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.
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:
- To stimulate good management between parties (e.g. the developer and contractor) and by extension the associated works on site
- To be used in a wide variety of commercial situations
- 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.
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.
Figure 1: Illustrative graphic of the NEC suite of contracts [Source: https://www.neccontract.com/About-NEC/How-NEC-Contracts-Works]
As with all projects, successful teamwork, from developer to architect through to the landscapers, 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 is a highly ‘paperwork’ focused system and there are many cloud-based solutions available to make NEC management more efficient. So, you may 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
It’s clear how 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. It is always recommended to follow the NEC guidance notes and flow charts (found via the NEC website) if you want to learn more about an NEC Contract option.
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:
- The Contractor’s main responsibilities
- Testing and Defects
- Compensation Events
- Risks and Insurance
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.
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
Each particular contract type offers a range of pricing mechanism options to choose from at tender stage. This includes lump sums, target costs or cost reimbursable contracts. These are set out as follows:
NEC Option A: Priced Contract with Activity Schedule (used with ECC, ECS, TSC & PSC)
NEC Option A is linked to a contract programme where each activity, for example “revolving door installation”, is allocated a price. The contract programme and activity schedule are submitted at tender. There are no partial payments as each interim payment is made against the completion of subsequent activities. This creates a less complicated interim payment process and an ability to manage cash flow effectively.
NEC Option B: Priced Contract with Bill of Quantities (used with ECC & ECS)
Like a JCT, with Option B a Bill of Quantities (BoQ) is included based off drawings, specifications and other tender documentation. From the developer’s specified quantities, the contractor will price rates against each item and bears the risk of carrying out the work to the agreed rates. The contractor will be entitled to interim payments certified at ‘assessment’ dates by the Project Manager. These interim payments are calculated by the quantity of completed work for each BoQ item, multiplied by the relevant rate.
NEC Option C: Target Contract with Activity Schedule (used with ECC, ECS, TSC & PSC)
Option C a cost-plus contract. It’s subject to a pain/gain share mechanism by reference to an agreed target cost built up from an activity schedule. A target contract enables the contractor and/or consultant team to share in the benefits of cost savings but likewise to share in the burden of any cost overruns.
NEC Option D: Target Contract with Bill of Quantities (used with ECC & ECS)
Option D is a hybrid of Option B & C.
NEC Option E: Cost Reimbursable Contract (used with ECC, ECS & TSC)
In NEC Option E, the contractor is reimbursed the actual costs incurred, plus an additional fee. Great for the contractor, but as a developer you are largely taking on the financial risk. That said, in situations where the scope of works cannot be properly defined at the outset and associated risks are high, you may be required to use this option. For example, a newly acquired fire damaged plot that requires repair alongside a new build.
NEC Option F: Management Contract (used with ECC)
NEC Option F is a cost reimbursable contract in which the works are constructed by several different contractors. These contractors are tied into and managed by a single management contractor. The Management Contractor is responsible for the works and is paid based on costs incurred, plus associated fee (e.g. 10% of costs). Like Option E, the client developer is taking on the risk.
NEC Option G: Term Contract (used with PSC)
With Option G, following instruction from the Employer within a stated time period, prices for consultant services are calculated by the time expended against the relevant task schedule and/or a proportion of any lump sum. The service provider is required to keep account of records and expenses for the developer’s peace of mind.
The JCT, criticisms and concluding thoughts
The advantages of NEC are evident, largely due to the intricacies of its clauses, processes and mechanisms. But, it is these same intricacies that critics argue require “too much expertise” to operate and makes the NEC a “triumph of form over substance.” The NEC Contracts require much more paperwork and project management, which come at a cost to the project.
For large scale developments, the complexity of supply chains means you need to capture cost information related to compensation events, which is time consuming. Project Managers are often required to proceed with variations based on estimates. Reimbursement are based on actual costs rather than tender rates and are therefore only challengeable based on the interpretation of whether they’re reasonable.
Versus the JCT, which is aimed at the domestic UK market, the NEC has been drafted for use internationally with a choice of governing law and language. The JCT focuses more on liabilities and risk, whereas the NEC requires and enables a more proactive and collaborative approach to managing the contract.