Many presentations have been given on why the new engineering contract (NEC) is so different from other standard forms of contract. I have given quite a few myself over the last 25 years. But I have only recently focused on the criticality of just one word in the NEC contracts: forecast. It’s important to keep in mind four key points:
- Critical words in NEC contracts are forecast and fault.
- The contractor and the project manager must be prepared to agree to forecasts of the cost and time effects of every change, and regularly agree to forecasts of total cost in cost-reimbursable options.
- Under a cost-based contract the amount due each payment is largely based on a forecast of the contractor’s spend by the time of the next payment
- It is important for parties to recognize and agree when a contractor is at fault.
The word forecast appears in all the main NEC4 and NEC3 contracts:
the Engineering and Construction Contract (ECC), the Professional Service Contract (PSC), the Term Service Contract (TSC) and in the short versions of these contracts. For the purposes of this article I will refer to clauses in the NEC4 ECC.2
In most traditional contracts, when an event occurs for which the contractor can claim extra time or money, the process is to keep records, keep more records, possibly get those records agreed and then sort it out later when the effects of the event are over and can be assessed, and argued about, based on those records. But often the assessment of the claim is months, if not years, after the event. In the meantime, the client and supplier are guessing at the possible outturn cost (actual and final construction cost) and indeed the required completion date for the contract.
So, the key word forecast in clause 63.1.3 is what makes NEC so different from all other contracts. The clause sets the rules for how to assess the cost of a ‘compensation event’ - the NEC word for any event that might lead to the contractor getting more money and/or time.
That said, can we forecast the effects of change?
Clause 63.1 states (bullets omitted): “The change to the Prices is assessed as the effect of the compensation event upon the actual Defined Cost of the work done by the dividing date, the forecast Defined Cost of the work not done by the dividing date, and the resulting Fee. For a compensation event that arises from the Project Manager or the Supervisor giving an instruction or notification, issuing a certificate or changing an earlier decision, the dividing date is the date of that communication. For other compensation events, the dividing date is the date of the notification of the compensation event."
In most compensation events the very clear dividing date will occur soon after the event happens This assessment rule is used in the contractor’s quotation for the event, in the project manager’s review and, if agreement cannot be reached, in a ultimate project manager’s assessment, and, if it comes to it, in an adjudicator’s assessment.
When it comes to time, the equivalent Clause 63.5 applies. It states, “A delay to the Completion Date is assessed as the length of time that, due to the compensation event, planned Completion is later than planned Completion as shown on the Accepted Programme current at the dividing date.”
The only change in NEC4 was the addition of ‘at the dividing date’, which makes this much clearer. While the word forecast is missing here, the delay to planned completion to be assessed is based on the forward-looking accepted program and so, like cost, assessment of delay is very much a forecast.
Rather than just keep records, the contractor and project manager must look forward rather than backward and forecast the effect of the compensation event. And, as they are doing so, they are required to ignore what is happening and agree the forecast of the cost and delay -- including allowances for risks with the contractor, as seen at the dividing date.
The forecast will not be right but, when implemented, it is a reasonable deal in the circumstances. Each compensation is subject to such a deal. The agreed forecast is not revisited: the contractor or consultant will win on some and lose on others.
The assessment process is very clearly defined and has clear timescales. The clear intent, which characterises NEC, is to get these events agreed (implemented in the language of the contract) as the works proceed. Clients will recognize the benefit of this to their business, but they must also recognize that this agreement of events at the time needs resources and therefore, costs money.
A common criticism of the NEC is its administrative burden. However, a significant part of the additional burden compared with other contracts is the need professionally to agree to the impact of compensation events during the project, that is, to professionally manage the contract. In effect, the client, if using NEC, must invest in the resources to make NEC provide the benefits of incremental certainty.
To do this, the project manager must have (or have access to) a good understanding of the contractor’s real costs and the program, negotiation skills and empowerment from the employer to make decisions. Under the contract there are few limits on the project manager’s actions but the contract between client and project manager is likely (ought) to set out where the client wants to be at least consulted before the project manager makes a decision. In effect the project manager’s role is to do deals with the contractor for each compensation event, based on the rules in the contract.
Forecasting total costs
In the target and cost-reimbursable options C−F, clause 20.4 requires “The Contractor prepares forecasts of the total Defined Cost for the whole of the works in consultation with the Project Manager and submits them to the Project Manager.”
Most contractors will include, in that forecast, the amount forecasted each month rather than just the forecast at the end of the project. Some clients use an additional condition (Z clause) to make that an explicit requirement.
The forecasts are required at the interval stated in the contract data, typically monthly. For a client it is critical that this is done well, so that the client has incremental certainty on the costs of the contractor, which are paid by the client.
In the case of target contracts -- which for NEC4 ECC are Options C and D -- this forecast, combined with proper management of the prices through forecasting and implementation of compensation events as described above, will give clients incremental certainty of the total they will pay after the contractor’s share.
Forecasting the money to be paid by the contractor
In the target and cost-reimbursable options C−F, the main part of the amount due, the price for work done to date is (clause 11.2(29)) “the total defined cost which the project manager forecasts will have been paid by the contractor before the next assessment date plus the fee.”
Now this will self-correct every month, but the project managers will have to be good at forecasting! They should have at their disposal to help:
- The contractor’s resource loaded accepted program; and the contractor’s clause 20.4 forecast of defined cost as noted above.
They also have ‘open book’ access to the Contractor’s records of cost. (clause 52.2).
There is another important word that should be highlighted in every NEC user’s copy of the contract. NEC requires any compensation event that has happened to be notified, either by the project manager or the contractor. But, in clauses 61.2 and 61.4, if “the event arises from a fault of the Contractor,” the project manager does not instruct a quotation and there is no change to the prices or delay to the completion date.
An example is a project manager giving an instruction to stop work, leading directly to a compensation event. But if the reason for that instruction was a clear health and safety issue, that will be the ‘fault’ of the contractor and there will be no change to the prices or delay to the completion date. Hence no need to instruct a quotation for the event.
I have seen clients using extensive Z clauses defining what fault means here, but these are surely unnecessary. Clearly, if contractors are not working within the requirements of the law or the scope, they are at fault.
In summary, the word forecast is the one word that makes NEC contracts different from so called traditional contracts. NEC users need to make sure they properly understand the meaning and significance of forecasting the cost and time effects of changes and of forecasting the total defined costs. It is also important to be able to recognize when contractors are at fault.
- To access past NEC Newsletters:
- Log in/register at www.neccontract.com
- Under ‘About NEC’, drop down to News and Media
- Click on ‘Find out more’ under ‘My NEC’
- My downloads
- NEC – New Engineering Contract. (The family of contracts)
- NEC3 – third edition 2005
- NEC4 – fourth edition 2017
- ECC Engineering and Construction Contract
- PSC Professional Service Contract
- TSC Term Service Contract
- NEC4 ECC
- See also NEC News and Media article titled Links between key NEC processes
ABOUT THE AUTHOR
Richard Patterson is a chartered Civil Engineer specializing in procurement with particular skills, experience and enthusiasm with NEC contracts. Richard’s main role is to be the focal point for NEC experience within 16,000 strong global management, development and engineering consultancy, Mott MacDonald. With a specialty in target NEC contracts, incentives and collaborative working, he is also a trainer in procurement and especially NEC contracts. He has trained and presented on NEC in UK (extensively), Australia, New Zealand, Hong Kong, France, Germany, Vietnam and Ethiopia. Currently he actively supports the development of the Mott MacDonald NEC team in Hong Kong.
Richard delivers the NEC ECC Project Manager accreditation course for NEC Training and was a part of the NEC team that developed NEC4.
Richard has written many papers and articles on a range of NEC issues. Many are attached to his LinkedIn profile at: