now replaced in ECC3 with open-market rates for the equivalent plant.
• A further change in ECC3 is to bring in the cost of accommodation as a recoverable cost under the heading 'equipment'. The ECC2 items 44(a)-(f) provision have been deleted in this change. This should provide a more equitable basis of recovering these costs rather than by linking the working-areas-overheads percentage to the cost of people. This will also result in this percentage being substantially reduced from the level it was in ECC2 and reducing the uncertainty surrounding it.
• The ECC2 provisions for items 43 have been amended. Item 43(a) 'financing charges' has been deleted as a recoverable component of cost and is treated as included in the fee. This is replaced with 'cancellation charges arising from a compensation event' picking up, for example, charges levied by a change to the works information, which necessitates cancelling a previous order by the contractor. New item 43(i) deals with the consumables and equipment for the project manager's and supervisor's offices.

SCCC changes

Similar changes to the SSCC have been made along with the following;

People

• ECC2 items 11-13 are consolidated into a brief but all-inclusive statement that it is the 'amounts paid by the contractor' which are used to assess the people costs.

Equipment

• ECC2 item 23 'idle and standby times, allowances for deduction' have been deleted.

Charges

• ECC2 item 4(a) 'overhead payments for people including payroll burdens' has been deleted from items to be included in the percentage for people overheads. This is covered in the revised ECC3 item 11.

Manufacture and fabrication

• A change from ECC2 is that the cost of manufacture and fabrication of plant and materials is now 'amounts paid by the contractor' rather than the ECC2 approach of hours, hourly rates and adding a percentage for overheads. This measure, along with others, simplifies use of this schedule further.

Two fee percentages introduced

The definition of 'fee' (ECC 3 subclause 11.2(8)) has now been divided into two elements: 'the subcontracted fee percentage to the defined cost of subcontracted work' and 'the direct fee percentage to the defined cost of other work'. These are tendered in the contract data part two.

Problems arose during ECC2 compensation-event assessment, where input from a specialist (subcontractor) only attracted the ECC2 fee percentage, whereas the subcontract fee percentage entered by the same specialist was invariably a higher figure (expressed in percentage terms), with the contractor potentially being out of pocket as a result.

In ECC2 there was provision for a fee that, when applicable, was calculated by applying a single fee percentage to actual cost. This is now replaced by two fee percentages, one applied to defined cost of subcontracted work and another to other work.

The fee has different purposes for the main options and this change, together with amendments to the definition of a subcontractor, defined cost and the schedules of cost components, should remove an area of uncertainty with ECC2 when dealing with subcontractor's costs in particular.

For further information please contact the lead author on 020 7665 2446 or email robert.gerrard@neccontract.com.

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