People are asking about NEC contracts – are they appropriate for us? Do they support collaboration? Can we use them anywhere?
In his presentation titled Ask the Expert: NEC Contracts – why are they so different? And can I use them? (August 1, 2017), Richard answers those questions and explains the basic features of NEC using the construction contract as an example. The crux of his comments follow.
What is NEC?
NEC is a family of contracts designed specifically to be flexible, clear and to actively stimulate collaboration and professional project management. NEC was formerly the ‘New Engineering Contract’ but that name has long since been dropped. NEC is not new, is not exclusive to engineering and is not only a contract – it has always been a management procedure. The trend for using NEC contracts is growing across sectors and countries.
Is NEC really different from traditional contracts?
Yes. Traditional contracts are focused on the allocation of liability and often written in legalese. In contrast, NEC contracts reflect three key principles: clarity, flexibility, and stimulus to good management.
Clarity – NEC contracts are written in plain English, using short sentences and bullet points.
- NEC Contracts are for both project and professional services and supply -- all using similar language and processes.
- Main contracts (long version) and short version contracts are provided for different levels of complexity.
- Main contracts allow a range of payment options including lump sum, target cost, and reimbursable options. The project contract also has a remeasurement option – with a bill of quantities1).
- The main contracts are modular with a number of secondary options – to be chosen – or not – by the employer to suit the contract.
- Project contracts allow any amount of design by the supplier.
- NEC4 now includes a contract for ‘design build and operate’.
Figures 1 - 3 illustrate the flexibility…
- in the NEC family and
- as an example, in the Engineering and Construction Contract (ECC), the project contract.
Figure 1 – NEC3 family
Figure 2 – NEC4 new members
Figure 3 – Flexibility – The ECC3
Stimulus to good management
- Contracts are drafted as processes (also mapped out as flow charts) and can be managed in the cloud systems.
- Clear roles and clear actions are defined.
- There is a clear timescale for each action.
- The effect of change and claims on time and money are assessed in advance.
- The contracts, when properly used, directly encourage collaboration and professional project management to give the client better control and better awareness of the likely time for completion and the amount to be paid.
- The contracts need active management.
Who uses NEC and where?
To date NEC has most often been used for infrastructure and building contracts, most specifically in the UK, South Africa, Hong Kong and New Zealand. The contracts are designed for worldwide application. Known for helping to improve project management, they can be used in any sector.
What heightened awareness does NEC give us?
The NEC is not a panacea for every situation. It needs investment in resources, training and systems for it to work properly. An investment in NEC gives the client better control of its contract and better awareness of the forecast actual time for completion and the amount to be paid. Using NEC does seem to reduce the likelihood of post contract claims, expensive arbitrations and court cases.
Because NEC is owned by the UK’s Institution of Civil Engineers – does that mean it’s a civil engineering contract?
NEC can be used for civil engineering but is in no way limited to either civil engineering or construction. As stated, NEC contracts can be used in any sector, although to date, they are most commonly used in construction and facilities management. When NEC was envisioned, the UK’s Institution of Civil Engineers (ICE) funded its development even though NEC would use the previous ICE contract that ICE was publishing at the time. As a result, ICE publishing - ICE Virtual Library, the company owned by ICE, also owns the copyright to NEC and has continued to support its development.
Can NEC be used across the world?
Yes. NEC contracts are not tied to any one jurisdiction. The law of the contract is stated for each contract, but the vast majority of the contract is written in plain language processes that transcends the legal system in the background.
However, any party using NEC contracts outside the UK would benefit from having a competent construction lawyer with some training in NEC to review the contract within the context of the local law.
In what countries is NEC used?
NEC is the preferred contract for infrastructure by many organizations in the UK. NEC is also used widely for buildings and in the private sector.
After a period of trials, the NEC is now mandated by the Hong Kong government for construction spending. The NEC is widely used in South Africa, where it is one of four construction contracts endorsed by the government. Its use is developing in New Zealand and it has been used successfully in Australia and India. NEC is also being used in the Netherlands for the International Criminal Court (ICC) buildings2.
Why then, after 20 years, is it still used widely only in the UK, South Africa, Hong Kong and New Zealand?
Limited choices. Internationally the choice of forms of contract for development projects has been limited to FIDIC (The International Federation of Consulting Engineers) by the policy of the Multilateral Development Banks (World Bank, Asian Development Bank, etc.). This has significantly helped FIDIC become the obvious choice in the international construction market.
Time. It took some years in the UK for the NEC to take hold, and for several years the ICE continued to publish and support its traditional ICE contracts. Use of NEC in South Africa in the early days was influenced by one person on the drafting panel being a senior procurement professional there
In Hong Kong, the government responded to the Tang report on procurement and chose NEC as a form of contract that could support contractual partnering.
Inertia. Fundamentally the first thing in the mind of an employer when selecting a form of contract is what did we use last time? There is a huge inertia and, it seems a resistance, to properly investigate what is available. Nevertheless, why shouldn’t any responsible employer investigate the options for contracts to deliver their projects, think about their decision criteria and choose accordingly?
Lack of awareness. NEC contracts worth £ billions have been used successfully on probably hundreds of thousands of contracts. But awareness levels of it outside the four countries where it is significantly used is still very low. NEC is a part of the not-for-profit ICE and it simply does not have access to sufficient marketing spend to push NEC hard into new markets. That said, it has heavily supported developments in Hong Kong and established Hong Kong and Australasia branches of its Users Group.
Why is NEC not used in Canada and the US?
There is still almost zero awareness of the NEC in the North American market and very little take up of the standard forms available in Canada and the US. In the US, in particular, the market is particularly litigious (having strong lawsuit or claim potential). Most big clients in each of the states and provinces seem to use their own contracts that have been developed by their own lawyers over the years.
The lack of a well-used standard form would surely lead to huge wastage in the industry. It will take an outward looking procurement professional to properly investigate what is available and decide to try the NEC. As stated by Humphrey Lloyd: “there are no real difficulties in using the NEC3 contract either inside or outside the UK”3.
One thing that may influence greater use of the NEC is the NEC’s target cost contract may be appropriate where the client really wants to incentivize collaboration, and the NEC is ideally suited for early contractor involvement. This is being considered for major projects and is formally included as an option in ECC4.
Has NEC been translated into languages other than English?
No, because the demand is not strong enough to justify a professional legal translation. When a translation is required, the plain language used in all NEC contracts should make it relatively easy to translate.
Where do you think it might go next?
Geographically, the NEC contract has also been used in India where it could be further developed. Given its success in Hong Kong, Singapore and Malaysia are logical possibilities. I hope continued use in New Zealand may lead to more use in Australia. And, despite the challenges, success in a few high-profile projects in the US or Canada could give NEC a foothold there.
- bill of quantities – list items provided by employer (contractor tenders rates)
- International Criminal Court Permanent Premises, Netherlands
- Some thoughts on NEC3, by Humphrey Lloyd, from NEC Newsletter January 2009, Special Issue; and Use of NEC in legal jurisdictions other than English law, by Richard Patterson, Mott MacDonald NEC Newsletter, No 47, July 2009. Mott Macdonald is a global, employee-owned management, engineering and development consultancy delivering innovation saving our clients’ money and time.
ABOUT THE AUTHOR
Richard Patterson is a specialist in NEC forms of contract who trains Mott MacDonald staff and their clients in all aspects of the NEC. He assisted in transferring the organization’s NEC skills to Hong Kong where NEC is now mandated for government construction spending. He has also mentored Mott MacDonald’s teams in South Africa and recently trained the team using NEC with Auckland airport in New Zealand. Author of 24 articles, 5 papers, and a book on NEC, he works today with the procurement team affiliated with the water consultancy division in the European region of a global consultant to Mott MacDonald.
Find the author and links to many of his detailed articles on NEC at: https://www.linkedin.com/today/author/coolsoberandsmiling