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Clarity, flexibility, direct link to project management – that’s what sets NEC contracts above ‘traditional’ standard forms.

 

EDITOR’S NOTE:   After publishing his most recent article titled NEC contracts, are they right for you? in IACCM’s Contracting Excellence Journal1, Richard Patterson hosted an excellent webinar Feb 18, 2018 titled NEC Contracts - a flexible toolkit for procurement.2 What follows summarizes major points you must not miss especially if you are involved with NEC or anticipate it soon. 

Before you invest in any project or service, consider the NEC “family” of contracts (designated NEC3) once known as New Engineering Contracts.  First launched in 1991, NEC contracts between Cient and Contractor are designed for any project or service located anywhere for any industry. The latest, fourth edition, NEC4 was published in 2017.4

NEC is a widely-used, diverse range of project management contracts designed to deliver projects on time and within the budget.  Known for their flexibility, NEC works well to purchase works, services and goods across all sectors – including civil, building, nuclear, oil and gas – as well as across all stages of a project from planning, design and project management to construction, maintenance and facilities management. NEC can be used for procurement of services, works and supply in the specific ways set out in the Project Management Institute’s (PMI’s) Project Management Body of Knowledge (PMBOK®).5

Early warning plus collaboration make NEC unique

The NEC contracts are designed to enhance collaboration. All NEC contracts start with a clause like “…The Client, the Contractor, the Project Manager and the Supervisor shall act as stated in this contract and in a spirit of mutual trust and co-operation.”

Although this sets the scene, the NEC’s unique concept of early warning plus its attention to program and change control and the clarity of roles and procedures makes the NEC contract so different from ‘traditional’ contracts. All these processes foster collaboration.

Clarity plus flexibility make risk allocation easier

NEC contracts are specifically designed to support good project management and collaboration. Very flexible for risk allocation and risk management,6 they are designed for use internationally.7 NEC contracts are most successfully used in the UK, South Africa and Hong Kong, particularly in the construction sector and are gaining popularity in New Zealand and elsewhere.  However, they apparently are not yet used in the USA or Canada other than perhaps for an ‘unusual’ contract. In North America, although published standard forms exist,8 it seems that using a standard form of contract is often alien to clients – and many pay their lawyers to draft bespoke contracts for them. This causes huge additional costs to the supply chain and cannot be good for the efficiency of construction spending. The construction contract allows any level of design to be passed to the contractor.

Additional NEC advantages

  • The contracts are very strong on the use of a program (more often known as a ‘schedule’ in North America). An NEC contract sets out in detail the required contents of the program, clear processes and timescales for its submission, updating and acceptance by the client’s project manager. Critically, they set out how the program is to be used directly to establish any entitlement to an extension of time for the supplier.9
  • NEC contracts have a simple and clear process requiring both parties to notify each other of risks that either party recognizes after award.  (There are appropriate consequences if the contractor fails to ‘early warn’ as required by the contract.)
  • NEC contracts are very focused on change management.
  • NEC contracts provide clear compensation.  Any event for which the supplier may be entitled more time and/or money is identified as a ‘compensation event’. (This replaces terms like ‘claim’ in traditional contracts.) The compensation events are listed very clearly, almost all in one clause of the NEC contract.
  • Rules are clear for assessing and ultimately agreeing to the forecast effect on time and cost of these compensation events.

 

  • Timescales are clear for quotations, acceptance and sanctions on each party for noncompliance with those timescales. The emphasis is very much on ‘resolving the issue now’ rather than ‘later’.
  • A tightly drafted provision is provided to prevent the ‘traditional’ delay and disruption claims common in the construction industry. In other words, as tools for project management, NEC contracts directly support all the processes set out for project management in the PMBOKÆ.

Many options

The target contract options C and D give a real commercial incentive for the client to collaborate. Key Performance Indicators (KPIs option X20), can be used to directly incentivize other positive behaviors and results.

More radically, option X12 (multi-party) partnering allows the client to set up a ‘core group’ between contractors using separate contracts with the client.  This option also allows the same project to include wide incentives in the separate contracts and in key subcontracts.

Option X22 provides for ‘early contractor involvement’ where the supplier joins the team earlier than normal and works with the client to develop the scope, timescales, price and risk allocation to prepare for contract delivery.

Due to be launched in June 2018 is the NEC Alliance Contract, a true multiparty contract that incentivizes collaboration between all the parties signed up to it.

An NEC Engineering and Construction Contract (ECC) consists of:

  • The core clauses dealing with all the processes that are common, irrespective of the payment option. 

 

  • One of six total payment options:
  1. fixed price with activity schedule
  2. fixed price with bill of quantities
  3. target contract with activity schedule
  4. target contract with bill of quantities
  5. reimbursable
  6. management contract 

 

  • A choice of one of three dispute resolution options:
  • W1 for adjudication
  • W2 for adjudication, modified to match UK law and
  • W3 for a dispute avoidance board
  • A selection of secondary options:
  • X1 Price adjustment for inflation
  • X2 Changes in the law
  • X3 Multiple currencies
  • X4 Ultimate holding company guarantee
  • X5 Sectional Completion
  • X6 Bonus for early Completion
  • X7 Delay damages
  • X8 Undertakings to the Client or Others
  • X9 Transfer of rights
  • X10 Information modelling
  • X11 Termination by the Client
  • X12 Multiparty collaboration
  • X13 Performance bond
  • X14 Advanced payment to the Contractor
  • X15 The Contractor’s design
  • X16 Retention
  • X17 Low performance damages
  • X18 Limitation of liability
  • X20 Key Performance Indicators
  • X21 Whole life cost
  • X22 Early Contractor involvement 
  • Some very minor jurisdiction-specific options (three for UK and one for New Zealand) 
  • Any additional conditions of contract specifically developed for the contract (Z clauses). 

In Section 12.1.1.9 Organizational process assets, The PMBOKÆ describes different types of contracts. In many countries, including the USA and Canada, these are routinely developed as bespoke contracts often by the client’s lawyers. As a result, each contract is very different, adding hugely to the cost of procurement and delivery of infrastructure.

Are billions of assets worldwide possible?

Wouldn’t it be helpful if we could develop those types of contracts using the building blocks of a standard form of contract -- perhaps one published by a renowned institution10 -- and use them successfully to deliver billions of pounds (£) worth of assets around the world?

It can be done and here’s how:

Firm Fixed Price Contracts (FFP)
Under ECC, this is simply option A, a priced contract with activity schedule. The bidder bids an activity schedule. The amount due each month is based on the prices of the activities that have been completed.

 

Fixed Price Incentive Fee Contracts (FPIF)
PMBOK’sÆ description of FPIF contracts suggests “…some flexibility in that it allows for deviation from performance, with financial incentives tied to achieving agreed upon metrics. Typically, such incentives are related to cost, schedule or technical performance of the seller [...] Under FPIF contracts, a price ceiling is set, and all costs above the price ceiling are the responsibility of the seller, who is obligated to complete the work….” 

Perhaps this does not sound like a fixed price contract and certainly not in terms of ECC. ECC option C is a target cost contract. The bidder signs up to delivering for a target price. If the contractor delivers for less than the target he shares in the ‘gain’ with the client. If he exceeds the target, he shares in the ‘pain’ with the client. Both pain and gain are defined by the client in the contract as a series of defined ‘share percentages’ to apply to savings or overspend in defined ‘share ranges’ above and below the final target. This is infinitely flexible.

The FPIF contract described in PMBOKÆ would be viewed by some as a ‘guaranteed maximum price’ (GMP) contract. In essence it is a unique type of target contract where the contractor takes all the pain of overspend over the target (as adjusted for client changes and client risks throughout the contract). 

Separately from the cost sharing mechanism, the client could choose any combination of the following secondary options related to schedule or technical performance:

  • X6 – bonus for early completion
  • X7 – delay damages
  • X17 – performance deductions11
  • X20 – key performance indicators (which allows the client to define extra payments for achieving stated targets for any parameter). 

Note that any of these ECC secondary options – and others – can be added to any ECC contract – and to any of the PMBOKÆ contract types. 

Fixed Price with Economic Price Adjustment (FP-EPA) allows for inflation adjustment of the price and protects the supplier from inflation. In the ECC, any of the ECC options can achieve this by including one simple secondary option, X1, ‘price adjustment for inflation.’ So, in ECC this is not a separate type of contract, just a feature that can be added to any ECC contract including those described above for either the FFP or FPIF contract. 

Cost reimbursable contracts 

Cost plus fixed fee contracts (CPFF)
PMBOKÆ describes the contractor under a CPFF contract receiving allowable costs plus a fixed fee to cover the contractor’s non-allowable costs (including all ‘overheads’) and profit. ‘Fee amounts do not change unless the project scope changes’. 

This is not a standard option in the ECC. Under target options C and D and reimbursable option E contracts, the contractor receives a fee which is a tendered percentage of allowable costs. However, the fixed fee option could be affected by a very small change as an additional condition of contract – a simple redefinition of ‘the Fee’. Incidentally, it would seem fair for the fee amount to increase with all client risk events and not just project scope changes. 

Cost Plus Incentive Fee Contract (CPIF)
In ECC language this is a target contract. (The ECC option C is described above under ‘Fixed Price Incentive Fee Contracts (FPIF)’). 

Cost Plus Award Fee Contracts (CPAF)
PMBOKÆ states: “The seller is reimbursed all legitimate costs, but the majority of the fee is earned only based on the satisfaction of certain broad subjective (sic.) performance criteria defined and incorporated into the contract. The determination of fee is based solely on the subjective (sic.) determination of seller performance by the buyer and is generally not subject to appeals. Under ECC this would be a modification of the option E (reimbursable) contract with the fee redefined to not be a simple percentage of the allowable costs but to be a defined function of ‘performance.” Given that money is involved, it is suggested that the function be based on objective rather than subjective measures. This would be put into effect by a simple change to the definition of Fee, leaving all the other processes in the contract as standard.

Time and Materials Contracts (TMF) The PMBOKÆ description of TMF contracts suggests they may include tendered rates rather than real cost for certain resources. In the ECC target and reimbursable contracts, the allowable cost is defined in detail in what ECC calls ‘Defined Cost.’ This includes:

  • people on site reimbursed at the actual cost to the contractor to employ them
  • designers off site paid at tendered rates 

If a client has good reason to change this, a clear structure exists in the model and changes needed will be straightforward to make. 

What’s in it for you?

PMBOKÆ describes a range of types of contract. All of these can be put into effect by using the options within the modular NEC ECC. The same principles are applied in the NEC’s Professional Services Contract (PSC) and Term Services Contract (TSC) which share the structure, principles, language and many of the clauses in the ECC.

All of the options are based on a set of core clauses that contain straightforward processes for program, early warning, payment and, perhaps most importantly, change control.  All this means the documents are project management tools as much as they are contracts. 

The contract promotes collaboration but that also needs attention to the culture and behaviors within the team. The contract will not change behaviors on its own, but a client looking to enhance collaboration would be well served by a contract that is designed to do so. 

So, as we said at the beginning: Anyone responsible for procurement of any project or service should take a good look at the NEC before procuring their next job in their normal way. 

END NOTES and REFERENCES

1. CE article: NEC contracts, are they right  for you?

2. IACCM webinar: NEC Contracts - a flexible toolkit for procurement

3. NEC was formerly the ‘New Engineering Contract’. Now NEC is the brand for a family of contracts. See www.neccontract.com 

4. See also NEC4 contracts – posting by necÆ June 2017 – Reference only (cost is involved to obtain).  Option: NEC: free resources

5. PMI AND PMBOK® websites – reference only (cost is involved to obtain.)

  • PMI – Project Management Institute
  • PMBOK® - Project Management Book of Knowledge

6. Using NEC contracts to manage risk and avoid disputes, Richard Patterson, Mott MacDonald, Proceedings of the Institution of Civil Engineers, Management, Procurement and Law, 2009, No 4.

7. Use of NEC in legal jurisdictions other than English law, Richard Patterson, Mott MacDonald, NEC Newsletter, No. 47, July 2009 

8. For example, by the American Institute of Architects http://www.aia.org/contractdocs/about

9. Producing a program under the NEC form of contract, Proceedings of the Institution of Civil Engineers, Management, Procurement and Law, Glenn Hide, May 2010;

Managing a program under the NEC(ECC) form of contract’, Proceedings of the Institution of
Civil Engineers, Management, Procurement and Law, August 2010.

10.The NEC is published by the UK’s Institution of Civil Engineers – because it was the ICE that sponsored its development in the late 1980’s. However, it is not specific to civil engineering or, indeed, engineering. The contracts can be used in any industry or sector. 

11.Using NEC to incentivize lowest whole-life cost Richard Patterson and Barry Trebes, Mott MacDonald, NEC Newsletter No 75, November 2015 

 

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Richard Patterson, NEC and procurement specialist and Mott MacDonald consultant


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