Whilst NEC has been in operation since 1993, it was in 1995 after the publication of Sir Michael Latham’s report, which describes the use of NEC as “extremely attractive”, that it became what is now the go to contract for major infrastructure contracts in the UK.
NEC 3 was published in 2005 and updated in 2013. The latest edition, NEC 4, was released in 2017 and has been pitched as evolution not revolution, incorporating feedback from industry experts, clients, and contractors in order to deal with common issues that arose between the parties when administering NEC3.
At the NEC Users Group Annual Seminar in June 2017, the following three core drafting principles were listed as having been used when drafting NEC4:
- Stimulus to good management
- Support the changing requirements of users
- Improve clarity and simplicity
NEC4 includes improvements that are made to ‘fix’ any issues of ambiguity, including loop holes that allowed slack practice to cause issues with NECs pro-active approach to project management. For example, the lack of a deemed acceptance provision for programme submissions and the introduction of additional clauses such as the use of Senior Representatives to aid in dispute resolution before commencing adjudication.
What has been amended, updated or improved?
A number of subtle changes have been made to pull NEC4 inline with industry standards such as:
‘Works Information’ is renamed the ‘Scope’. Whilst the term Scope was already in use on NEC Professional Service Contracts (PSCs), in the Engineering and Construction Contract (ECC) and the Term Service Contract (TSC) it was Works Information and Service Information. A uniform use of the ‘Scope’ across the differing forms makes sense.
Contracts are now gender neutral. For example, where previously a passage would read, “He gives an instruction”, it now reads “the Project Manager gives an instruction”. This is reflects the drive for diversity in the construction industry.
Reference to client
Reference to the ‘Employer’ has been replaced with ‘Client’ to pull NEC in line with standard industry terminology.
On most projects, risk registers are managed by the client, contractor, or jointly managed. In NEC3, an ‘Early Warning’ had to be accompanied by a risk reduction meeting. The ‘Early Warning’ was then entered onto a risk register. This caused confusion as to how to differentiate between the two and therefore the true intent of how to manage early warnings under NEC3 felt somewhat lost. However, NEC4 now refers to the early warning register and early warning meetings, meaning that risk management should proceed as normal via actively managing a live risk register whereas the early warning register will serve as an agenda for the next early warning meeting.
In terms of value engineering (VE) options, under NEC3 target cost options there was the mechanism for the contractor to propose VE, which if accepted would not reduce the target cost but allowed the saving to be shared between the Employer (now Client) and the Contractor. However, for the priced Options A & B there was no such provision, presumably as it was perceived that the Employer would gain no benefit of accepting alternative requirements or a different product. However, under NEC4 this as now been resolved by the introduction of a ‘value engineering percentage’ which is entered in the contract drafting. The principle here is that the prices come down by the value of an agreed compensation event multiplied by the percentage stated, again a sensible amendment to the standard form.
PM response to programme submissions
In the absence of a response from the Project Manager, deemed acceptance of compensation events was available to contractors through the provision of clause 62.6 of NEC3. However, NEC3 was conspicuous in the absence of any such provision in regards programme submissions. In the event the Project Manager did not respond it simply meant there was no accepted programme. This caused issues with modelling compensation events into the latest accepted programme if that programme was out of date and not reflective of actual progress.
However, under NEC4 a similar provision to clause 62.6 exists whereby, in the absence of a response, a contractor can serve a notice which after a further week of no response results in the programme becoming ‘deemed accepted’.
Additional employer risks
In Contract Data Part 1 of NEC3, the Employer could enter ‘additional Employer Risks’ which in the event they occurred would trigger a compensation event pursuant to Cl.60.1 (14). Not all Employers realised what they were entering here would lead to a compensation event, they actually meant to enter ‘the following matters will be included in the Risk Register”. This put an obligation on the contractor to add these to the risk register so they could be managed but if they did occur would remain the contractors risk.
To avoid this confusion, rather than additional Employer Risks, NEC4 now states “additional Client liabilities” which is a drive to make the person drafting the contract understanding the ramifications of their actions.
Application for payment
In terms of payment, whilst the Project Manager is to assess the amount due under NEC3 and this has not changed in NEC4, but there are now express obligations on the Contractor to submit an application for payment before the next assessment date and obligations on the Project Manager in terms of what to do in the event no application for payment is received. The process has not fundamentally changed but the layout of obligations on the parties is clearer.
In NEC3 there was the “direct fee percentage” and the “subcontracted fee percentage” with the premise being the subcontract fee would cover the subcontract overheads and profit whereas the direct fee percentage would cover the contractors. This was deemed to be ambiguous in its administration, leading to confusion and many clients amending contracts in order only one fee applied.
NEC took feedback from the industry on this subject and now under NEC4 there is only one “fee percentage”.
Schedule of Cost Components
Defined Cost under NEC3 was amounts due to subcontractors plus a number of other conditions and the Schedule of Cost Components less Disallowed Cost. However, for Options C, D or E the Shorter Schedule of Cost Components could be used but only by agreement and for ECC contracts, only for assessing compensation events.
For simplicity in NEC4 there is now the Schedule of Cost Components, and for Options A and B the Short Schedule of Cost Components. Also, the Schedules now include subcontract cost, therefore when thinking Defined Cost, you only need to refer to the Schedule or Short Schedule (notwithstanding the need to consider Disallowed Cost) and apply the Fee.
Working Area Overhead
In NEC3 Options C, D & E you could apply the Working Area Overhead to the cost of People with a view this would cover the administrative burden of signing off on the cost of stationary and toilet roll etc. In real terms, it meant the contractor had to separate costs out into claimable piles, whereas now under NEC4 these items are payable as Defined Cost, thus reducing the admin burden.
Defined Cost plus the Fee
On a similar theme to the Working Area Overhead, previously under NEC3 you could operate percentage uplifts for People Overheads and Manufacture and Fabrication Overheads, whereas now under NEC4 contractors simply claim Defined Cost plus the Fee.
Cost of preparing compensation events
Under NEC3 the Project Manager could request a quotation for a proposed compensation event but if, upon receiving the quote, they decided not to implement it then under Options A and B the contractor would be left out of pocket for recovering their costs of preparing the quote. Equally, under an Option C or D the Defined Cost would be paid but there would be no compensation event.
Feedback from contractors using NEC was that they considered this to be unfair practice. In NEC4 the cost of preparing compensation events is allowable as Defined Cost and notwithstanding that, if the Project Manager decides they do want to take the quote forward this is a compensation event pursuant to Clause 60.1 (20).
However, in contracts there is a general view that contractors will have allowed for a level of pricing quotations and, unless they need to introduce additional resources to price a compensation event, what is there to be compensated for? Therefore, even with the new compensation event clause this issue remains.
Under NEC3 quotations for compensation events are to be priced based on the Defined Cost of work already done, the Defined Cost of works not yet done which often led to ambiguity if works had already started but had not yet finished. In NEC4 this has been clarified by using the ‘dividing date’ which is described as the “date of the notification of the compensation event”.
When the split of incurred versus forecast costs is to be applied, when assessing any delay impact in NEC4, the Contractor is to use the accepted programme current at the dividing date. Contrast this to NEC3 where it stated assessment was to be against the accepted programme.
Option Clause X10 “Information Modelling” requires contractors to provide an Information Execution Plan. This is regarding BIM albeit referred to as ‘Information Modelling’ and is helpful as many contracts using NEC3 ECC required amendments via a Z Clause to reinforce the need for a BIM execution plan that meets the client’s requirements and more so the UK Governments BIM mandate for the construction industry.
The Contractor’s Design
In terms of X15, under NEC3 titled “Limitation of the Contractor’s liability for his design to reasonable skill and care” and in NEC4 titled “The Contractor’s Design”, the switch from the contractor being liable for reasonable skill and care to ensure his design complies with the Works Information under NEC3 to skill and care normally used by professionals designing works similar to the works which in effect puts the burden of proof to evidence such a failure onto the client.
Notwithstanding this, under NEC4, X15 now includes the requirement for the contractor to provide PI insurance reflective of the contract requirement.
Senior Representatives in dispute resolution
In terms of the standard NEC dispute resolution options for contracts inside (Option W1) and outside (Option W2) of the Construction Act, there is a provision for ‘Senior Representatives’ to try and resolve a dispute before adjudication is launched. This operates fine for contracts that are outside of the construction act where for those inside the provision can only be entered into the contract by agreement as the right of the parties to refer to adjudication cannot be removed.
Cost of people
For NEC3 ECC contracts, the cost of people needed to be in accordance with the Schedule of Cost Components, which involved off site audits at the contractor’s head office to review payroll costs plus drilling down into all tax liabilities etc to establish the true allowable cost. If you contrast this to NEC3 PSCs which had the option to use their tendered people rates thus avoiding almost all the audit burden.
However, under NEC4 the PSC states Defined Cost is as per the Schedule of Cost Components as opposed to NEC3 which stated the Time Charge was staff rates multiplied by the staff time.
What is new?
There are some straightforward additions to the suite of contracts in NEC4 such as the introduction of a Professional Services and Term Service Subcontract. Also, a DBO (Design Build Operate) Contract.
In terms of dispute avoidance there is a new Option W3 for a Dispute Advisory Board. This is reflective of similar principles in international contracts such as FIDIC and is the NECs attempt to encourage the use of its contracts overseas.
Clause 18 in NEC3 is “illegal and impossible requirements” but a new clause 18 is inserted into NEC4 titled “Corrupt Acts”. The NEC3 clause required the contractor to inform the Project Manager of an illegal requirement whereas in NEC4 the Contractor “does not do a Corrupt Act” and there is now the option to terminate in the event a Corrupt Act is carried out.
There are also new clauses 28 “Assignment” in regards the transferring of rights to another party and new clause 29 “Disclosure” which restricts the contractor’s ability to publicise the works without the client’s agreement.
There are also new Secondary Option ‘X’ Clauses; X21 ‘Whole Life Cost’ which gives the contractor the option to propose changes to the Scope that will give the client a benefit of “reducing the cost of operating and maintaining the asset”. Also, X22 “Early Contractor Involvement” which includes a two-stage process set against a budget as defined in the Scope. In practice this is usually stage one, design then stage two, construction, set against an overall budget. It can only be used with Options C and E.
In terms of final accounts NEC3 stated the last date to make an assessment of the amount due was four weeks after the Supervisor issued the Defects Certificate. However, NEC4, Clause 53 has introduced a new process including timescales to agree the Final Assessment.
Are there any circumstances where NEC3 is still relevant?
NEC3 remains in use on many government contracts for major infrastructure projects and this will no doubt continue. There is no immediate need to rip up those agreements and reissue them under NEC4. However, when these frameworks come up for renewal or new contracts are procured you might struggle to make a case to continue using NEC3 when so many of the pitfalls have been addressed in NEC4.