Construction Futures Wales - NEC Contracts Overview Workshop

An Introduction to

30th March 2017

WELCOMETo an Introduction to NEC3 Contracts Jenna Goldsworthy

John HumphreysStuart Brisbane

Rachel Davies

Why Bother?

• Programme jointly funded by Welsh Government and CITB in Wales

• Targeting Welsh Construction related SME’s that want to grow and prosper

• Running until end of March 2018

Who or what is Construction

Futures Wales?

CFW is here to help by providing companies with the opportunity to learn about improved business practices that can increase

a company’s turnover and profit, and provide a competitive advantage when tendering for

future workCFW aims to help you:

improve customer satisfactionreduce defects, cost & impact on the environmentimprove safety & supplier relations and enhance

collaborative working

Aim

CFW is here to help by providing companies with the opportunity to learn about improved business practices that can increase a company’s turnover and profit, and provide a competitive advantage when tendering for future work

CFW aims to help you:improve customer satisfactionreduce defects, cost & impact on the environmentimprove safety & supplier relations and enhance

collaborative working

Aim

An Introduction to NEC3 Contracts

Stuart Brisbane

AgendaOverview of NEC Contract1. History 2. Overview3. Contract Choices4. Layout and Clauses5. A New Language6. Roles and Responsibilities7. Works Information8. The IMPORTANCE of Program9. Early Warnings 10. Compensation Events11. Communication12. Management of Risk13. Points of Note14. Proformas15. Signposting

1. History

1. History

1985 ICE review alternative contract strategies

1986 ICE commissioned new style of contract

1991 First consultative edition produced

1993 Edition 1 published

1994 “Constructing the Team” Latham 1994, singled out NEC for good practice

1995 Edition 2 published, all 13 Latham principles adopted

1999 Short form published

2005 Edition 3 published and existing contracts updated. New Term Service and Framework contract published

2006 June 2006 amendments

2013 April 2013 amendments

Still the New Engineering Contract?

1. History

NEC3 April 2013 Edition complete family of contracts (39 documents including guidance notes and flow charts)

Currently £570

1. History

Available to Purchase from 22nd June 2017 – updates on NEC Website and via the NEC user Group. Advanced orders being taken 10% discount

2. Overview

2. Overview

• Constructing the Team - Sir Michael Latham 1994 (11/13)

• Rethinking Construction – Sir John Egan 1998

• Achieving Excellence – OGC 2003

• HM Treasury

• Welsh Government

Why the NEC !

Basic Characteristics of NEC • Contractor lead

• Mutual trust and co-operation (edition 2 onwards)

• Good management encouraged (not just rights and obligations)

• Procedure driven

• Programme given HUGE prominence

• Recognising risk and dealing with it as you go rather than allocating

blame afterwards

• Clear and distinct roles for those involved

• Minimises subjective phrases such as fair, reasonable, opinion

2. Overview

Basic Characteristics of NEC

• Modular approach

• Interlocking contracts e.g. Subcontract, PSC, Adjudicator

• Logical contracts (can be described in flow charts)

• Written in simple English (and in the present tense)

• Certainty of actions and outcome

• Flexible approach allows use in multi discipline projects and a wide range of projects

• Can be used internationally

2. Overview

• Bold and major initiative in the drafting of construction contracts. Concepts are significantly different from other forms of contract, such as the JCT Standard Building Contract 2005, requiring a cultural change in attitudes and knowledge for those who use it.

• NEC produce comprehensive Guidance Notes and Flow Charts for each contract to demonstrate how they should be used.

• Compatible and interlocking with the other NEC3 contracts such as the ECC Subcontract, Professional Services Contract and Adjudicators Contract.

• The first Core Clause states that all parties shall act in a spirit of mutual trust and co-operation, supporting the contract’s use for Partnering Frameworks.

2. Overview



• It requires far greater management

• Very Specific

• Needs attitudes to change

• There is no room for negotiation

• Must be aware of the requirements• Activity Schedules

• Time Barring

2. Overview

There is as yet very little legal precedent, but some well respected legal commentators have expressed reservation over what they consider to be many unresolved legal issues.

So It’s the brilliant way forward that we should all use !!!

NEC3 Suite of Contracts• Works• Engineering and Construction Contract (ECC)• Engineering and Construction Short Contract (ECSC)• Engineering and Construction Subcontract (ECS)• Engineering and Construction Short Subcontract (ECSS)

• Services• Professional Services Contract (PSC) – Architecture, Engineering• Term Service Contract (TSC) – Maintenance, Management• Term Service Short Contract (TSSC)

• Supply• Supply Contract (SC) – Goods, Products• Supply Short Contract (SSC)

• Others• Adjudicator’s Contract (AC), Framework Contract (FC)

2. Overview

2. Overview

NEC3 Suite of Contracts

2. Overview

3. Contract Choices

NEC 3 : Main and Secondary Options and Alternatives

3. Contract Choices

ECC main option is based on the completeness of works information for example

• Employer has a fully designed scheme and requires a lump sum price

• Employer requires a contractor to design and construct works on a fixed price basis

• Employer needs an immediate start to urgent works that are not designed


Contract Options revolve around four main concepts

• Activity Schedule

• Bills of Quantities

• Cost Reimbursement

• Target Cost

3. Contract Choices

Main Options• ECC has six main options, based on different

mechanisms for payment to the Contractor and basic allocations of risk between the parties involved…

• Option A: Priced Contract with Activity Schedule• Option B: Priced Contract with Bill of Quantities• Option C: Target Contract with Activity Schedule• Option D: Target Contract with Bill of Quantities• Option E: Cost Reimbursable Contract• Option F: Management Contract

Empl

oye

r

Contractor

A

BC

DF

E Financial Risk

3. Contract Choices


Choice of option will be dependant on allocation of RiskContract Type Main

OptionsBalance of risk

Employer Contractor

PricedA (35%)

B (6%)

TargetC (55%)

D (>1%)

Cost reimbursable E (Low)

Management F (Low)

3. Contract Choices

Main Options – A & B• Lump sum contract whereby the Contractor prices the information

provided and this forms the basis of the price paid by the Employer. Payment is made on completion of the Activities or the Work, valued using the measured quantities or rates.

• The Employer carries minimal financial risk. Bill of Quantities carries more risk for the Employer because they prepare it, whereas the Activity Schedule is prepared by the Contractor. However the Employer may identify key activities to be included on the schedule.

Empl

oye

r

Contractor

A

BC

DF

E Financial Risk

3. Contract Choices and Strategy

Main Options – C & D• Target Contracts are sometimes used where the extent

of the work is not fully defined or where the risks are anticipated to be greater. Financial risk is shared between the Employer and the Contractor using pre-agreed share percentages. This is sometimes referred to as a pain/gain incentive scheme.

• The Contractor tenders a target price in the form of Prices using either an Activity Schedule or Bills of Quantities. The target price includes the Contractor’s estimate of actual cost plus a percentage fee to cover overheads and profit.

Empl

oye

r

Contractor

A

BC

DF

E

Financial risk can also be shared with the appointed Consultants, such as the Architect, using an interlocking PSC.

3. Contract Choices

Main Options – C & D• During the course of the contract, the Contractor is paid their actual

cost plus the fee. This is defined as the Price for work done to date (PWDD). The target prices are adjusted for Compensation Events and for inflation if applicable.

• At the end of the contract, the Contractor is paid (or pays) his share of the difference between the final total of the Prices and the final PWDD according to pre-agreed share percentages stated in the contract.

• Example of Share Percentages within an Employer’s two-stage pain/gain incentive scheme…

ITP = First-Stage Tender (Stage C)FTP = Second-Stage Tender (Stage H)Final Outturn Cost = Actual Cost (Stage

K)

3. Contract Choices

Main Options – C & D• Worked example of an Employer’s two-stage pain/gain incentive scheme…

ITP = First-Stage Tender (Stage C)FTP = Second-Stage Tender (Stage H)Final Outturn Cost = Actual Cost (Stage K)

What affect does an incentive scheme have on the quality of the completed building? What stops the Contractor and Consultant value engineering to reduce the Final Outturn Cost and increase their gain shares?


Main Options – E & F• Cost Reimbursable Contract (Option E) is used when

the definition or extent of the work to be carried out is not available and an early start on site is required (i.e. rectifying fire damage). The Contractor carries minimal financial risk and is paid actual cost plus the tendered fee.

• Management Contract (Option F) is when the Contractor is responsible for supplying management services and may not directly carry out the work themselves. The works are pre-defined and the Contractor is paid actual costs.

Empl

oye

rContractor

A

BC

DF

E


Engineering Construction Short Contract (ECSC)

• For work that does not require all the procedures in the ECC• Single Contract Data• Price list for PWDD and:

– Quantity changes– But not CE’s

• No express provisions for contractor design• Flexible programme requirements• No Main or Secondary Option but:

– can have “additional clauses”– includes delay damages and retention


PSC & PSSCProfessional Services / Professional services short form contracts

• Used to appoint professionals (by Employer or Contractor)

• Designers

• Project Manager

• Supervisor

• Same Objectives as NEC Main Contracts• Same clause structure as the NEC ECC


Professional Services Contract (PSC)

• Main Option Clauses:

– A – Priced Contract with Activity Schedule

– C – Target Contract

– E – Time Based Contract

– G – Term Contract

• Options B, D & F are not used


4. Layout & Clauses

Layout of the Contract• User friendly layout which is split into sections that deal

with essential requirements and a ‘pick and mix’ choice of additional requirements.

• The ECC includes the following sections…• Core Clauses • Main Option Clauses• Secondary Option Clauses• Schedule of Cost Components• Contract Data

• Other documents appended to the contract are…• The Works Information • The Site Information

• Depending on the Main Option, further documents appended to the contract may include an Activity Schedule and Bill of Quantities.

There are risks involved in providing a flexible form of contract because the various options can result in conditions which some lawyers regard as producing great variability and a risk of imbalance. However it is more preferable than amending standard forms of contract which, if needed, should be undertaken with extreme caution.

4. Layout and Clauses

Layout of the Contract• The option structure is Modular in form with five modules , normally

chosen by the employer

• ALWAYS have the core clauses and the Schedules of Cost Components

• Choose ONE main Option clause (A-F) which decides the mechanism for payment

• Choose one dispute resolution option (W1 or W2)

• Choose as many secondary Option clauses as required (prefixed X or Y)

• Add any other additional Clauses (Prefixed Z) requirements.


Core & Main Option Clauses• The Core Clauses are set out in nine sections and apply

in all contracts. The clauses allow for a flexible amount of Contractor design.

• Section 1: General • Section 2: The Contractor’s Main Responsibilities• Section 3: Time• Section 4: Testing and Defects• Section 5: Payment• Section 6: Compensation Events• Section 7: Title• Section 8: Risk and Insurance• Section 9: Dispute and Termination

• The Main Option Clauses provide two options for the dispute resolution procedure.

• Option W1: Used unless the HGCRA 1996 applies.• Option W2: Used in the UK when the HGCRA 1996

applies.


Secondary Option Clauses• The Secondary Option Clauses are set out under 22 headings and may be

incorporated or not as required. This gives great opportunity to tailor the contract to suit the client and project requirements.

• You must elect to include them; No automatic incorporation

• Option X1: Price Adjustment for Inflation • Option X2: Changes in the Law• Option X3: Multiple Currencies• Option X4 : Parent Company Guarantee• Option X5: Sectional Completion • Option X6: Bonus for Early Completion• Option X7: Delay Damages• Options X8-X11 (PSC)• Option X12: Partnering• Option X13: Performance Bond• Option X14 :Advanced Payment• Option X15: Limitation of the Contractor’s Liability for Design• Option X16: Retention• Option X17 : Low Performance Damages• Option X18 – Limitation of Liability• Option X19 : Not Used• Option X20: Key Performance Indicators (not with X12)• Option Y(UK)1 – Project Bank Account• Option Y(UK)2: The HGCRA 1996• Option Y(UK)3: The Contract (Rights of Third Parties) Act 1999• Option Z: Additional Conditions of Contract


Cost Components & Contract Data• The Cost Components are two schedules which contain cost

information supplied by the Contractor. They are used to assess payments to the Contractor and the cost effect of Compensation Events. Costs are defined in relation to people, equipment, plant and machinery, utility charges, manufacture and fabrication, design and insurance.

• Known as the ‘Contract Particulars’ under JCT, the Contract Data provides data required by the specific conditions of the contract. The section is split into two parts

• Part 1 - Data provided by the Employer

• Part 2 – Data provided by the Contractor. Information includes...

• Name of Parties• Insurance Details• Start and Completion Dates• Interest Rates• Retention Percentage if applicable• Rates for Delay Damages if applicable


Works and Site Information• The Works Information specifies and describes the Works to

be carried out, including Contractor’s design responsibilities. Most information will be given in a specification and on production drawings in the traditional manner. However, it may also include…

• Statement of Constraints on how works are carried out• Health and Safety• Details of Contractor’s Design elements• Information on Specialist Subcontractors• Details of Tests• Performance or Advance Payment Bonds

• The Site Information describes the site and its surroundings and is used to assess compensation for site conditions. Information may include soil investigations, contamination reports and details of below ground services.


Managing Change• NEC3 includes a clause which obliges the Contractor and

Project Manager to notify each other as soon as they become aware of any matter which could increase the Prices or delay Completion. This is called an Early Warning.

• Under the JCT Type, the procedure for managing change is known as ‘Variations’. A Contractor’s Schedule 2 Quotation can be used to obtain a fixed price quotation for a variation. However, it is not mandatory and typically responsibility lies with the QS to price variations. Disputes can arise and are often not resolved quickly.

• Under the NEC3, the procedure is known as ‘Compensation Events’ and an immediate assessment of the cost and time implications are made. These are mandatory and binding, with no provision for later review. They are events which do not arise from the Contractor’s fault and entitle the Contractor to be compensated for any effect the event has on the Prices and Dates.

Compensation Events are listed in the Core Clauses and the Options. The Contract Data also has provision for the Employer to insert their own additional compensation events.


5. A New Language

5. A New Language

Terms in italics are project specificDefined terms have capital initialsThese drafting principles make it easier to understand the contractThese principles should be adhered to when drafting documents & communicating

Clause 11.1:

Terms identified in the Contract Data are in italics eg. Period for reply, boundaries of the site

Defined terms have capital initials, eg Accepted Programme, Completion, Defect

The index is useful to refer to as it details the links within the contract – it helps build the intellectual map

5. A New Language

The NEC contract introduces a number of new terms which are peculiar to the NEC contract, such as

Compensation Events - similar to variations, extensions of time and loss and expense under other contracts.

Contract Data – there are two parts – Part 1 is completed by the Employer as part of theInvitation to Tender documentation, and Part 2 is completed by the Contractor as part of his tender. If the Contract Data is not completed properly, then it will be very difficult toproperly administer the contract

Project Manager (PM) – similar to the Architect / Contract Administrator under otherContracts

Schedule of Cost Components and the Shorter Schedule of Cost Components – Crucial in the assessment of Compensation Events

5. A New Language

Works Information - Significant in understanding the scope of work, and in describing the constraints in providing such work

Risk Register – assists in creating awareness about project specific risks

Fee percentages – there are several fee percentages that need to be tendered in respect of assessing cost, and a knowledge of their application is crucial when formalising an NEC 3 contract

Activity Schedule – under Option A this document is a series of lump sums, and payment is only due if the activity is completed (similar to milestone payments). Careful consideration of the Activity Schedule will maximise the contractor’s cash flow within interim payments.

• There are 19 defined terms relevant to the core clauses

• These are in alphabetic order

• Additional defined terms exist dependent upon the:– Main Options– Secondary Options

5. A New Language

Clause Defined term & comment Linkage

11.2(1) Accepted Programme – latest Accepted Programme supersedes previous. Vital to have an Accepted Programme in place for the good of the project

31.3, 50.3 (remedy)

11.2(2) Completion – the second bullet serves as a basic filter, the first bullet allows the Employer to be very precise

X7.1 (remedy)

11.2(5) Defect – two bullets – one relates to the Works Information, the other to applicable law & accepted design

45.1 & 45.2 (remedy)

11.2(9) Key Date – critical milestone from the Employer’s perspective, often reflects interface between the Contractor and Others

14.3 (alter), 25.3 (remedy)

Some Defined Terms and Basic Contract Linkages

5. A New Language

Clause Defined term & comment Linkage

11.2(10) Others – eg Local Authorities, Archaeologist 60.1(5)

11.2(14) Risk Register – consists of risks identified as part of the tender process plus early warnings

Contract Data, 16.4

11.2(16) Site Information – factual information about the site 60.1(12), 60.2, 60.3

11.2(18) Working Areas – necessary for Providing the Works & used only for work on this contract

15.1, SCC, SSCC

11.2(19) Works Information – specifies and describes the works or any constraints

14.3, 60.1(1)


5. A New Language

Clause Defined term & comment

Main Option A, 11.2(20)

Activity Schedule (note the sequential clause numbering)

Main Option A, 11.2(27)

Price for Work Done to Date (PWDD) – completed activities

Main Option B, 11.2(28)

Price for Work Done to Date (PWDD) – bill items

Main Option C,11.2(23)

Defined Cost – definition of what is paid for under Options C-F

Main Option C, 11.2(25)

Disallowed Cost – definition of what is not paid under Options C-F

X5.1 Sectional Completion – references equally apply to Sectional Completion eg clause 16.1

5. A New Language


6. Roles & Responsibilities

Key People• The ECC sets out the responsibilities and roles of the

following key people:

• Employer Not involved in administrating the contract – no power to issue instructions.

• Project ManagerKnown as the ‘Contract Administrator’ under the JCT, the Project Manager manages procurement of the Works for the Employer. Contract contemplates appointment prior to the Consultants so that they manage the design process.

• SupervisorKnown as the ‘Clerk of Works’ under the JCT, the Supervisor exercises certain responsibilities on site for the Employer, including testing, monitoring quality and issuing the Defects Certificate.

• Contractor • Subcontractors• Adjudicator• Note, no references to an Architect or QS by

profession.

Unless delegated the role or responsibility, the Architect who produced the Works Information, may not have a role in the Contract and therefore have no responsibility to monitor quality and compliance with the Works Information. The Supervisor may have limited knowledge of the Works Information and this may affect the quality of the completed building. Traditionally as Contract Administration, the Architect has a responsibility to monitor quality.


A typical project using NEC Contracts

Client

Project ManagerPSC or PSSC

Consultant SupervisorPSC or PSSC

ContractorECC or ECSC

SubcontractorECS or ECSS

SuppliersECS or ECSS

SuppliersSC or SSC

ConsultantPSC or PSSC

AdjudicatorAC


Project Manager Consider – No Contract Administrator / No Clerk of Works/ No Architect / No Quantity Surveyor

• Therefore the Focal Point of Contact

• Has a defined Role and responsibility

• Utilises a clear Matrix for Actions and Reactions

• Facilitator of a formulaic Approach to solutions

• Role is all about fair and impartial administration of the contract on behalf of the Employer with the intention of achieving the Employers goals in terms of budget, program, quality and brief - (10.1)

• Duties include changing the works information, managing change and using expertise in management and construction judgments.

• The employer has a relatively minor role (The PM running the show!!!)

• Supervisor ensures compliance with Works Information


Adjudicator • The Adjudicator is appointed jointly by the Employer and Contractor and only becomes

involved when a dispute is referred to him.

• A Person independent of both the Employer and Contractor required to give decisions within stated time limits

• If either party does not accept decisions then they may proceed to Arbitration

• Adjudicators fee is shared jointly between parties (Personal experience not so)

• Adjudicator only person to change a Project Managers decision

• Now witnessing insertions into Z clauses to remove adjudication


Delegation • The contract enables the Project Manager and Supervisor, after notifying the Contractor,

to delegate their actions

6. Roles & ResponsibilitiesConsider producing some sort of RACI for your project (Careful about Growing legs and impact on Contract) – below selection of just three pages from 25. (Nottingham Council Framework)

7. Works Information

• The Contract Data ‘refers’ to the documents which contain the Works Information.

– Contract Data Part 1 identifies the Employer’s Works Information

– Contract Data Part 2 identifies the Contractor’s Works Information for his design


• Clause 21.1 states“The Contractor designs those parts of the works which the Works Information states he is to design”

• If the Employer carries out most of the design, a list of items designed by the Contractor may be stated. “The Contractor designs the following …..”

• If, conversely, the Contractor carries out most of the design, a list of items designed by the Employer may be stated. “The Contractor designs all of the works with the exception of the following …….”


• What happens if there are inconsistencies between the Works Information provided by the Contractor (for his design) and that provided by the Employer?

Clause 17.1notify

Clause 14.3Ability to change

Clause 60.1(1),

Second bullet

Changing the Contractor’s WI to comply with the Employer’s is not a compensation event. In that respect, the Employer’s WI is dominant


• What happens if the Employer’s WI contains inconsistencies in drafting and/or is ambiguous?

Clause 17.1,Notify

Clause 14.3 – ability to change

Clause 63.8, Employer

pays

The Employer compensates the Contractor for any inconsistency or ambiguity


TELEVISIONS – 42” or 24” – 63X £127.99 = £8063.37

8. Importance of Program

• Under the JCT Types, the Contractor is required to submit a Programme but it is not a binding Contract Document and there is no requirement to keep it up to date.

• In contrast, the Accepted Programme forms part of the Contract Data under the NEC3 and the Contractor is required to keep it up to date. Any changes must be accepted by the Project Manager within 2 weeks. It is an important document and is used to monitor/assess the time effects of Compensation Events.

Programme should show…

• Start Date/Completion Date/Key Dates

• Planned Completion• Order and Timing of Operations• Time Risk Allowances• Health and Safety Requirements• Information from Required Others• Float


• The programme is key – it’s the ‘beating heart’ of the NEC

• The NEC programme is a joint programme

• It provides critical management data

• If the programme is not compliant/accepted it becomes very difficult to objectively assess compensation events

• In order to ensure acceptance it is worthwhile considering a joint review before final submission/acceptance


• To say that the NEC is “big into programming” would be a massive understatement.

• Under most JCT contracts – Contractor provides a program uses to monitor progress and possibly uses to illustrate delays if making a claim

• Under NEC the contractors first program must be provided within the period for reply stated in the Contract Data Part 1 (usually 2 weeks)

• If the contractor fails to provide the PM can deduct 25% from all payments until program is provided in the accepted form.

• Clause 31.2 gives specific requirements for the program – as usual start, end, key dates but also items not usually previously submitted like float, risk, resources.

• Clause 31.3 also gives the reasons why a Project manager may reject the program


• Clear and objective requirement for a detailed program with a statement of resources

• Regular updates which provide the essential tool for the parties to manage the project and to notify and manage the effect of problems and delays etc.


• The programme needs to be accepted as a priority

• Early warnings (time related) will be difficult to identify without a good programme

• Compensation events will be very difficult to objectively access without an Accepted Programme and active early warnings process


Three Stimuli to Good Management:

• Meet to agree the first programme (whether accepted as part of the tender or not):

• Project on the wall• Hold meetings to agree Programs in draft before submissions• Agree changes informally• The programme is the project!• An acceptance is then required• This is a much more collaborative way of working• We also develop our understanding and what the project pressures are –

this will aid the identification of early warnings


Practical Suggestions:

9. Early Warning

• Early Warnings are very important part of NEC• They are about identifying potential problems before they occur with a view

to avoidance or mitigation• Designed to avoid waiting until they have happened and seeking to apportion

blame• There is no entitlement under Early Warnings• They should not be viewed as claims however if not given or given and

ignored have consequences• Under Clause 16.1 Contractor or PM can issue• Consequences if Contractor not issued when could have – under options C-F

could be disallowed costs• Clause 16.2 gives rights to PM or Contractor to Instruct attendance at risk

reduction meeting.• Issue of EW entails PM must add to the Risk Register• All about encouraging proactive and collaborative working

9. Early Warning

The early warning process• The Project Manager should facilitate and

trouble shoot the process• This is not about casting blame• Its about mature project management –

recognising that both parties will encounter problems

• Its about overcoming them collaboratively

9. Early Warning

The early warning process:

• ‘Notify’ – separately (13.7)• 4 reasons• 5th reason is discretionary• Protecting time, quality and cost

16.1 Notify

9. Early Warning

Impact if we don’t manage Early Warnings:

Clause 16.1Notify (separate communication:

clause 13.7)

The Prices

Clause 63.5: “…event is assessed as if the

Contractor had given early warning”

Disallowed Cost

Clause 11.2 (25)*….was incurred only because the Contractor did not ….give

an early warning….

Options A-F

Options C-F

Under Options C-F failure to notify early warnings can have a detrimental effect on the Prices (value) and Defined Cost (cost)

*11.2(26) under Option F

9. Early Warning

9. Early Warning

Implementing the key procedures: Early warnings

Procedures in contract

• Risk Register to be compiled by the Project Manager

• Each early warning to be notified and recorded in the Risk Register

• Mitigation & risk reduction to be undertaken as per clause 16.3

Practical suggestions

• Ensure the ethos is right within the team – early warnings are not a pre-empt to a claim!

• Develop the Risk Register from the tender process

• Consider a protocol of picking up the phone and discussing initially. If both parties agree/one feels strongly then follow through with the paperwork?

• Ensure dialogue is maintained• Consider a categorisation system eg. category 1 = critical (meet in the next 24 hours),

category 2 = non-critical (record and discuss at the next progress meeting)

9. Early Warning

10. Compensation Events


Compensation events are defined as events which if they do not arise from Contractors fault, entitle Contractor to be compensated for effect on the Prices, Key Dates and Completion Date

Therefore it is important to remember that compensation events deal with both time and money

What is a compensation event?• Events which entitle the Contractor to be compensated for

the effect on the Prices, Key Dates and Completion Date• Both time & cost are assessed in a single quotation• Some compensation events may be negative eg omit work

from the Works Information (this will have a negative impact on the Prices but will not bring forward the Completion Date)

• This section rewrites the traditional rule book in terms of change management Clearly defined timescales are in place Failure to comply with these timescales can result in the Contractor

being time barredThe timescales are clearly defined with sanctions in place for those that do not follow the process!


What is a compensation event?

• Compensation Events are the ONLY way to change price / and or Completion Date

• All in one place and treated in the same way• Cost assessed at forecast change in cost• Time forecast delay based on latest Accepted

Programme• All to tight and defined timescale


What are the reasons for a compensation event?

• There are three main reasons:

• A change of mind/decision

• Failure to do something (a lot relate back to the programme

• Something has happened that is beyond a reasonable risk level


Where are they listed?• There are four sources of compensation events:

• Clause 60.1 (19 reasons)

• A further 3 stated in clauses 60.4, 60.5 & 60.6 (Options B & D)

• Also secondary Options X2, X12.3(6) & (7), X14.2, X15.2 & Y2.4

• Potentially additional compensation events in Option Z


Summary of the compensation event clausesClause Description Relevant Clauses

60.1(1) Change to the Works Information 14.3, 27.3 & 44

60.1(2) Access and use of the site 33.1

60.1(3) Employer providing something 31.2

60.1(4) Stop or not start any work 34.1

60.1(5) Employer and Others working times and conditions 31.2

60.1(6) Replying to communications 13.3

60.1(7) Object of value 73.1

60.1(8) Changing decisions -

60.1(9) Withholding acceptance 13.8, 13.4, 24.1,31.3

60.1(10) Instructions to search 42.1

60.1(11) Test or inspection causing delay 40.5

60.1(12) Physical conditions 60.2 & 60.3

60.1(13) Weather -

60.1(14) Employer’s risk 80.1

60.1(15) Take over 35.2

60.1(16) Employer provides materials, facilities and samples 40.2

60.1(17) Correction to an assumption 61.6

60.1(18) Breach of contract -

60.1(19) Unforeseen events 19.1


The compensation event process – Overview:• The compensation event process is clearly defined• Section 6 is divided into 4 main sections: Notify,

Quote, Assess, Implement• Timescales are in place with sanctions for either

party if they are not followed• The timescales are about agreeing the impact not

when the work is done• Both time and cost are assessed• There is no separate prolongation/extension of time


The compensation event process – Overview:


• There is a defined process to agree (or impose) the effects of a compensation event

• within defined time limits• Notification (61)• Quotation (62)• Assessment (63/64)• Implementation (65)• Either Party can make sure that process and time

scales are adhered to

Implementing the key procedures: Compensation events

Procedures in contract

• Clear timescales and procedures detailed in section 6

• Both parties may ultimately be time barred if they fail to follow the timescales

Practical suggestions

• Meet to discuss appropriate compensation events before final submission

• Discuss any issues – the aim is to informally agree before formal submission

Agree to meet regularly & maintain dialogue


Consider the contractual loop and ensure keep client informed

11. Communication

Communication protocol: Clause 13.1• Clause 13.1 clearly states the methods of communication which the contract requires in a form that can be read,

copied and recorded

• The contract requires professional record keeping

• The Project Manager should discuss and agree with the Contractor which method(s) of communication will be used at commencement of the contract

• The NEC published guidance on communication in April 2013

• Good examples and suggestions are contained within this guidance

11. Communication

• As a minimum, the ECC pro-forma’s are recommended as the means of communicating

• They state the relevant clause

• The communications are structured

• This is not being contractual – it’s following what the contract requires (‘acting as stated’)

Communication protocol: Clause 13.1Media Pro’s Con’s

Letter/email • Easy to implement • Need to log each communication • They can be ambiguous about

what is being drafted

ECC3 pro-forma • Clear communication (as per April 2013 guidance)

• Need to log each communication

Collaborative softwareSpeciality NEC

• Clear communication• Automatically logs

communication (systems do vary)

• Cost involved• Require buy-in from the team

11. Communication

Communication protocol: Clause 13.7

• ‘Notified’ matters need to be communicated separately!

• Each early warning should be notified separately

• Each defect should be notified separately

• Each compensation event should be notified separately

11. Communication

Full list of notifications under the ECC (clause 13.7)Clause Issue14.2 Delegation

14.4 Replacement of the PM or Supervisor

16.1 Early Warning

17.1 Ambiguities and inconsistencies

18.1 Illegal or impossible requirements

31.3 Programmes

40.3 Tests and inspections

42.2 Defects

61.1 Compensation Events



61.5 Decisions on Compensation Events

61.6 Assumptions on Compensation Events

62.6 Quotations for Compensation Events

64.3 Assessments of Compensation Events

64.4 Late assessment of Compensation Events

65.1 Implementation of Compensation Events

73.1 Discovery of objects of value etc

11. Communication

12. Management of Risk

• The Risk Register is a new feature under NEC3.

• It is a live document that is formed by the Project Team post-contract (i.e. not a contract document) and will change as the work progresses.

• Risks can be added to the Register as part of the Early Warning process, or removed because of actions taken by the parties (i.e. soil investigations).

• Risks are allocated a likelihood of occurrence and impact, along with an approximate cost effect. Regular Risk Reduction Meetings should be held during the Contract.

12. Management of risk


• Clause 80.1 defines the Employers Risks under the contract• Clause 81.1 sets out that all other risks are carried by the Contractor.• Clause 83 each party indemnifies the other against events which are at its risk

• Often ITT’s are including preliminary risk registers to help prospective contractors understand what getting into.

• Risk Registers are a practical project management tool , time or cost consequences should fall outside of clause 83 and be addressed through other mechanisms (CE’s) Parties need to be very clear as to how any such risks are allocated.

• Recent difficulties around final entry clause 80.1 which allows additional Employers risks to be specified in the Contract Data in order to include a preliminary risk register .

• Employer will often append or refer to the risk register in the contact data and if that register assigns actions to the employer could be argued that they become part of 80.1

• Broad consensus that risk register operates at a practical level and not intended to alter 80.1 and 81.1 however still limited case law and remains uncertainty.

• Prudent for clarity to amend the contract that items in the risk register are not employers risks.


Clause 80 Employer s risks (damage and 3rd party claims)

Clause 81 Contractor s risks (by difference)

Clause 83 Indemnity» Each party indemnifies the other» Net contribution

Clause 84 Insurance cover 4 No

Clause 85 Insurance policies

Clause 87 Insurance by Employer

Clause X18 Limitation of liability

13. Points to Note

13. Points to Note

Check the Z clauses – Advice is to minimise however increasingly seen used

• Introduction of Provisional Sums• Significantly altering of periods (4 weeks to become time barred)

Key risks – physical conditions:

• Physical conditions (clause 60.1(12)) are a compensation event if they are over and above the defined risk:

• …… an experienced Contractor ….. such a small chance of occurring ……unreasonable for him to have allowed for it

• When ‘judging’ if it is a compensation event – clause 60.2 lists what the Contractor is deemed to have taken account of

The Contractor needs to take account of the risks which are within the parameters of this definition

On most projects this represents a significant risk

Example: A new housing development on a disused hospital site: Discovery of a redundant drain and telephone cables in different places to those shown on drawings is unlikely to be a compensation event (?)

13. Points to Note

14. Proformas

15. Signposting

https://www.neccontract.com/

https://www.neccontract.com/NEC4-Products/NEC-Users-Groups

Bronze - £365Silver - £775Gold - £1445Platinum - £2575

Consider

Typical contract booklets £20-£60

Bundles circa £80

Full Suite - £540

15. Signposting

15. Signposting

NEC eprint & ecorporate licences

eprint – Will allow a 1 user (1 machine licence) access to the NEC complete suite of 29 documents (the clauses in PDF format and the Contract Data and Forms in standard word format – last priced Aug 2011 was £1095 + VAT 25% discount for each aditional licence.

ecorporate - Unlimited access to the above for your organisation was £8,500+ VAT or a corporate to minimise however increasingly seen used

15. Signposting

• BOOK 1: Introduction to the Engineering and Construction Contract• BOOK 2: Procuring an Engineering and Construction Contract• BOOK 3: Managing the contract• BOOK 4: Managing Change• BOOK 5: Managing Procedures

Barry Trebes and Bronwyn MitchPublisher: Thomas Telford

15. Signposting

15. Signposting

RecapOverview of NEC Contract1. History 2. Overview3. Contract Choices4. Layout and Clauses5. A New Language6. Roles and Responsibilities7. Works Information8. The IMPORTANCE of Program9. Early Warnings 10. Compensation Events11. Communication12. Management of Risk13. Points of Note14. Proformas15. Signposting

An Introduction to NEC3 Contracts

Stuart Brisbane

Thanks for Listening

30th March 2017

ProgramWorks information / Contract DataPaymentMore detailed look at particular clauses (suggestions)WeatherDefectsDefined / Disallowed costAccelerationRiskCompensation EventsTerminationDispute ResolutionZ Clauses – Time / Provisional SumsOne to One Support

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Transcript of Construction Futures Wales - NEC Contracts Overview Workshop