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Contents

Section 1 NEC History and its Intentions

Section 2 The NEC's Key Roles

Section 3 NEC Main Option Clauses

Section 4 Core Principles of the NEC Contract 

 

Description:  This module offers and introduction to the NEC (New Engineering Contract) family of contracts, its history and intentions.

Author:  David Lowe, Value by Design Ltd


Section 1 NEC History and its Intentions




Aims and Objectives

At the end of this section you should be able to:
  • Discuss the background surrounding the commission of the first NEC contract
  • Outline the changes that have been made to the contract since its original inception, and why the changes were necessary
  • Discuss the core principles and intentions of the contract


History 

The construction industry had developed contracts by iterations, which had originally been drawn up by Land Surveyors of the 1870s, who drafted the first formalised contracts. The nature of the iterations means that since that time contracts were patched rather than totally reconsidered. The intention was a clean sheet based on best practice and a solutions-orientated contract.   


Remedies 

Professor Martin Barnes, the NEC’s original author, undertook extensive research into Project Management with specific interest in alternative forms of work-based scheduling. His findings are outlined in his 1970s papers on use of Activity Schedules instead of Bills of Quantities. 

Today, Project Management handbooks are based on the principles of the NEC contract and one can therefore consider the NEC as a handbook of Project Management best practice and, contrary to popular belief, a handbook of best practice should not be left in the bottom drawer as other contracts usually are.




Publications

  • Thomas Telford Ltd (2005), NEC3 Engineering and Construction Contract (ECC), London: Thomas Telford Ltd
  • Broome, Jon (1999), The NEC Engineering and Construction Contract: A User's Guide (NEC2 Only), London: Thomas Telford Ltd
  • Trebes, Barry; Mitchell, Bronwyn (2005), NEC Managing Reality Book 1 Introduction to the Engineering and Construction Contract, London: Thomas Telford Ltd



Self-Assessment Task

  • Explain the reasons for the introduction of the NEC Contract.




Section 2  The NEC's Key Roles




Aims and Objectives

At the end of this section you should be able to:
  • State the key roles within the NEC contract
  • State which traditional roles are not included and how their responsibilities were successful integrated within the NEC contract


The NEC intention is to offer a simplified and clear allocation of roles and responsibilities. As in many other areas, NEC uses different titles for roles than could be previously expected (differentiating it from other contracts). A prime example is the ‘Project Manager’, which in the NEC contract refers to the project’s manager (and therefore could cover the role of an individual or team who manage the project) rather than a Project Manager (as a distinct job title). Design is issued on behalf of the Employer by the Project Manager, rather than issued by a designer designated in the contract. This has occasionally caused contention to architects who may feel beholden to the Project Manager. As the primary aim of this is to ensure impartiality of the Project Manager, it is considered that the Project Manager control information issued to the contractor to ensure all are aware of instructions. This matches the NEC’s intention that the Project Manager and the contractor are active and aware of all design considerations and implications and able to proactively manage changes and Compensation Events. 



Publications

  • Thomas Telford Ltd (2005), NEC3 Engineering and Construction Contract (ECC), London: Thomas Telford Ltd
  • Broome, Jon (1999), The NEC Engineering and Construction Contract: A User's Guide (NEC2 Only), London: Thomas Telford Ltd
  • Trebes, Barry; Mitchell, Bronwyn (2005), NEC Managing Reality Book 1 Introduction to the Engineering and Construction Contract, London: Thomas Telford Ltd



Self-Assessment Task

  • State the how the traditional roles within a construction contract have been integrated within the NEC contract.





Section 3  NEC Main Option Clauses




Aims and Objectives

At the end of this section you should be able to:
  • Explain the breakdown of sections and clauses within the NEC suite of Contracts
  • Explain which forms differ in their clause content and where


There is a consistency to the core clauses across all forms of the NEC contract. Parties should initially consider the main options as ‘setting the direction’ of the contract through selecting the reimbursement mechanism, which in turn reflects risk allocation and the extent of commercial operations within the contract. Options available within each of the NEC forms directly respond to the types of work within that area / sector (ie. Term Service Contracts – TSC – do not have Bills of Quantities as they are not typically found in the maintenance activities).  

The NEC’s core clauses 1 to 9 aim to compartmentalize issues and avoid cross referencing as can be found in other forms such as JCT. Therefore, for example, Compensation Events are referred to in core clause 6 and not referred to elsewhere. 

In the Secondary Options, as with the core clauses, the NEC aims for consistency, eg. XI will always be inflation related changes. Where a topic of an X clause is not appropriate to a particular form of contract, the reference will be blank, ie. X4 to X11 do not form part of the TSC. Where X12 is used, X20 the KPI clause will not apply as X12 includes its own KPIs. 

Similarly, the NEC’s intention to be used through the supply chain can be seen by the consistency of clauses between the main contract forms and subcontract forms. 

Option Y clauses cater for specific national clauses, hence in the UK we have Y(UK)2 (which includes for Housing Construction and Regeneration Act). Use of the NEC internationally would see these replaced with alternative statutory laws. 

Dispute clauses, such as Y clauses, can be used to reflect UK or non-UK dispute resolution practices. 

Z clauses are specific to the Employer and should reflect specific client requirements and can be seen as a ‘make or break’ moment in NEC drafting. Anecdotally, the re-drafting of NEC forms of contract into JCT forms of contract through judicious use of Z clauses leads to confusion and complications that would be better catered for by using a JCT contract. Great care should be taken when considering the impact of Z clause inclusions. 

Within public sector organizations, the use of Z clauses allows for the provision of financial regulations and standing order compliance, ie cartels and bribery and corruptions clauses.  

Contract Data Part 1 Information supplied by the Employer and Part 2 Information supplied by Contractor form the NEC contract: 
  • Part 1 provides information for pricing, design considerations where appropriate, risk allocation and general contract choices.
  • Part 2 offers an effective, financial and contractual response. The Employer’s agreement to this seals the offer of acceptance.
The Risk Register is in all of the above contracts. The NEC does not provide a template document for the Risk Register, however it does detail what a Risk Register should include. The standard NEC forms of contract provide a starting point for risk allocation between the parties. The Risk Register is an effective mechanism for reallocating project-specific items. 

Frameworks create an agreement for a period of time, creating a mechanism for future work, pricing and allocation.   



Publications

  • Thomas Telford Ltd (2005), NEC3 Engineering and Construction Contract (ECC), London: Thomas Telford Ltd
  • Broome, Jon (1999), The NEC Engineering and Construction Contract: A User's Guide (NEC2 Only), London: Thomas Telford Ltd
  • Trebes, Barry; Mitchell, Bronwyn (2005), NEC Managing Reality Book 1 Introduction to the Engineering and Construction Contract, London: Thomas Telford Ltd



Self-Assessment Task

  • State how the Works Information and Activity Schedules be used to change the roles, responsibilities and liabilities of the Contract.





Section 4 Core Principles of the NEC Contract




Aims and Objectives

At the end of this section you should be able to:
  • State the core principles of the NEC Contract
  • Discuss ways the contract offers a flexible approach and how this flexibility positively enables Project Management


Activity Schedules 

The Activity Schedule is designed to be an alternative to a Bill of Quantities’ traditional premise of a component-driven cost model. Standard methods of measurement, such as SMM7 and CESMM3 focus more on creating cost models than assisting the construction of a project.  

Activity Schedule contents can be partially or wholly determined by the Employer. The contractor’s procurement methods and programme / Plan of Work can also have a significant effect on the Activity Schedule.   


Target Costs 

Note that within Target Cost contracts, the use of the Risk Register share allocation and information contained within the Works Information can have a significant impact on the ease with which a Target Cost can be set. 

The NEC’s consideration of Target Cost includes the important process of changing the original Target Cost by Compensation Events. The Target Cost is considered against Actual Cost of the original activities and subsequent Compensation Event activities. This effectively avoids the historical risk of variation accounts, including for costs provided elsewhere. The NEC caters for the management of a single contractual cost base, as opposed to the management of an original contract sum and subsequent variation of cost duplication that sometimes occur through use of JCT contract and day works.   


Open Book Payment 

As elsewhere in NEC, the authors have used a simplified allocation process if a cost cannot be found within the Defined Cost, ie. [the cost of using] a subcontractor for a Scheduled of Cost Components item must be included within the Fee. The Fee can therefore be seen to include overheads, profit and other contractor’s non-project orientated costs / inclusions. 

Following the theme of Target Cost and open book not being cost plus, the NEC includes a process for disallowing costs. A common area of confusion arises in payment of defect replication costs prior to completion only if they are not incurred through failure to comply with Works Information or agreed processes.   


Schedule of Cost Components 

A Schedule of Cost Components can be used as a check list for reimbursements and cost removal within the contract. A specific issue within the NEC Option C contract is that work removed from Works Information is subsequently removed from the Target Cost using the cost based on the Schedule of Cost Components rather than Activity Schedule inclusions. The intention of this potentially contentious issue is designed to ensure pricing errors or gains are not compounded, ie. an incorrect price of tender would not be extended, increasing a contractor’s loss further. Conversely, an anticipated profit for an activity that is consequently removed would not be lost. The implication of this is to remove some traditional loss of profit claims.  


Programme 

The cornerstone of the NEC and one of the most underused aspects. The programme has the potential to make both parties’ lives easier. Early agreement of an appropriately drafted and resourced programme and its subsequent regular updates makes the proactive management of the contract and Compensation Events far easier. 

As with many aspects of the NEC, new terminology exists that the user must be familiar with. These include programming terms such as float, time risk allowances, and critical path analysis, and new meaning to terms such as acceleration. 

A perceived weakness of the NEC is its inability to ensure the contractor finishes on the completion date. The contract relies on the incentive of disallowed costs and contractor’s wish to complete works and gather final account quickly to complete on time.    


Compensation Events 

Compensation Events consider time and money simultaneously, being designed to value change during construction – preferably before the event. They offer an Early Warning process to pre-empt issues; a quotation before the event occurs; an agreement to proceed, timescale restraints and a prompt resolution of final accounts.   
The NEC aims to work preemptively and proactively and manage the future. This culminates in the 8 week window of opportunity for contractor notification of compensation events. This effectively limits the contractor to a period of time after an event occurs or is identified and failure to notify the Project Manager within this period disqualifies the contractor from seeking remedy through Compensation Events. This window is removed if the Project Manager should have advised the contractor of the event and as such Project Managers should be aware of their duty to communicate change (see earlier note regarding design issue).     


Early Warning 

An Early Warning is a notification by either party of a potential impact on time / cost / quality and is logged in the Risk Register. An Early Warning Meeting is held in order to present proposals for a solution. A response is received from the Client / Project Manager and the Risk Register is updated accordingly and Works Information changed where appropriate. Early Warnings follow the common theme of good Project Management in as much as all parties should seek to find an appropriate redress to the issue or potential issue that best reflects the delivery of the Employer’s goal, ie the delivery of the Works Information.



Publications

  • Thomas Telford Ltd (2005), NEC3 Engineering and Construction Contract (ECC), London: Thomas Telford Ltd
  • Broome, Jon (1999), The NEC Engineering and Construction Contract: A User's Guide (NEC2 Only), London: Thomas Telford Ltd
  • Trebes, Barry; Mitchell, Bronwyn (2005), NEC Managing Reality Book 1 Introduction to the Engineering and Construction Contract, London: Thomas Telford Ltd



Self-Assessment Task

  • Discuss the ways the NEC contract offers a flexible approach.





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