Episode 57:

Hello and Welcome to the Part3 with me podcast, 

The show that helps part 3 students jump start into their careers as qualified architects and also to provide refresher episodes for practicing architects. I am your host Maria Skoutari and this week we will be talking about the NEC Contract. Todays episode meets PC5 of the Part 3 Criteria.

We’ve previously spoken about the JCT Contracts, which are typically the most widely used building contracts in construction, but I thought today would be useful to give you an introduction into the NEC Contract as some of you may have come across this type of building contract or there may even be a possibility that you will get a question on it in your Part 3 coursework or exams. 

Alongside the JCT forms, the NEC Contract Forms can be a suitable alternative to be used as the building contract for a construction project. The NEC, which stands for New Engineering Contract, is widely known for its collaborative working and contractual partnering characteristics that’s why it is a very popular form used on public sector projects although it can be used on a variety of projects including private projects.  

NEC was first published in 1991 and was to be an entirely new clean sheet approach to drafting construction contracts undertaken for the Institution of Civil Engineers and became very popular from its endorsement in the Latham Report released in 1994 which boosted its use and further endorsement in the UK Government. The NEC was initially considered to be better used on a broad range of ‘engineering projects’ but following the publication of the Latham Report it started to become more widely used as an ‘engineering and construction contract’, the latest is NEC4. 

The NEC aims to break away from the conventional procurement processes with no necessary compromise between time, cost, quality or risk management as commonly found in JCT contracts. This resulted in a form which is adaptable and suitable for use in lump sum, design and build, or management procurement and for both civil engineering and building works. Unlike the JCT contracts, the key persons on NEC are the Project Manager, who manages the procurement of the works for the employer and the Supervisor, who exercises certain responsibilities relating to quality assurance on site for the Employer with whom they have a contract for services. No specific reference to the architect. 

Mutual trust and cooperation is at the core of the NEC that’s why it has been drafted to be flexible, clear and simple as well as promoting good management. It offers a range of benefits, in that parties to the contract:

• Have the flexibility of pick and mix contract conditions to suit both the project and project team by making one all purpose document suitable for traditional procurement, design and build, or management contracts and is suitable from large scale projects down to domestic-scale work for both engineering and building work. 
• It is written in plain English, giving both legal and project management rights and obligations equal status. The form aims to be clear and easily understandable promoting less rise to disputes.
• It provides real-time project management with simultaneous decision-making on the part of all parties promoting good performance and early completion
• And cross-industry application enabling multidisciplinary working practice 

The NEC consists of a number of family of contracts which the Engineering and Construction Contract as the main construction contract supported by the NEC Subcontract for use for sub-contracting, the NEC Short Contract which is a smaller version of the main contract and is also complemented by the NEC Short Sub-Contract, followed by a number of other Contract types. 

In terms of its set up and what it contains as a contract document, it comprises of the core clauses allowing for a flexible amount of contractor design enabling its use on traditional and design and build procurement followed by the main option clauses and secondary option clauses. The core clauses are relatively generic with the intention that they can be applicable to any project whatever its nature and location, then there are the main options of which one is chosen and then you have the secondary option clauses to assist in fine tuning the contract to meet the specific needs of the project. The aim of the three-tiered structure is that it allows for the contract to be designed to fit the needs of the individual project, there is no default version of the contract it always follows the three tiered approach so parties will need to assemble the contract creatively, carefully and in consultation with the client. 

There are 9 Core Clauses consisting of:

• The General information - which sets out the general agreements between the parties of the contract
• The Contractor’s main responsibilities - which sets out any design responsibilities they might have, staff allocation responsibilities, subcontracting responsibilities and so on 
• Time - The NEC also differs radically from its approach to the provision of a programme by the Contractor offering clarity and certainty from the outset of the project and as the project progresses. It also introduces Key Dates ensuring critical dates along the process are controllable. 
• Quality Management - The Supervisor is essentially responsible in relation to quality 
• Payment - Key thing to note about payment is that under NEC it is relatively rare for payment difficulties to arise if the contract has been assembled properly, but it has quite an onerous provision in withholding 25% of the amount due for payment until the first programme is submitted by the Contractor. This is to ensure the programme is fulfilled and meets the requirements in Core Section 3: time.
• Compensation Events - this clause essentially deals with financial and temporal consequences of foreseeable events that may rise during the course of the contract and which are at the Employers risk. 
• Title - this clause essentially relates to ownership in terms of materials intended to be included in the works 
• Liabilities and Insurance - which relates to the risk allocated between the Employer and Contractor 
• Termination - which sets out the specifics to be followed in the event of termination by either the Contractor or Employer. 

Then we have the six Main Option Clauses, which includes:

• Option A: Priced Contract with activity schedule - This Option essentially creates a lump sum contract suitable for a range of building projects and is not restricted to traditional procurement only but can be used for other methods also. Under Option A the Contractor is entitled to be paid for each completed activity incentivising contractors to stay on programme and is up to the Project Manager to assesses whether an activity is 100% complete and should be included in the certified sum for payment. Under Option A the architect is appointed by the client and acts as Project Manager and Supervisor.
• Option B: Priced Contract with bill of quantities - This option creates a re-measurement contract and the architect should highlight to the client that this option is not a lump sum contract and the potential risk for quantity changes would rest with the client and the price would not necessarily remain fixed. Option B has the preparation of a Bill of Quantities on behalf of the employer at tender stage and the possibility of individual lump sums may be allocated to specific items included in the scope of work carried out by the contractor. The key difference between Option A and Option B is that the fees for preparation of the Option B Bill of Quantities will be borne directly by the employer whereas the Option A Activity Schedule will be funded by tendering contractors as part of their ‘bidding risk’. Option B doesn’t incentivise contractors like Option A  due to its payment process being proportionate for lump sums on the basis of proportional completion of each lump sum compared to Option A where the sum is released when a portion is 100% complete. Typically under Option B, the Client appoints a Cost Consultant and the Architect and the architect also acts as Project Manager and Supervisor. 
• Option C: Target Contract with activity schedule - With Option C, a target cost is agreed at the outset, incentivising the Contractor to achieve or to better the target in the form of shares in any savings. Option C follows an Activity Schedule prepared by the contractor similarly to Option A. With Option C, the allocation of risk can be weighted by the share percentage allocated to each party to the contract and the proportions are agreed between the parties. The success and accuracy of the Target cost in Option C relies on the accuracy of the cost plan, this type of contract tends to be used by experienced clients on relatively large size projects with above average complexity and with sensitive accountability for spending. 
• Option D: Target Contract with bill of quantities - Similarly with Option C, the Option D target cost relies on the requirements that any overspend is shared in pre-agreed proportions between the parties and also relies on the cost planning being sufficiently accurate to arrive at a realistic Target Cost. With Option D, it requires a relatively significant amount of time to be spent on pre-contract analysis which dips into the money to paid on cost consultant fees, so this type of contract would be suitable on very specific types of projects, such as a large commercial project with an experienced client that wishes to keep control of Bill of Quantities and early contractor involvement.   
• Option E: Cost reimbursable Contract - The approach with this Option is to adopt an ‘open book’ accounting policy with the Contractor being paid at Defined Cost plus a percentage fee for profit and overheads. Option E permits an early start on-site with relatively little final information available to the contractor. This Option presents higher risk to the Employer in terms of cost. 
• Option F: Management Contract - The intention with Option F is that the Contractor manages the subcontract packages and prepares forecasts of the total Defined Cost of all the works plus a percentage fee. This is a more attractive option if the contract focuses on the degree of subcontracting desired and how well prepared the scope of the subcontract packages is likely to be. 

And then you have 22 Secondary Option Clauses which can be operated on a pick and mix basis in any combination in order to tailor the contract as closely as possible to the needs of the particular project. Secondary options broadly fall into 2 categories:

• Options which introduce choice in standard procedures - these processes are the options included in the contract conditions of the standard form contract 
• Options which introduce additional standard procedures - these processes are the options that conventionally have not been available in standard form contract conditions without the introduction of bespoke drafting. 

A key point to make here is that there is no obligation to introduce any of the secondary options. 

The NEC also allows scope for three dispute resolution option clauses, one of which must be chosen. 

• Option W1 is the dispute resolution procedure used unless the UK Housing Grants, Construction and Regeneration Act 1996 applies. 
• Option W2 is the dispute resolution procedure used in the UK when the Housing Grants, Construction and Regeneration Act 1996 applies and making sure it complies with the Act. 
• Option W3 can be used where the Housing Grants, Construction and Regeneration Act 1996 does not apply but the contracting parties choose a Dispute Avoidance Board rather than adjudication. This Board is to be followed before referring the dispute to the courts or arbitration. 

Following the Dispute Resolution options are the Contact Data which is data provided by the Employer and data provided by the Contractor followed by the Schedule of Cost Components which includes People, Equipment, Plant and Materials, Charges, Manufacture and fabrication, Design and Insurance. 

So that covers the contents of the Contract, what it entails and how it is structured. Now lets look at the parties typically involved in an NEC Contract.  

So first and foremost we have the Employer and Contractor which are the key parties that need to sign off and agree on the building contract. 

Then we have the Project Manager and Supervisor, the Project Manager performs the time and cost contract administration duties, architects can taken on this role as well as cost consultants can also perform this role. The Supervisor performs the quality inspection contract administration function, which again an architect can undertake, although other disciplines can also take on the Supervisor role. A key item to highlight with the Supervisor role is to have good understanding of the Scope and the ability to assess compliance with it when inspecting the works. Architects can act as both lead designer and Project Manager and Supervisor on a project if required. 

Then other parties to the contract include Subcontractors which are parties in contract with the Contractor to provide part of the works. 

Then is the adjudicator which is the person that any dispute that arises during the contract will be referred to them and that has the authority to settle the dispute. If either party doesn’t agree with the adjudicators decision they have the choice to take the dispute to the chosen Tribunal after completion. 

And then is the Consultant, which can be a specialist from any discipline who enters into a contract with the Employer. 

Now when it comes to Design Responsibility, the Contractor designs part of the works which the Scope states he is to design which the Contractor submits as the Scope requires and it is then in return it has to be accepted by the Project Manager. There is also scope within the NEC for the provision for dealing with temporary works design. No when it comes to Design Liability, unless otherwise stated, the default liability in the NEC is fitness for purpose, but this can be modified by describing the design liability accurately in the Scope or invoking one of the Secondary Options which mentions design liability. 

When it comes to Defects, there are two key dates, the defects date and the defects correction period. The defects date is for post-completion defects to be rectified under the contract and then the defects correction period is the period within which an individual defect must be corrected. 

And then is the Completion process, under the NEC there is no ‘practical completion’ as found in other standard forms of building contract, under the NEC it is deemed that Completion occurs when the project is actually complete. Employers also have the opportunity to use parts of the Works prior to Completion and of course the option of taking over the works after Completion. It is open to the parties to decide between Completion and the Completion Date from the outset by stating requirements in the Contract Data. 

So what makes the NEC contract different from other contracts and why would it be the preferrable approach.

The NEC is well known for its collaborative working approach and provides the option to design teams and clients to utilise the full suite of the NEC Contracts to take forward their projects. So alongside the NEC Construction and Engineering Contract, consultants can use the Professional Services Contract which can be applied to all types of professional services so having the different Consultants sign up to the same contract type can be a great benefit to the efficient progress of the project. 

The Professional Services Contract promotes better documentation and more efficient management skills as well as a clear line of both delegated responsibility and authority. Within the Scope it can be stated either by specifying and describing the services to be provided by the Consultant or by stating any constraints on how the Consultant provides the Services. Now when it comes to the fee calculation, the NEC Professional Services Contract offers more flexibility and accuracy in fee calculation through its main options:

• A Priced Contract with Activity Schedule
• A Target Contract
• Time based Contract
• Or Term Contract 

So in addition to the fee options, there are also secondary options with adjustments to recognise the Consultants role. 

In terms of additional benefits offered by the NEC Contracts:

• It can also be used internationally
• It offers real time project running without reliance on future negotiations allowing for the project to move forward quicker
• It offers consistency with the use of the full suite of NEC Contract Documents as previously mentioned
• Something to be cautious of with the NEC its commitment requirement to enable successful delivery and precision through its structured approach

So to sum up what I discussed today:

• The NEC is centered around good management of relationships and collaboration promoting best practice 
• It can be used on a wide variety of projects both small and large including engineering, building, contractor design and international projects
• The NEC is structured around the Core Clauses, Optional Clauses and Secondary Option Clauses and through a pick & mix approach create a project specific contract
• The key persons under the NEC is the Project Manager who manages the procurement of the Works for the Employer and the Supervisor who exercises certain responsibilities relating to quality assurance on site for the Employer