LECTURE 3 The New Engineering Contract - particular features and usage Warwick University.

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LECTURE 3

The New Engineering Contract - particular features and usage

Warwick Universitywww.vantagethree.com

Introduction

Content

The New Engineering Contract - particular features and usageA look at the NEC being the most common contract in use today for major projects. What does it try to achieve, how does it operate, what about Z clauses?Comments and case studies on good examples and also bad examples. What are the usual failures?Note that the following day we will go into the whole subject of disputes and how these might be resolvedwww.vantagethree.com

Introduction

In July 2005 the NEC published the 3rd edition of its suite of Contracts (NEC3).

(The 1st edition having been published in 1993, the 2nd edition in 1995.)

NEC3 Procurement and Contract Strategies, Part 1, Page 1, Opening Paragraph:

NEC is a modern day family of contracts that facilitates the implementation of sound project management principles and practices as well as defining legal relationships.

Key to the successful use of NEC is users adopting the desired cultural transition. The main aspect of this transition is moving away from a reactive and hindsight-based decision-making and management approach to one that is foresight based, encouraging a creative environment with pro-active and collaborative relationships.

www.vantagethree.com

Introduction

Contract Opens..

Actions 10

10.1The Employer, 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.

Not a contract to be put in the drawer and forgotten about until problems arise!!


Introduction

It is said that 3 main objectives to NEC3 exist:


Key Principles of NEC3

1. Flexibility

How?

Promotes easy selection of best fit procurement route for project circumstance;Whole family of interlocking contracts for engineering & construction as well as any term or professional contract;Similar structure & terminology across whole family to promote ease of learning and back to back arrangements for process integration and contractual cover;Modular structure within each contract, so that can rapidly assemble best fit procurement arrangement without expensive legal input.www.vantagethree.com


2. Clarity

To promote ease of understanding at the doer level (approx. 1/3 size) & therefore to reduce disputes due to misunderstanding or omissions.

How?

Simple & common structure;

Flow charting ensures logic flow;

Shorter sentences, bullet points, no cross-referencing Lawyers say Janet & John language;

Less subjective : precise definitions. Avoids fair and reasonable;

shall to denote an obligation is not used but rather present tense verbs: acts, notifies, obtains;

Avoids technical terms & legalistic language - Difficulties?;

Contractor's obligation is to Provide the Works in accordance with the Works Information. www.vantagethree.com


2. Clarity (Continued)

Clear division of function, responsibility (& risk) helps accountability & motivates people to play their part.

Clearer definition of compensation events.

Traditional role of Engineer or Architect has been split into four roles:

The designer (not mentioned in contract);

The Project Manager : responsible for time and cost management on the Employers behalf & evaluating reasonably submissions for acceptance;

The Supervisor : responsible for ensuring that the quality of construction meets that in the Works Information;

4.The Adjudicator : an independent third party brought into rapidly resolve any disputes. A cheaper, faster, simpler, form of dispute resolution cf. arbitration?www.vantagethree.com


Clarity (Continued) Problems

It is not always clear whether the contract intends to impose an obligation on the Contractor or Project Manager (or indeed any party).

In conventional drafting (and in everyday language) obligations and optional activities are distinguished by the use of must or shall for the former and may for the latter.

NEC3 and its predecessors occasionally make use of these expressions, but more frequently it simply describes the activity that is anticipated e.g. the Contractor notifies, which can be unclear.

It is ironic that one of the few instances that shall is used is in relation to the somewhat vague obligation on the Parties in Core Clause 1 to: act in a spirit of mutual trust and co-operation.www.vantagethree.com


3. Stimulus to Project Management

A range of contractual mechanisms and incentives to promote collaborative project management, thus increasing predictability of time, financial aspects & quality.

How?

Focus on communications, cooperation & programme;Updated Risk Register & active risk management new to NEC3;Early warning of issues ad process for resolution;Strong emphasis on detailed updated agreed programme;Defined criteria and process for rapid resolution of time & cost affects of compensation events;Timescales to all actions, some with sanctions/stimuli if not done especially for Project Manager in NEC3!!!Separate and better defined Roles & Responsibilities.

Period for Reply is defined in the Contract Data.

Notifications must be in writing to be effective and must be communicated separately.www.vantagethree.com

The documents to NEC3 and the procurement options

NEC3 is a family of contract documents:

the Engineering and Construction Contract (ECC) (the main standard form of NEC contract); the Engineering and Construction Subcontract (to be used where the Contractor has been appointed under the ECC); the Engineering and Construction Short Contract (ECSS) (for simpler projects, involving lower risks and requiring less sophisticated project management); the Engineering and Construction Short Subcontract (to be used where the Contractor has been appointed under the ECSS); the Professional Services Contract (PSC); and the Adjudicators Contract (for appointment of an Adjudicator to determine disputes).

Plus, new to NEC3:

the Term Service Contract (TSC) (for the appointment of a supplier or contractor over a period of time, e.g. for long term maintenance); andFramework Contract (FC) (for the appointment if a panel of contractors from whom one will be selected to provide a defined scope of work from time to time);NEC3 also contains a Procurement and Contract Strategies document to assist with choices.

We are concerned principally with the Engineering & Construction Contractwww.vantagethree.com


Contracts Map:

NEC3 also continues a Procurement and Contract Strategies document to assist



Main Options

Each Contract consists: Core Clauses (Black Book) and Options

The Main Options (one must be chosen) allow lump sum through to cost plus:

A Priced contract with activity schedule

B Priced contract with bill of quantities

C Target contract with activity schedule

D Target contract with bill of quantities

E Cost reimbursable contract

F - Management contract

Option Booklets contain Core Clause + relevant main option clauses which are highlighted in Bold

Must also select Option W1 or W2 if Construction Act applies, to complete the chosen Main Options.www.vantagethree.com


Corresponding allocation of financial risk



Secondary Options : Bolt-ons to fine tune risk allocations

Option X1 :Price adjustment for inflation

Option X2 :Changes in the law (without it, the Contractor takes the risk of 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

Option X12 :Partnering

Option X13 : Performance bond

Option X14 : Advance payment to the Contractorwww.vantagethree.com


Option X15 : Limitation of the Contractors liability for his design to reasonable skill and care (compare to fit for purpose)

Option X16 : Retention

Option X17 : Low performance damages

Option X18 : Limitation of Liability (worthy of considerable attention!!)

Option X20 : Key Performance Indicators

Option Y(UK)2: The Housing Grants, Construction and Regeneration Act 1996

Option Y(UK)3:The Contracts (Rights of Third Parties) Act 1999

Option Z :Additional conditions of contract

The test is the extent of Option Z employed!!


Payment Provisions

NEC3 renames Actual Cost to Defined Cost.

Defined Costs is still subject to disallowed Cost.

At Clause 11.2 (23), Defined Cost is:

The amount of payments to Subcontractors for work which is subcontracted without taking account of amounts deducted for:

retention;

payment to the Employer as a result of the Subcontractor failing to meet a Key Date;

the correction of Defects after Completion;

payments to Others;

the supply of equipment, supplies and services included in the charge for overhead cost within the Working Areas in this contract

And, the cost of components in the Schedule of Cost Components for other work.

Less Disallowed Costs


Payment Provisions

Clause 11.2 (29) The Price of Work Done to Date = forecast Defined Cost + Fee.

What is the Fee?

Clause 11.2 (30) Prices are lump sum prices for each activity to the Activity Schedule.

All costs not included in the Defined Cost are deemed included in the Fee!!! [52.1]


Payment Provisions

Option C Target Cost


Payment Provisions

Option C Target Cost

The intention behind the NEC Target Contracts is to share the pain of cost overruns and the gain of cost savings between the Contractor and the Employer.

That gives both parties an interest in completing the project on time and on budget and, where possible, incorporating value engineering changes.

The pain/gain sharing arrangement does not take place until Completion, when a preliminary assessment of the Contractors share is made, with a final assessment being made at the final account stage: Core Clauses 53.3 and 53.4.

Difference of total Prices and the Price for Work Done to Date => share ranges


Risk Allocation & Risk Management (Risk Register)

Risk & outturn cost

NEC3 provides an ideal basis to encourage and support risk management

NEC3 starts with a fair allocation of risk but beware of heavy Option Z usage!



Risk Register - Clause 11.2(14)

Part of Contact Data Part 1 from the Employer; Part 2 from the Contractor

It is a register of :

the risks which are listed in the Contract Data and;

the risks which the Project Manager or the Contractor has notified as an early warning matter.

It includes a description of the risks and a description of the actions which are to be taken to avoid or reduce risk.

It is a post-contract risk management tool and NOT a place for risk allocation between the Parties.

To further the objective of good project management.

The expectation of the draftsmen is that if risks are identified early enough it will often be possible to prevent risks from becoming reality or, at least, to manage and minimise the risks.



A project risk register:


Change Control (Early Warnings, Compensation Events)

Early Warning

The vehicle for notification and commencement of the project-based risk management process is the Early Warning.

The Contractor and Project Manager give an early warning by notifying the other as soon as either becomes aware of any matter which could:

Increase the total Prices;

Delay Completion;

Delay meeting a Key Date or;

Impair the performance of the works in use.

In addition the Contractor may give early warning by notifying the Project Manager of any other matter which could increase his total cost.www.vantagethree.com


Early Warning (Cont.)

The Early Warning process seeks to:Encourage a collaborative and proactive approach to risk and change management;

Improve the management of risk and change in project-time;

Enable the processing of Compensation Events.

It is recommended that the system is integrated through the supply chain and to avoid insignificant risk with low probabilities and low impacts in order to avoid clogging the process.www.vantagethree.com


Early Warning (Cont.)

Sanction for failing to comply?

Clause 63.5, the absence of an early warning has to be taken into account when making the assessment of the amount due for compensation events, the contractor cannot recover more in the assessment than if an early warning notice had been served.

If the Project Manager has notified the Contractor of his decision that the Contractor did not give an early warning of a compensation which and experienced contractor could have given, the event is assessed as if the Contractor had given early warning.

And further:

Disallowed Cost includes those costs incurred because no early warning was given.



Compensation Events

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

As such all risks not to be taken and priced by the Contractor should be made compensation events under the contract.



Compensation Events

19 Compensation Events are found at Sub-clause 60.1.

However there are also 3 in main Options B & D regarding quantities.

They also exist in some Secondary Options.

And the may be some added by way of an Option Z provision



Compensation Events from Sub-clause 60.1:

Project Manager gives instruction changing the Works Information;

(2)Employer does not allow access to part of the Site;

Employer does not allow access to part of the Site;

Default by Employer or Others;

Contractor encounters certain physical conditions;

A weather measurement is recorded, less frequently than once in ten years;

An event which is an Employers risk stated on the contract (see Clause 80.1)

(18)a breach of contract by the employer which is not one of the other compensation events in this contract.



Compensation Events fit into the overall Risk Management process



A Condition Precedent/Time-Bar exists.

Clause 61.3

If the Contractor does not notify a compensation within eight weeks of becoming aware of the event, he is not entitled to a change in the Prices, the Completion Date or a Key Date unless the Project Manager should have notified the Contractor but did not.



Hazards of the Condition Precedent

It may be that the contractor does not serve a formal notice because, by words or conduct, the employer or indeed the Project Manager represents that they will not rely upon the strict eight week notice period.

The contractor would also need to show that he had relied upon this representation.

In addition, this approach is supported by core clause 10.1 which requires the parties to act in the spirit of mutual trust and co-operation.

Avoid this difficult and dont rely on verb representations or a relaxed approach to the administration of the Contract give notice!

Not going contractual only implementing the good project management provision of the Contract which serve both Parties.

CEs can run to hundreds process becomes overloaded and unworkable.



Compensation Events Difficulties

Does a company become aware when an employee, site manager, director, board of directors becomes aware?

Based on the case law, a company will only be deemed to have become aware when the management of that company became aware. Therefore, in the context of notifying a compensation event, the 8 week period would not start to run when an employee had knowledge but the time would start to run when the site manger had knowledge of the event.

What is meant by becoming aware?

It is arguable that a contractor at managerial level did not become aware until it received financial reports indicating losses and legal advice was sought to determine whether the event was a compensation event.

A further difficulty with notification, is that it may not be immediately apparent that an event will be a compensation event e.g. ground conditions it may be weeks after the date encountered when it is determined that a reasonable contractor should not have taken them into account?www.vantagethree.com

Programme & Time

No traditional clause requiring the contractor to proceed regularly and diligently.

Rather obligation is to produce programme and maintain it showing real rate of progress.

The fundamental aspects of managing a NEC3 programme are:

Foresight identifying issues and dealing with them as they occur;

Detail quality & content;

Collaboration all parties contribute it the process that outturns an agreed revised programme. Effect of change is more easily & more accurately evaluated against the same.


Programme & Time

Importance of Programme

If the contractor does not submit the first programme when required, 25% can be withheld in interim payments. [50.3].

If no accepted programme in place, Project Manager is entitle to give extensions without regard to the Contractors outdated programme.

Contractor is required to update the programme as instructed or at the intervals prescribed in the contract so that there is always an accepted programme.

Each revised programme is to show actual progress on each operation and the effect on the remaining work; effects of CEs; plans for handling delays & defects; any other contractors proposed changes to the Accepted Programme.

Terminal Float belongs to the contractor!!!! [Core Clause 63.3].www.vantagethree.com

Summary

NEC 3 has many legitimate and laudable aims;

Improvement on traditional contracts;

Requires increased resources to operate effectively;

Improved administration;

Complies fully with the Achieving Excellence in Construction (AEC) principles and recommended by the OGC for public sector construction procurers on their construction projects;

Gaining popularity: BAA - T5, CTRL, Crossrail, ODA, BIA, South Africa, MENA

The drive to achieve simplicity would appear to provide plenty of scope for disputes to arise as a result of the uncertainty in the meaning and application of clauses.

an appropriate contractual framework to use where the parties genuinely wish to adopt a collaborative approach to a project.

Key to success is strong project management techniques


Q & A


Q&A / Conclusions / Feedback

Thank You

LECTURE 3 The New Engineering Contract - particular features and usage Warwick University.

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