NEC Contract Options | C-Link

You’ve heard about the NEC Contract before (and no, we’re not talking about the big tin shed in Birmingham!), but you usually use the JCT. This article provides an overview on the NEC Contract options, advantages/disadvantages and whether it’s the best option for your upcoming project. We go into detail on every Option, from Option A through to Option F.

Table of Contents

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About the NEC

NEC (New Engineering Contracts) (or the NEC 3), first published in 1993, is a suite of end to end project management focused contracts that define legal relationships and empower users to deliver projects:

  • On time
  • On budget
  • To the highest standards.

The NEC is designed to be highly flexible for use across all sectors. This includes public and private, buildings and infrastructure, plant and equipment. It’s worth noting that as a QS/PM you may work on legacy projects that use the NEC3 version. The NEC4 is now available for upcoming projects, which is an evolution of NEC3 to meet new market demands, expectations and feedback from NEC3 users.

Why the NEC?

Simply put, it’s black and white. Intended to be less adversarial than other popular forms of contract – like the JCT – and it’s uniquely designed with three key characteristics:

  1. To stimulate good management between parties (e.g. the developer and contractor) and by extension the associated works on site
  2. To be used in a wide variety of commercial situations
  3. To be clear, simple and written in plain English, without the legal jargon

It also has a proven record on some of the UK’s most complex and demanding projects, such as Crossrail and the London Olympics.

NEC Structure

The NEC has a unique structure. It’s suitable for working on a range of project types, interfacing with all ends of the construction supply chain cycle.

It covers WORKS

Procurement such as the construction, refurbishment and decommissioning of buildings, structures, process plants and infrastructure. Example developments include; houses, schools, hospitals and leisure facilities to infrastructure for water, energy, transport, industry and waste.

It covers SERVICES

Procurement of professional services such as engineering, architectural, project management and consultancy works. It also covers support services such as facilities management, cleaning, catering, security, maintenance and data processing. Ideal when offering a turnkey development.

It covers SUPPLY

Procurement of high-value goods and associated services such as transformers, generators, rolling stock, cranes, gantries and complex plant. It also allows for lower-risk items such as building materials and products, stationery, personal protective equipment and parts. All the things needed to fuel the build phase of your development.

NEC Contract Options Image

Figure 1: Illustrative graphic of the NEC suite of contracts [Source: https://www.neccontract.com/About-NEC/How-NEC-Contracts-Works]

Operational Ethos

As with all projects, successful teamwork helps keeps the cogs of business turning. Using the NEC requires all parties to enter into contract with a collaborative mind set and adherence to the contractual procedures.

Unlike the JCT, the leader on an NEC development is the Project Manager (not Contract Administrator). It includes a range of subtle differences in key terminology and new terms such as “Compensation Events”. Therefore, training is important for effective operation.

It’s a highly ‘paperwork’ focused system and there are many cloud-based solutions available to make NEC management more efficient. You need to consider whether you have the appropriate human resource in place. The use of NEC is a big culture change. You need to allow for ‘hard’ skills such as programming and forecasting, as well as ‘soft’ skills, such as negotiation.

If you do have a team available to administer the contract, the NEC’s increased transparency and greater compliance will help deliver a successful project.

Suite of Contracts

The NEC can be used for various stages of your development, but what are the specific contracts that can be used and in what scenario?

Below, we’ve reviewed each type of NEC Contract with a brief explanation to give an understanding of what may be best for you. We always recommended that you follow the NEC guidance notes and flow charts shown below (sourced via the NEC website) if you want to learn more about an NEC Contract option.

NEC3 Suite

ECC Engineering and Construction Contract – this is the core document from which the Options A-F are extracted. It contains all core clauses and secondary option clauses, together with the schedules of cost components and forms for contract data.

Core clauses include:

  1. General
  2. The Contractor’s main responsibilities
  3. Time
  4. Testing and Defects
  5. Payment
  6. Compensation Events
  7. Title
  8. Risks and Insurance
  9. Termination

Developers most commonly use the Engineering and Construction Contract (ECC). It covers any level of design, with the flexibility to be used in the appointment of a contractor for engineering and construction work. It includes core clauses, such as Payment, which are vital when managing cashflow. Then there are secondary clauses, such as X16 in relation to retention, offering important protection from any Contractor defects. The comprehensive set of clauses is ideal for instilling confidence with your funders in your contractual process.

ECSC Engineering and Construction Short Contract

Similar to the ECC, but where works are more straight forward and do not require sophisticated management techniques.

ECS Engineering and Construction Subcontract

Core and secondary clauses are similar to the ECC. This is a trickle down version intended for use in appointing a subcontractor where the contractor has been appointed under the NEC3 Engineering and construction options.

ECSS Engineering and Construction Short Subcontract

Similar to the ECS, but where works are more straight forward and do not require sophisticated management techniques.

FC Framework Contract

The Framework Contract is intended for use in the appointment of one or more suppliers to carry out construction work, to provide design or advisory services on an ‘as instructed’ basis over a set term. For example, you are working on a phased development scheme and have multiple package elements of the same nature. This contract could be a good solution to lock in a supplier early and ensure consistency (be it rates, payment terms, timing etc) over the total development duration.

TSC Term Service Contract

This contract could be used for the appointment of a supplier for a period of time to manage and provide a service – for example site security. This document contains the core clauses, the three main option clauses, secondary option clauses and contract data forms.

TSSC Term Service Short Contract

Similar to the TSC, but where works are more straight forward and do not require sophisticated management techniques – imposing only low risks on both the Employer and Contractor.

PSC Professional Services Contract

The PSC is intended for use in the appointment of a supplier to provide professional services.  It can be used for appointing project managers, supervisors, designers, consultants or other suppliers under NEC contracts. It can also be used for appointing suppliers on non-NEC construction projects or for non-construction projects. Useful if dealing with previous projects or indeed joint venturing on an existing live project.

SC Supply Contract

Ideal for local and international procurement of high-value goods and related services including design. Maybe high-end marble for your kitchen/bathrooms sourced from Italy.

SSC Supply Short Contract

The SSC is similar to the SC, but for use with contracts which do not require sophisticated management techniques and impose only low risks on both the Purchaser and Supplier.

AC Adjudicators Contract

Whilst you never hope to be in this position, the AC is used to decide disputes under the NEC family of contracts. It may also be used for the appointment of an Adjudicator under other forms of contract.

NEC4 Suite

In March 2017 the next evolution of NEC contracts was published, in the form of NEC4. This incorporated two decades worth of user feedback. The NEC4 is designed to help more successful project outcomes by:

  • Reinforcing the ethos of project collaboration
  • Improving the triggers to avoid disputes with more effective identification/management of risk and opportunity and support of innovation through digital advances

There have been key changes to the existing provisions within NEC3 ECC and ECS Contract types. That includes early warning provisions, programming changes and early contractor involvement.

Additionally, there are two new contract types available which we have reviewed below.

DBO Design Build and Operate Contract

The DBO allows clients to procure a more integrated whole-life delivery solution. The development of this contract reflects the increasing demand for contracts extending into the operational phase. For example, PRS schemes with added services such as concierges or laundry.

ALC Alliance Contract

As suggested by the name, collaboration is at the heart of the ALC in which the client and all key members of the supply chain, called ‘Partners’, are engaged under a single contract. All members have an equal voice and share in the contract performance as whole as opposed to their own individual performance.

The ALC is designed for long term major projects or programmes of work but can also be used to deliver a programme where several lower-value projects could be combined to create a major programme of work. 

NEC Contract Options Explained

NEC Option A

NEC Option A

What is NEC Contract Option A (Priced Contract with Activity Schedule)?

Option A is linked to a contract programme with a schedule of activities where each is allocated a price. For example “man-safe installation”. These two documents would be prepared as part of the tender.

The advantage of using an activity schedule is that it simplifies the administration of the interim payment process. With subsequent interim payments being made against the completion of each activity – so no partial payments.

In each interim assessment, the sum that is due is defined as the total of:

  1. Each group of completed activities (those without defects)
  2. Each completed activity not in a group.

Under Option A, the activity schedule is a more important document than, for example, under Option C. This is because of the significant effect on the contractor’s cash flow, directly affecting the timing and payment value. As a developer, you may need to consider this if procuring subcontractors.

When should you use Option A?

Option A within the Engineering and Construction Contract (ECC) is often used on projects such as infrastructure, buildings, highways and process plants. It is used for the appointment of a contractor for engineering and construction work, including those with a level of design responsibility.

Examples of projects which have used Option A with a Priced Activity Schedule, include:

  • Battersea Cable Tunnel, London (UK), £9 million value;
  • Guy’s Hospital, Great Maze Pond, London (UK), £100 million value;
  • Glenwood School, Essex (UK), £14.5 million value;
  • Oxygen Train 17 integration, Secunda (South Africa), £60 million value.

Programme Management

An accepted programme is a fundamental to any NEC Contract where Option A is attached. Unlike other contract forms, there is a requirement for the contract to be regularly updated as it forms the baseline against which future accepted programmes are measured. The client, contractor and project manager all having a key part in the acceptance process.

The Project Manager’s acceptance of the programme, including any later revisions, is significant under the contract. It represents recognition from the Project Manager’s perspective that the programme is realistic, practical and includes the information required under the contract. Albeit as per Clause 14.1, it does not take away liability from the contractor to comply with their obligations.

It is prudent to note that the maximum timescales for response within the NEC Contract do not practically work on projects where there is significant change. Efforts should be made by the project team to shorten timescales where possible for the benefit of all.

Early Warning Notices (EWNs) are a simple but important feature of the NEC: collated into a risk register, they place responsibility on both parties to notify one another of any matter that could affect time, cost or quality. Whilst the programme requirements under the contract are the minimum required, you can always show more. This includes resolved/unresolved EWNs to encourage project team decision making by the project team.

Managing the contract programme process is not easy on any large project and key programme considerations are:

  1. Provide enough detail to cover key activities from third parties and/or employer to clearly demonstrate effect of change
  2. Utilise information from the entire project team
  3. Regularly update the programme, ideally once a week
  4. Highlight compensation events at the time they occur to assess their true effect. Not doing so, will mean that they will only become more subjective to both parties with time and other ongoing events
  5. Proactively manage the acceptance of programmes
  6. The parties must recognise and manage the implications of any Z clauses

Variation Administration

Compensation Event (CE) is the all-encompassing term used within the NEC, equivalent to the JCT term “variation” i.e. events which have a time and/or cost impact. Do not be misled by the word compensation, as the price can go up or down.

As a developer you will be presented with compensation events by the contractor where it is deemed the contractor has incurred a time/cost implication due to no fault of their own. For example, where the developer has directed an additional external canopy to be installed. Compensation events can also occur without either party being at fault, for example adverse weather. In this situation, a compensation event would be used to allocate risk between parties.

Option A, clause 60.1 contains 19 events as standard. The employer can add further events within the Z clauses. Administrating compensation events can be segmented into four parts:

  1. Notification
  2. Quotation
  3. Assessment
  4. Implementation
1. Notification

For instructed Compensation Events such as remedying a defect by others, the Contractor will be notified by the Project Manager who will ask for a quotation. For all other events, the Contractor will notify the Project Manager within eight weeks of being reasonably aware. On receipt of an instruction requesting quotation, the contractor will return their price and inclusions/exclusions, within the stated timescales.

Any response to a Compensation Event notice will be on a ‘Yes/No’ basis stating the reasons as to why. These reasons could include:

  • “The event is the Contractor’s fault”
  • “It has not occurred or is not going to occur”
  • “It has no effect on the Defined Cost and the Completion Date”
  • “It is not one of the listed events”

In all other cases, the reply is ‘yes’ along with an instruction to the Contractor to provide a quotation.

2. Quotation

Quotations must deal with the effects of time and money associated with the compensation event. On receipt of a quotation, the Project Manager must respond within 2 weeks (or an agreed and notified extended period) and the reply must be one of the following four responses:

  • Acceptance
  • Confirmation that the CE will not be instructed
  • Notification that the quotation has not been prepared properly, reasons why and an instruction to re-submit
  • A notification that the project manager will instead assess the CE event
3. Assessment

The NEC3 philosophy is that neither party should be disadvantaged or should unfairly gain an advantage from the occurrence of a compensation event. Instead, any assessment or valuation is to be based on the following:

  • Actual defined cost for work already done, plus Fee
  • Forecast defined cost for work not yet done, plus Fee
  • Planned completion as show on the latest accepted programme
4. Implementation

When a Compensation Event is implemented it means it is finalised and cannot be changed by the parties, only by an adjudicator. A Compensation Event becomes implemented when:

  • The Project Manager accepts the Contractors quotation
  • The Project Manager notifies the Contractor of his assessment
  • The Contractors quotation is treated as having been accepted by the Project Manager

Sanctions

If a Contractor fails to notify the Project Manager of a Compensation Event within 8 weeks of becoming aware, the Contractor loses the right to claim any additional time or money. Unless it was the project manager that should have notified the contractor.

If the Project Manager fails to reply to a notification of an event by the Contractor within 1 week, the Contractor may notify the Project Manager of that failure. If the failure continues for a further 2 weeks after the reminder, it is deemed that the Project Manager has accepted that the event notified is a compensation event and an instruction issued to provide a quotation.

If the Project Manager fails to reply to a quotation or to assess a quotation within the allowed time, the Contractor may notify the Project Manager of that failure. If the failure continues for a further 2 weeks, the Contractor’s quotation is treated as being accepted.

There is no express sanction for a situation in which both the Project Manager and the Contractor entirely fail to notify an event which the Project Manager should have notified save that only notified events are compensation events and no event can be notified beyond the Defects Date.

Price Management

Under Option A, the ‘Activity Schedule’ needs to be carefully prepared in order for it to be effectively operated. A failure to do so can result in adverse commercial consequences. Keep in mind the following key points:

  • Completed ‘activities’ only – Contractors are only entitled to be paid for completed activities. In theory, the entirety of the works could be expressed as one singular activity. In which case, the Contractor would only be entitled to claim payment after completion of the whole of the works. The Contractor will therefore be seeking to ensure that the Activity Schedule is broken down to maximise their cashflow.
  • Unfixed materials – Under Option A there is no automatic right for contractors to claim the value of unfixed materials. A Contractor is only entitled to payment if the Activity Schedule contains specific activities for their delivery.
  • Design services – Design services should be considered when preparing the Activity Schedule. A Contractor should look to apportion the price for the design services against specific activities within the Activity Schedule.
  • Provisional sums – The NEC does not cater for provisional sums. If an element of the works is incapable of being accurately specified at the outset then it should be described in as much detail as possible in the technical documentation, together with the appropriate assumptions. If the scope of work or assumptions change, they may be addressed by way of the compensation event mechanism.

Summary

The activity schedule is the key fundamental when using NEC Contract Option A. For a developer it’s beneficial as the contractor cannot claim monies for a work element not satisfactorily complete. Careful consideration is required during tender to ensure the schedule is structured in such way as to best manage cash flow.

In an ideal world, the activity schedule will tally like for like with the project programme. Albeit this be subject to revision to include for EWN’s, compensation events and weekly programme reviews. Underpinning the successful implementation of NEC Contract Option A is project team and communication flow to ensure the programme and activity schedule is regularly updated.

NEC Option B

NEC Option B

What is NEC Contract Option B (Priced Contract with a Bill of Quantities)?

Compared with NEC Option A, the main difference with NEC Option B is the use of a bill of quantities – similar to that of a JCT. Such a document would typically be prepared by either the Quantity Surveyor or an external cost consultant and is appended in this form of NEC Contract.

Price Management

The Bill of Quantities is linked to project specific measurements headed under specific drawing and specification references, for example, H92, “Rainscreen Cladding”. It is important the quantities within this document accurately reflect the realities of the tender and contract documentation, as this acts as your baseline and as a measure against any future change management e.g. omissions and/or additions.

Unlike Option A where specific elements of work within an activity schedule are certified for payment upon full completion, when using Option B the Contractor is entitled to be paid interim payments based on Percentage of Completion of each BoQ Item in line with the contract payment schedule.

The advantage of using this method is that it provides a greater flexibility for all parties in terms of cash flow. Conversely it can become contentious, especially where you have multiple elements of work built into a singular rate which are not so easy to assess, for example stick curtain walling.

We recommend that at the outset of a project respective parties collaboratively review the BoQ to identify elements/rates that could prove troublesome and devise a method to simplify assessment. In the case of a singular supply & install rate for stick curtain walling, proportionally split the rate to reflect the main elements involved, for example; brackets (25%), mullion (20%), transom (20%), glazing (25%) and silicone (10%) etc. In doing so, any potential for disagreement is removed and the agreement is inserted into the contract.

Compared with the use of an activity schedule under Option A, operating a BoQ under Option B involves a higher level of site assessment by the surveyor during the build phase. As payments are certified upon full completion of each activity under Option A, there is a greater responsibility on site/project management to inspect works during the build phase and the surveyor towards completion. Under Option B, periodic site assessments (as dictated by the contract payment schedule) would be required. To help resolve any potential discrepancies between a contractor’s application and project manager/quantity surveyor’s assessment, we’d suggest conducting a joint survey at each assessment interval.

Of the ten available contract types under NEC 3 or twelve under NEC 4, there are seven under which Option B is applicable. These include:

  • ECC Engineering and Construction Contract
  • ECSC Engineering and Construction Short Contract
  • ECS Engineering and Construction Subcontract
  • ECSS Engineering and Construction Short Subcontract
  • TSC Term Service Contract
  • TSSC Term Service Short Contract
  • PSC Professional Services Contract

When should you use Option B?

Option B within the Engineering and Construction Contract (ECC) can be used on projects such as infrastructure and buildings. But, it is preferred for the construction of buildings as opposed to infrastructure.

Example projects which have used Option B with a Bill of Quantities, include:

  • Welsh National Sailing Academy, Wales (UK), £8.9 million value
  • Tsuen Wan Sewerage, West Kowloon (Hong Kong), £14 million value
  • Sham Mong Road Footbridge, Kowloon (Hong Kong), £22 million

Programme Management

Within any NEC Contract option, a mutually accepted programme is fundamental. As there is a requirement under Option B to regularly update the programme to reflect any acceleration, delay or re-sequencing etc. the key points to remember are:

  • The onus is on the contractor to submit a programme to the Project Manager
  • A programme should demonstrate actual progress and its effect on the timing of the remaining works
  • The impact of any actioned compensation events
  • Measures to remedy any delays and/or notified defects
  • Any other changes proposed by the contractor

Not only is the information within the programme important, but also the timing. Always consider that:

  • A programme must be submitted within the period for reply upon receipt of request from the Project Manager
  • It can be submitted when the contractor chooses to
  • At no longer intervals than those stated within the NEC Option B Contract Data.

The Project Manager’s acceptance of the programme, including any later revisions, is significant under the contract. It represents recognition from the Project Manager’s perspective that the programme is realistic, practicable and demonstrates the information that the contract requires.

Variation Administration

Compensation Event (CE) is the all-encompassing term used within the NEC, equivalent to the JCT term “variation” i.e. events which have a time and/or cost impact. Do not be misled by the word compensation, as the price can go up or down.

As a developer’s Project Manager or Quantity Surveyor, you will be presented with compensation events by the contractor, where it is deemed the contractor has incurred a time/cost implication due to no fault of their own. For example, the developer has directed an additional number of windows to be installed. Compensation events can also occur without either party being at fault, for example adverse weather. In this situation, a compensation event would be used to allocate risk between parties.

Administering a compensation event can be categorised into four parts:

  1. Notification
  2. Quotation
  3. Assessment
  4. Implementation

One important take-away consideration is that a Project Manager has the right to assess a compensation event on behalf of the contractor in cases where:

  • The contractor has not submitted a quotation and details of his assessment within the time allowed
  • The Project Manager decides the contractor has not assessed the compensation event correctly and does not instruct submission of a revised quotation
  • The contractor has not submitted a programme alongside the quotation as required by the contract
  • The quotation programme submitted by the contractor is not accepted for one of the reasons stated within the contract

It’s imperative that the Contractor always submits its Compensation Events early and reasonably to avoid the need for assessment to be taken out of their control.

Summary

The Bill of Quantities and Programme are the key fundamentals when using NEC Contract Option B. As a PM or QS who has previously worked with the JCT form of contract, it offers a familiar link into the world of NEC contracts. That said, careful consideration is required during tender stage to ensure the BoQ is structured in such a way as to best manage cash flow and reduce issues in future assessments.

As with any successful contract administration, the successful implementation of NEC Contract Option B, is collaboration and communication.

NEC Option C

NEC Option C

What is NEC Contract Option C (Target Contract with Activity Schedule)?

NEC Option C is a cost reimbursable contract set against a target contract price, more commonly known as the target cost.

The NEC defines cost through its schedule of cost components (SoCC). There is also definition as to what is allowable and disallowable. The Contractor is paid his ‘defined cost’ on a monthly basis after presenting his application for payment to the Project Manager, who accordingly assesses the amount due.

If you’re considering whether to use this form of contract, the key question to ask yourself is: what is the likelihood of overspending on your project when delivering against the target? Alternatively, what are the chances on an overall saving? If the Contractor overspends and exceeds the target price of the contract then the Contractor and Employer will share this overspend. This is called the ‘pain share’. Equally, if the Contractor delivers the final cost within the target price then this benefit is called the ‘gain share’ or, formally known as the ‘share ranges’.

Contracting parties don’t intend to overspend but it remains a possibility. The best tactic to avoid this is to set your target contract so that it offers a real incentive to the Contractor and Employer to collaborate in successfully delivering the project. This ‘shared’ saving creates an ideal win-win for all parties.

We recommend that you avoid competitively tendering a target cost contract as this puts the onus on Contractors to provide an unsustainable price to win the contract. When this happens, you incentivise the Contractor to chase contract variations or ‘compensation events’ and increase the target price as opposed to delivering real cost savings.

How do you avoid this scenario? Negotiate a target contract with all parties with complete transparency on the following:

  • What is included within the price?
  • The extent of the scope
  • An agreement of rates up front
  • An understanding between all parties of where responsibility lies for each risk, with appropriate allowances made

Contract Arrangement and Setting Up

The commercial risk of defined cost expenditure is shared, so now you need to set the share ranges to an appropriate level. A 50/50 share on any savings and overspends is the most equitable. However, savings are often broken down into increments. For example, on the first 10% of overspend or underspend the split may be 50/50, but then for any further increases in overspend the Employer wishes to take less of the burden so sets the split at 70/30 to the Contractor.

To offset this the Employer also defines the opportunity for any gains over 10% at the same ratio. There are many ways to balance the incentives, but you should focus on incentivising all parties to work together with a common aim to successfully deliver the project.

A charge for overhead costs incurred in the working area is calculated by applying the working area overhead to the cost of people as described in the SoCC. You should inform your decision here on how the works are likely to be delivered. For example, if the Contractor decides to self-deliver part of the works using their own labour instead of subcontracting, this could result in a large liability if a high percentage is used. For this reason, you should carefully consider the working area overhead, alongside the fee with scenarios run, as to all possible outcomes when making tender assessments.

Once in contract, pay attention to the monthly programme updates and the progress made against the baseline. Study this progress against the Contractor’s monthly forecast updates of their defined cost to completion to ensure one reflects the other.

Programme Management

The Employer sets the parameters of when the contract should be completed by, when the Contractor can have access to the works and the contract start date. The Contractor then provides a programme that delivers to these constraints. The Contractor must detail how the activities on the Activity Schedule relate to the operations on each programme. Here, you should provide an Activity Schedule to a suitable level of granularity such that programmes can be assessed in detail.

Once a programme is reviewed and acceptable, it becomes the baseline programme with progress performance measured against it at the stated intervals in the Contract Data. Each month the Contractor will input actual progress against this baseline, which will provide a ‘planned completion date’ against the ‘contract completion date’.

On a lump sum or re-measurable form of contract, the financial risk of finishing late almost always resides with the Contractor, but here the risk is shared. It’s important to create a detailed programme that is:

  • Fully linked to logic
  • Resource and cost loaded
  • Complete with a clear critical path

All points above are paramount to providing real intelligence in measuring levels of manpower required versus actuals. On a project of particular complexity or sizeable duration, a detailed programme can accurately provide a likely end date and final bill.

When reviewing programmes, consider the Employers obligations to keep programming and avoid these activities being manoeuvred onto the critical path, which in most cases can be used to derive entitlement to a compensation event. Such sharp practices by Contractors should be dealt with before agreeing the baseline programme.

Financial Management

The Contractor provides forecasts of the total defined cost for the whole of the works at intervals stated in the contract data. In nearly all cases it makes sense to match this to the same intervals as the revised programmes. Every four weeks is common practice. They are also to provide an explanation of any changes between forecasts. Getting early agreement on format is important here.

If you master the programme and receive robust and accurate cost forecasts that match the rate of progress, you’ll be on the front foot in terms of being able to make decisions in good time as opposed to being reactive to issues as they arise.

The schedule of cost components dictates what can be claimed, or is allowable, in terms of defined cost and therefore what is not stated here is by default deemed to be included in the fee. Either listing a breakdown of headings for the fee or requesting one as part of a tender return is good practice as it can avoid any ambiguity or inconsistencies between the parties later down the line. It can also help in normalising any tender returns.

Value Management

It’s critical to mitigate any changes in good time and issuing early warnings should not be something administered by the Contractor alone. The contract states that early warnings can be issued if either party becomes aware of any matter that could increase the total of the prices.

Compensation events are administered in the usual fashion i.e. they are based on actual defined cost or forecast defined cost including any affect to the planned completion date plus suitable risk allowances. Once agreed the target contract price is increased by the value of the compensation event.

When should Target Contracts be used?

Like any contract price, the target contract is only as good as the Scope, Works Information or general contract drafting that supports it.

What must be considered is the stage of project development at which you are procuring. If you’re at early stage development works and the Employer wishes to procure a full detailed design and build, be prepared to agree to a large amount of risk incorporated into the price and then manage that risk accordingly. Conversely, if the scheme is more developed, an Employer should expect a more palatable value of uncertainty risk. Experience tells us that when a detailed preliminary design, plus a suitably worded output specification, is used to provide an Activity Schedule, then you’ll likely set a realistic Target Contract.

Specific Contract Nuances

Be aware of the contract nuances in NEC Option C, such as Disallowed Costs, which can be invoked by the Project Manager if she decides that cost has been incurred only because the Contractor did not give a required early warning. Either party can issue early warnings, therefore to operate this clause the Employer will have to demonstrate they were not aware of the issue at the time themselves. These ‘nuances’ can also be used ‘when the Project Manager decides’ as opposed to by agreement. Maintaining ‘mutual trust and cooperation’ is vital.

The Project Manager can disallow costs for plant and materials on the basis the costs incurred were not to Provide the Works. Similarly, disallowed costs can be invoked if resources were not used to Provide the Works or not taken away from the Working Area when requested by the Project Manager. This offers some protection for the Employer when certifying payment and puts the onus on the Contractor to adequately manage their costs or face the risk of not being paid for poor cost control.

When administering payment, be aware that in assessing the Price for Work Done to Date, the Project Manager must forecast Defined Cost, which will have been paid before the next assessment date. This exerts a certain amount of trust in the Contractor that they will indeed make such payment before the next assessment date. However, the Contractor must keep proof that payments have been made and such records are to be made available to inspect at any time within working hours.

The contract also prescribes that the Project Manager makes a preliminary assessment of the Contractor’s Share at Completion, then later a final assessment based on the final Price for Work Done to Date and the final total of the Prices.

This approach could mean the Employer overpays the Contractor until Completion is achieved in the event of a likely overspend. This is not an ideal situation and bad practice can occur whereby Contractors can delay completion until they have pressed their case for more compensation events to prolong any negative certificate being issued.

To avoid this occurring, Z Clauses are often drafted to allow the Project Manager to make interim assessments of the Contractors Share if forecasts of the final Price for Work Done are predicted to be more than the final total of the Prices.

Summary

If set up correctly, with suitable buy in from all operating parties, NEC Option C can be a success. It requires a full open book approach and policy on Defined Cost to be in place during the administration of the project. Any changes must be agreed with a similar level of opportunity as the original Target Contract to maintain the same level of incentivisation through the contract term.

However, what should be remembered is that if early indicators are showing signs that all is not going to plan, take immediate corrective action to mitigate the impact for the benefit of all parties.

NEC Option D

NEC Option D

What is NEC Contract Option D (Target Contract with a Bill of Quantities)?

You can consider Option D to be like Option B, but with a twist. The similarity? They both have a Bill of Quantities.

The fundamental difference and unique feature of Option D? A contractual mechanism which enables the consultant team and/or contractor to share in any cost saving benefit, but also a proportion of any cost overrun. Typically, at a pre-determined ratio.

If you are unfamiliar with a Bill of Quantities, this is a document prepared by either the Quantity Surveyor or an external cost consultant and incorporated within the contract. It provides measured quantities linked to project specific drawing and specification references, for example “J42 Warm Deck Roof Covering”.

It is important the quantities within this document accurately reflect the realities of the tender and contract documentation, as this acts as your baseline and as a measure against any future change management e.g. omissions and/or additions.

Target Cost Contracts

How Does it Work?

A target cost is set at the outset of a project, with cost savings and overruns shared based on a pre-agreed formula.

Bonus and penalty payments are usually capped to prevent over-zealous action towards either side of the risk/reward spectrum.

Why Use Target Cost?

With the financial risk shared between the client and contractor/consultant team at a pre-agreed proportion, target contracts often appeal to public sector developments such as community centres. They’re also suitable for projects that have a high degree of risk and uncertainty.

The case for a Target Cost is that the risk/reward element removes a pure profitability mind-set for one that is more focused on cost control and in consequence more collaborative.

With the target cost being so pivotal, there is great emphasis on an accurate Bill of Quantities and both time and care should be taken during pre-construction. If done right its use can lead to a greater flexibility for the employer, an earlier start on site, reduced potential of disputes and a greater level of trust.

How do Target Cost Contracts Compare with Other Options?
  • Versus Cost Reimbursable – Target Cost Contracts offer the contractor a greater reward and higher risk. For the employer there is lower risk/reward
  • Versus Re-measurement – A Target Cost Contract offers a greater risk/reward for both contractor and employer
  • Versus Lump Sum – A Target Cost Contract offers a greater risk/reward, including that of re-measurement

When and How to Set a Target Cost?

The earlier it is done the greater the uncertainty, but greater the potential for savings.

Under a single stage approach, a robust target cost is agreed at the start of Outline Design. Under a two-stage approach, the contractor may be engaged under a PSCA with an initial estimate refined until detailed design is ready. At which point a robust target cost can be set.

The actual figure should be calculated either via competitive tender process, direct negotiation or as set by the client. It needs to be genuine, offer the client Value for Money and be achievable by the contractor.

Elements of a Target Cost Contract  
  1. Based Cost
  2. Fee Percentage
  3. Contractor Allowance for their Risk under the Contract

Base Cost – is your defined cost comprised of the physical works required to deliver the works as defined within the Work Information? This includes: measured work, temporary works, subcontracts and preliminaries both fixed and time related.

Fee Percentage – Contents of the fee are not defined in the Contract. With any contractor costs excluded within the defined cost deemed to be included within the fee. Typical inclusions are; overheads, profit and insurance.

Risk Allowance – An allowance for the contractor’s risk, which subsequently will not be grounds for compensation events.

Target Cost Formula

A ratio will be agreed on the split for every pound saved or overspent. So, for example, it could be a 50/50 split.

There will also be a cap on any overspend share, for example 110% of Target Cost Value. And on the cost benefit share, for example 90% of Target Cost.

Which Contract is Option D used Under?

Of the ten available contract types under NEC 3 or twelve under NEC 4, there are seven under which Option D is applicable. These are listed below:

  1. ECC Engineering and Construction Contract
  2. ECSC Engineering and Construction Short Contract
  3. ECS Engineering and Construction Subcontract
  4. ECSS Engineering and Construction Short Subcontract
  5. TSC Term Service Contract
  6. TSSC Term Service Short Contract
  7. PSC Professional Services Contract

Price Management

Compared with the activity schedule under Option A, where you are only paid upon full completion of an activity, the Bill of Quantities route is advantageous to your cash flow because under Option D, the contractor is paid based on Percentage of Completion against each BoQ Item and in line with the contract payment schedule dates, which should adhere to the Construction Act.

That said, due to the fundamental nature of a target cost contract, accuracy and clarity over each bill item is important. The aim is to prevent contentious negotiations over cost benefits or cost overruns.

Programme Management

A mutually accepted programme is important. With emphasis placed on regularly updating the programme to reflect any acceleration, delay or re-sequencing etc.

Take-away points:

  • It’s the contractor’s duty to issue a programme to the Project Manager
  • It should demonstrate actual progress and its effect on the timing of the remaining works
  • The impact of any actioned compensation events
  • Measures to remedy any delays and/or notified defects
  • Any other changes proposed by the contractor

It is not only the information contained within the programme that is important, but also the timing. Always consider:

  • A programme must be submitted within the period for reply upon receipt of request from the Project Manager
  • It can be submitted when the contractor chooses to
  • At no longer intervals than those stated within the NEC Option B Contract Data

Variation Administration

Compensation Event (CE) is the all-encompassing term used within the NEC, equivalent to the JCT term “variation” i.e. events that have a time and/or cost impact. Do not be mis-led by the word compensation, as the price can go up or down.

As a developer’s Project Manager or Quantity Surveyor, you will be presented with compensation events by the contractor, where it is deemed the contractor has incurred a time/cost implication due to no fault of their own. For example, the developer has directed an omission of revolving doors.

Compensation events can also occur without either party being at fault, for example adverse weather. In this situation, a compensation event would be used to allocate risk between parties.

Administering a compensation event can be categorised into four parts:

  1. Notification
  2. Quotation
  3. Assessment
  4. Implementation

Summary

Target Cost Contracts provide great risk/reward opportunities for both the contractor and employer. The contractual mechanism that permits sharing of any cost benefit and cost overrun helps to foster a more collaborative approach geared towards a reduction in disputes. What’s more, it goes further and sparks savings and stimulates greater project co-ordination.

A key fundamental factor to its success as a contract form – is the agreement of a robust target cost that provides:

  • Value for Money to the client, and
  • is achievable for the contractor to deliver on

If implemented in the correct fashion, it’s no surprise Option D is growing in use.

NEC Option E

NEC Option E

Option E Structure

With the intent of not going into depth on each clause, the below summarises the structure and clause content of NEC Option E:

Core clauses
  1. General
  2. The Contractor’s main responsibilities
  3. Time
  4. Testing and Defects
  5. Payment
  6. Compensation events
  7. Title
  8. Risks and insurance
  9. Termination
Dispute resolution
  1. Option W1
  2. Option W2
Secondary option clauses
  • X2   Changes in the law
  • X4   Parent company guarantee
  • X5   Sectional Completion
  • X6   Bonus for early Completion
  • X7   Delay damages
  • X12 Partnering
  • X13 Performance bond
  • X14 Advanced payment to the Contractor
  • X15 Limitation of the Contractor’s liability for his design to reasonable skill and care
  • X16 Retention
  • X17 Low performance damages
  • X18 Limitation of liability
  • Y(UK)2 The Housing Grants, Construction and Regeneration Act 1996
  • Y(UK)3 The Contracts (Rights of Third Parties) Act 1999
  • Z Additional conditions of contract
  • Note Options X1, X3, X8 to X11 and Y(UK)1 are not used

Schedule of Cost Components

Shorter Schedule of Cost Components

Contract Data 

Index

Which Contract is Option E used Under?

Of the ten available contract types under NEC 3 or twelve under NEC 4, there are seven under which Option E is applicable as listed below.

  1. ECC Engineering and Construction Contract
  2. ECSC Engineering and Construction Short Contract
  3. ECS Engineering and Construction Subcontract
  4. ECSS Engineering and Construction Short Subcontract
  5. TSC Term Service Contract
  6. TSSC Term Service Short Contract
  7. PSC Professional Services Contract

For reference, the ECC is typically the most frequently used with Option E.

NEC Contract Option E (Cost Reimbursable Contract) Explained

Option E is a cost reimbursable option, often referred to as “cost plus.” Under this option the developer will largely take on the financial risk. The contractor is reimbursed for all of their actual costs plus a pre-agreed overhead and profit percentage.

There are many scenarios where this form of contract is useful – such as when works cannot be properly defined at the project outset and/or risks associated with the works are high. For example, emergency work to a fire damaged commercial office, requiring immediate remediation to permit business re-occupation.

How is Option E Cost Reimbursable Implemented?

“Cost Plus” is not to say the use of Option E means a blank cheque book for the contractor. The terms and cost elements for which the contractor is to be reimbursed should be set out very clearly within the contract. This will include determining the direct project costs, like:

  • Site management
  • Labour
  • Material
  • Hired-in plant
  • Subcontractors.

A stark difference between NEC Option E and Options A to C is the inability to accurately plan cash flow – a drawback which affects both the developer and contractor. From the contractor’s perspective you may push to enact clauses that allow certain liabilities to be claimed early.

Option E is implemented based on ‘defined cost’ and on an open book basis. As the developer you will need to verify claimed costs and ensure they are realistic – in the case of hire-in plant this could mean maintaining a signed plant register.

As the developer you may wish to stamp out inefficiencies by incentivising the contractor through the introduction of a target cost partway through the project when better clarity is known about the scope and risks.

What is Defined Cost?

Dependant on the NEC option implemented, the definition of “defined cost” varies. Under Option E, it is the basis on which reimbursement of the contractors work to date is assessed i.e. ‘actual cost’.

Assessing actual cost is very difficult on a large and complex project, with many contractors’ costs likely not to be project specific i.e. a contractor makes a bulk material order of sand for use across multiple sites, one of which is your development site. Within Option E and its defined costs, there will be rules over what costs can be claimed and how.

In a scenario where you are using the ECC contract with Option E, defined cost is the amount of payment due for work without taking account any amounts deducted for:

  • Retention
  • Payment to the Employer as a result of failing to meet a Key Date
  • The correction of Defects after Completion
  • Payments to others
  • The supply of equipment, supplies and services included in the charge for overhead cost within the Working Areas of the contract
  • The cost of components in the Schedule of Cost Components for other work
  • Less any Disallowed Cost

Where assessment of the actual cost is not practical, Option E utilises a pre-agreed Schedule of Cost Components. The SCC is used to assess compensation events and determine the price for work done to date. It is split into the following sections:

  1. Staff
    • Considerations in assessing such costs include – holidays, sick time, overtime, benefits in kind (fuel etc), pay rises etc.
  2. Equipment and Plant
    • The agreed % fee will be applied to hire-in plant invoices. With an agreed set of rates for any contractor owned plant. For any agreed purchase of plant, payment would consider the residual value to the contractor upon completion of the project, unless the client takes ownership
  3. Materials
    • Costs would be assessed based on invoices, purchase orders and delivery notes. Pre-agreements should be made on any potential buying gains the contractor may achieve
  4. Charges
    • Pre-agreed rates on any site-specific utility charges
  5. Manufacture, Fabrication and Design
    • Pre-agreed factory hour/design rates, which consider the anticipated factory capacity required and overheads. Similarly, design rates will be set based on estimated total cost of design resource
  6. Insurance
    • Costs of procuring any project specific insurances. And potentially a proportion of any general company insurances i.e. public and employer’s liability

Verifying Defined Costs

The key to the successful operation of Option E is the verification of defined costs payable to the contractor. Takeaway points to consider are:

  • There is a need to put in place an audit process to validate contractor’s costs
  • The contractor is required to keep these records:
    • Proof of payment records
    • Communications about and assessments of compensation events for Subcontractors
    • Other records as stated in the Works Information

Disallowed Costs

Disallowed costs are those that do not form part of the agreed contract definition of a defined cost and can be ‘disallowed’ by the developer. These can include the following:

  • Costs which are part of the defined costs but have only been incurred due a failure or default of the contractor
  • Amounts not justified by the contractor’s records
  • Accruals
  • Costs incurred because the contractor did not follow a procedure within the Works Information
  • Costs as a result of early warnings which were not given

Programme Management

Like other Options, a mutually agreed programme is a key feature of Option E. In light of the high-risk projects Option E is used for (often with a lot of unknown variables), there is greater emphasis on regularly updating the programme to reflect any acceleration, delay or re-sequencing etc.

Considerations:

  • It’s the contractor’s duty to issue a programme to the Project Manager
  • It should demonstrate actual progress and its effect on the timing of the remaining works
  • The impact of any actioned compensation events
  • Measures to remedy any delays and/or notified defects
  • Any other changes proposed by the contractor

Variation Administration

Compensation Event (CE) is the all-encompassing term used within the NEC, equivalent to the JCT term “variation” i.e. events that have a time and/or cost impact.

In the scenario of Option E, without a schedule of defined works and as a cost reimbursable contract compensation events are effectively part of your contract claim for payment.

Summary

Cost reimbursable contracts are ideal in scenarios where the works cannot be accurately assessed and quantified. For this reason, it presents a higher risk for the client developer, as initially, there is no contract sum or target cost. Vitally important is the successful agreement of defined costs and their verification. Careful consideration is important before opting for this route.

From a contractor’s perspective, such a form of contract can be straight forward and lucrative, but great care must be taken to record costs as required by the contract and conduct operations in the collaborative spirit of the NEC.

NEC Option F

NEC Option F

Introduction to Option F (Management Contract)

Over the past decade the Option F Management Contract has been one the most widely used forms. This is due to the growing emergence of contractor/developers at both SME level and beyond.

It’s a cost reimbursable contract wherein the works are designed and/or constructed by multiple subcontractors who are contracted to a management contractor. The management contractor will ultimately be responsible for the procurement, co-ordination and implementation of the works in exchange for a fee i.e. the cost/tendered price of works + an agreed percentage. Often, the client takes on the financial risk.

Management Contracting Explained

Management Contracting is a procurement route where the client/developer engages the services of a third-party firm to procure and manage the necessary trade contractors to completion of the works. This may also include for cost consulting and design services, albeit the client/developer may choose to employ these services separately. It is not to be confused with Construction Management, where the trade contractors are employed directly by the client, with the construction manager acting as an ‘agent’ to oversee the works.

A management contractor will be procured early in the design process in order to best utilise their experience to advise on value engineering, risk management, buildability, cost and operational/logistical challenges.

While schemes will have budgets produced by the client/developer’s cost consultants, working with a management contractor refines the costs further. That said, price uncertainty remains until detailed design is complete and the trade packages are let because costs can only be finalised when subcontractor procurement is concluded.

The agreement between client/developer and management contractor will cover pre-construction and require a notice to proceed with construction activities. Before this point, trade contracts can be tendered but not let.

Compared with the construction management route, management contracting can be a simpler administrative process. Rather than having multiple trade contracts to administer, the client/developer only has one contract to manage. Albeit, individual trade contractor/parent company collateral warranties may still be required in the unfortunate scenario of a management contractor becoming insolvent.

The fee structure to a management contractor can be implemented in several different ways including: fixed, variable (based on costs + management percentage) or on a target cost basis. For more on this topic, see the section on NEC Option D.

Services of a Management Contractor

The services of a management contractor can be varied depending on the scope of works of the contract with the client/developer but they will often include:

  • Offer guidance on the development brief
  • Recommendation and management of project appointments (fire consultants, engineers, inspectors etc)
  • Advise on feasibility, buildability and design
  • Guidance on statutory approvals
  • Defining key performance indicators for work contractors
  • Managing mock-ups, samples and testing
  • Acting as principal contractor
  • Cost planning and control
  • Devising the project programme
  • Creating/approving risk and methodology statements
  • Tendering work packages
  • Organising and adhering to statutory requirements i.e. provision of welfare, water supply, site security, drying rooms etc.
  • Setting out main datum points
  • Provision of labour for general site maintenance/upkeep
  • Witnessing tests and co-ordinating commissions
  • Collating as-builts, O&M’s, health & safety file, F10 project notification, construction phase plan
  • Client communication and management

In addition, the client/developer can also transfer the management of design and cost consulting to the contractor.

Considerations in Appointing a Contractor

It is fair to say the reputation of a contractor is demonstrated by the character and ability of their management teams to drive a project forward while balancing cost, quality and fulfilment of the employer’s (developer’s) requirements.

The management contractor’s cost/fee can typically account for 5-7% of project total costs. If you consider this alongside the contractor’s direct influence on quality and efficiency it is easy to argue that the contractor can account for project costs fluctuating by up to +/- 10% as well.

Even within large contractor organisations, such as a Balfour Beatty or Mace, it is not uncommon to put forward the project portfolio and CV of the intended management team during tender. Be it the project director, commercial lead, site manager or planner.

The development process, from concept design to practical completion, can be a lengthy process. Be mindful that your prospective management appointees will themselves work as a cohesive team and you will be able to maintain a close rapport with them. We recommend that you conduct interviews (both in formal and informal settings) and take references in the tender process for a Management Contractor.

Programme Management

In line with previous options, a mutually agreed programme is a key feature of Option F. Some take-away points to consider include:

  • It’s the contractor’s duty to issue a programme to the Project Manager
  • It should demonstrate actual progress and its effect on the timing of the remaining works
  • The impact of any actioned compensation events
  • Measures to remedy any delays and/or notified defects
  • Any other changes proposed by the contractor

Variation Administration

In the NEC the term ‘variation’ is known as a Compensation Event (CE). It is the all-encompassing term to describe events that have a time and/or cost impact. Although do not be mis-led by the word compensation, as the price can go up or down.

As a developer you will be presented with compensation events by the contractor, where it is deemed the contractor has incurred a time/cost implication due to no fault of their own. For example, a specification upgrade where glazing screens have gone from non-fire rated to fire rated. Conversely, there are scenarios where neither party is at fault and for which a compensation event can be submitted. Such as extreme adverse weather. In this situation, the cost associated with said would be proportionally allocated between parties.

Option A, clause 60.1 contains 19 events as standard. Albeit the employer (developer) can add further events within the Z clauses. Administrating compensation events can be segmented into four parts:

  1. Notification
  2. Quotation
  3. Assessment
  4. Implementation

Summary

Option F provides the client/developer the flexibility to employ a Management Contractor to procure and manage the necessary trade contractors to complete the project works. This can be done on a fixed sum, cost plus or target cost basis.

It’s beneficial for the developer, especially those entering the market, as the risk/responsibility in procuring and managing works is with the management contractor. Albeit the burden of cost predominately sits with the client/developer.

Careful selection of the management contractor is of great importance and while making up a significant proportion of the project costs, if successful the cost and quality benefits achieved make it a worthwhile procurement route.

Option G

NEC Option G

Option G Term Contract (use with PSC)

New Engineering Contract (NEC) Option G: Term Contract is the pricing mechanism most typically used with the Professional Service Contract (PSC) for the appointment of consultants. Consultants are professionals appointed by the developer to perform expert tasks on a project and will often include:

  • Architect
  • Quantity Surveyor or Cost Consultant
  • Structural Engineer

Like an activity schedule, Option G, when used with a Professional Services Contract, uses a priced task schedule in the appointment of a consultant. Factoring in different rates for different grades of staff or services.

Service tasks can either be priced as a lump sum or on a time basis. The consultant carries the risk of being able to perform the tasks to the agreed prices. As the project manager, when the developer (employer)/project requires a service you will simply instruct the consultant in line with the task schedule.

Should there be a service not included on the task schedule, but required by the developer, this will be treated as a compensation event (a variation). This results in additional payments.

Professional Services Contract

Option G is utilised with the Professional Services Contract (PSC) contract. But what is a PSC?

A PSC is a contract intended for use in the appointment of a supplier to provide professional services.  It can be used for appointing project managers, supervisors, designers, consultants or other suppliers under NEC contracts.

Interestingly, it can also be used for appointing suppliers on non-NEC construction projects or for non-construction projects. This is useful if you’re dealing with previous projects or joint venturing on an existing live project.

When a consultant is instructed, fees are calculated by the time expended against the relevant task schedule and/or a proportion of any lump sum. The service provider will be required to keep account of records and expenses for the developer’s peace of mind.

Expectations

Working for the developer, in implementing Option G (use with PSC) you should expect the consultant to carry out their duties to a Standard of Care, which can be defined as the “skill and care normally used by professionals providing services similar to those contracted”.

Whilst this may seem a woolly definition, the contract stipulates some absolute obligations, emphasised by the contract being written in the present tense. Some of these key and absolute obligations include:

  • Clause 30.3: requires the consultant to complete contracted works by the key date
  • Clause 21.1: requires the consultant to provide services in accordance with the scope
  • Clause 25.1: requires the consultant to obey an instruction, given by the Employer

Intellectual Property

When employing an external consultant who may be concurrently working for other developers, the question of intellectual property is a pertinent one and this is covered by the contract as follows:

  • Clause 70.1: the developer is permitted to use the material provided by the consultant for the purposes stated in the scope (for example, issuing and sharing architectural drawings for tendering to subcontractors)
  • Clause 70.1: the consultant may use material provided by him for other work unless stated otherwise in the scope
  • Clause 70.4: the scope will determine the extent of the intellectual property license and this is why it is crucial that details are included therein

Limits of Liability

Regards limitations of liability, when engaging an external consultant different considerations should be taken compared to that of a trade contractor. This is particularly true with smaller consultancy firms or a single personal consultant.

The NEC Option G contract contains the following provisions to assist you in this regard:

  • Clause 82 defines the limits of liability
  • A cap on total liability, limits the total liability to developer in contract and tort, which should be stated in the contract data
  • Excluded matters can include liquated damages, intellectual property infringements and loss/damage to 3rd party property
  • Net contribution clause, limits consultant’s liability to proportion of the employer’s losses for which the consultant is responsible
  • Limits under Option X18
  • Cap on indirect and consequential losses can be included
  • No liability on consultant for a matter unless he is notified before the end of liability date

Risk Allocation and Management

Across the NEC suite of contracts, proactive management of risk is crucial. Emphasised by Clause 15, and the provision for Early Warning Notices (EWNs).

An Early Warning Notice is a requirement for either the developer or consultant to provide notice of any event or matter that could (Clause 15.1) lead to:

  • An increase in the price/ total cost
  • A delay to completion of the works
  • A change in sequence to the accepted programme
  • A delay in meeting a key date
  • Impairment of the usefulness of the services
  • An impact on the work of the developer or others

To further support the team in drawing out risks, Clause 15.2 and 15.3 makes provision for a risk reduction meeting to happen, if either party requests it. In these meetings collaborative proposals and/or solutions should be discussed to identify risks relating to any given EWN. Following the meeting, Clause 15.4 requires the risk register to be updated and actioned.

In accordance with Clauses 61.5 and 63.5, if extra time or cost has been incurred because of failure to give an early warning notice, this extra time or cost will not be recoverable in a compensation event. Whilst this seems harsh and administratively onerous, the underlying rationale is to deal with risks cooperatively as and when they arise in the spirit of proactive risk management. Overall this benefits the project.

Compensation Events

In the NEC the term ‘variation’ is known as a Compensation Event (CE). It is the all-encompassing term to describe events that have a time and/or cost impact. Although do not be misled by the word compensation, as the price can go up or down.

As per Clause 60.1, the contract lists the events for which compensation entitlement is due. This includes:

  • A change to scope/schedule of services. Be it an add/or omit
  • Employer changing mind on an agreed item
  • Employers breach of contract
  • Force majeure

Clause 61.3 has a strict time limit of eight weeks for notification of compensation events. Failure to do so will result in a loss of entitlement: notification is a condition precedent. This time limit is removed if the Compensation Event arises from an employer’s instruction to change an earlier decision or to correct an assumption.

Once the alleged event has occurred and been notified, the developer will decide whether the event is a qualifiable Compensation Event, as per Clause 61.4. If the event qualifies, as project manager you will assess the Compensation Event in respect of both time and cost and either approve or disapprove based on clause 64.1.

Programme

Clause 31.1 provides clear and objective requirements for a detailed programme, together with method statements and their continuous update.

Any programme should be prepared, updated and issued to the employer for approval to the timescales specified within the contract data. Clause 31.2 specifies the items that should be included on the programme, such as:

  • Key Dates
  • Completion dates
  • Time provisions/float

Programme management may be considered arduous for a consultant’s appointment, so the appointed consultant needs to have sufficient resource to maintain and manage the programme. Pertinent clauses relating to programme include:

  • Clause 30.3: this place an obligation on the consultant to meet key dates
  • Option X7: ‘delay damages’ which allows provision for damages should completion dates not be achieved
  • Clause 41.1: this places an obligation on the consultant to rectify defects. Defects in the case of a consultant are defined as any level of service that does not comply with the scope. The employer may notify any given defect to be corrected up to the ‘defect date’ stated in the contract data

Summary

The NEC Option G Term Contract (use with PSC) provides the client/developer a one-stop shop to engage an external consultant. It provides enough flexibility whether you are employing a single person consultant or a multi-national consultancy firm.

As with any contract, the scope and accurate pricing of the task schedule is of vital importance. To ensure the obligations of both parties are met.

When the required services and respective requirements are fully understood at the project outset, there is little that should go a-rye. Nevertheless, in such an eventuality the limits of liability will be crucial.

Company Contact Country
Alfreds Futterkiste Maria Anders Germany
Centro comercial Moctezuma Francisco Chang Mexico
Ernst Handel Roland Mendel Austria
Island Trading Helen Bennett UK
Laughing Bacchus Winecellars Yoshi Tannamuri Canada
Magazzini Alimentari Riuniti Giovanni Rovelli Italy