NEC Option A: Priced Contract with Activity Schedule
You’re working as either a Project Manager or Quantity Surveyor, with a leading developer, who often work under the NEC form of Contract.
You’ve decided NEC Contract Option A is best suited to your project. With pre-construction commencing and the construction phase upcoming, it’s time to understand NEC Contract Option A in greater depth.
Please note this article is specifically in reference to Option A contained with NEC 3 and 4. For a holistic overview of the NEC and its Contract Options, please do read our article “NEC Contract Options”.
About the NEC
The NEC (New Engineering Contract), first published in 1993, is a suite of end to end project management focused contracts, which define legal relationships and empower users to deliver projects:
- on time;
- on budget; and,
- to the highest standards.
The NEC is designed to be highly flexible for use across all sectors, including 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. However, 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. 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
The NEC has a proven record on some of the UK’s most complex and demanding projects, such as Crossrail and the London Olympics.
What is NEC Contract Option A (Priced Contract with Activity Schedule)?
From our article “NEC Contract Options” you now understand the various NEC contract types and how each offers a range of pricing mechanism options to choose from at tender stage, ranging from Options A to G.
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:
- Each group of completed activities (those without defects) and,
- 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 effecting the timing and payment amount. As a developer, you may need to consider this if procuring subcontractors.
Of the ten available contract types under NEC 3 or twelve under NEC 4, there are seven under which Option A is applicable. These include:
- 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.
- ECSC Engineering and Construction Short Contract – similar to the ECC, but where works are more straight forward and do not require sophisticated management techniques – imposing only low risks on both the contractor and the subcontractor.
- ECS Engineering and Construction Subcontract – again core and secondary clauses are similar to the ECC and 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 – imposing only low risks on both the contractor and the subcontractor.
- TSC Term Service 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 – 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. Useful if dealing with previous projects or indeed joint venturing on an existing live project.
When should you use Option A ?
Option A within the Engineering and Construction Contract (ECC) is most frequently 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.
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, practicable and demonstrates the information that the contract requires. 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. But, efforts should be made by the project team to shorten timescales where possible for the benefit of all.
Early Warning Notices are a simple but important feature of the NEC: collated into a risk register, it places 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 decision making by the project team and lead into assessment of a compensation event if necessary.
Managing the contract programme process is not easy on any large project and key programme considerations are:
- Providing enough detail to cover key activities from third parties and/or employer to clearly demonstrate effect of change;
- Utilise information from the entire project team;
- Regularly update the programme, ideally once a week;
- 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;
- Proactively manage the acceptance of programmes;
- The parties must recognise and manage the implications of any Z clauses.
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 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, 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. Albeit the employer can add further events within the Z clauses. Administrating compensation events can be segmented into four parts:
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.
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:
- 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.
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.
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.
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 was 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 that no event can be notified beyond the Defects Date.
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 on. A Contractor will only be entitled to be paid, if the Activity Schedule contains specific activities for their delivery.
- Design services – Design services should be considered when negotiating/preparing the Activity Schedule. A Contractor should look to apportion the price for the design services against specific deliverables/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.
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 will no doubt 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.