Moving procurement to the next level

by Gordon Moffat

The NEC Engineering and Construction Contract (ECC) – previously the New Engineering Contract – was first introduced in 1993 and the third edition, NEC3, came into operation in 2005. Despite the considerable press coverage it has received in the UK, it is still very new to a lot of contractors and employers. However, a number of parties across the Gulf are considering adopting one of its various alternatives and it is already being used by some employers on the Palm Jumeirah.

The NEC is drafted in simple language and is designed to be used across all industry sectors and international jurisdictions. It is an improvement over the more traditional forms of construction/engineering contract due to its flexibility, clarity and simplicity, and its stimulus to good management.

There are six different pricing options that are available for selection by the employer:
• 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.

The options reflect varying degrees of risk allocation between the employer and the contractor. Options A and B are priced contracts where the risk for being able to carry out the work for the agreed price rests with the contractor. Options C and D are target contracts where the employer and the contractor share the financial risks in an agreed proportion. Options E and F are two types of reimbursable contract where the financial risk is largely borne by the employer.
For a particular contract the employer will choose one main option that best suits its strategy for the project. These optional clauses are then combined with the core clauses to form the contract. All the main options can be used, with the boundary between design by the employer and design by the contractor, set to suit the chosen strategy.

The NEC is more than just a contract; its ethos is to be a day to day management tool that is proactive rather than reactive. The notion of “let’s get the job done and sort out the claims later” no longer holds, and its focus on early warning and strict time constraints is designed to concentrate the partnership of the project manager and contractor on resolving matters as they arise. One option in this respect is the opportunity to incorporate a dispute review board, which will be formed at commencement of the project and review, guide and issue directives based on disputes put to it during the project.

The prescriptive nature of the NEC demands significantly more resources than other contract forms. There are, for example, onerous demands for the contractor to prepare a programme that needs to include resource details and each activity has to have an accompanying method statement. The programme needs to be updated by the contractor during the project to reflect the implications of compensation events [variations or changes] and is an integral part of any justification for additional entitlement. The significance of the programme is evidenced by the provision in the contract that allows the project manager to withhold 25% of any payments due until such time that the programme is submitted.

The financial element of the justification is a forecast rather than a retrospective analysis and needs to include all associated matters such as risk and cost heads that would usually be included within a claim. The project manager has strict time limits in which to analyse this information and respond to the contractor.

The need for both parties to properly resource their project team is clear and, while failure to do so may subject the contractor to substantial irrecoverable cost, the project manager has its professional reputation to consider.

It is tempting for a bidder to reduce its price by not making adequate resource allowances. However, the employer would be well advised to take a longer-term and more pragmatic view and insist that the project team is properly resourced.

Familiarity with this contract is essential and there is no substitute for a detailed reading and consideration of its terms. It also requires change of attitude by all involved, where problems are shared and solutions are engineered jointly. Problem sharing and solving is not, however, something that flows automatically from the contract terms alone – it is driven and motivated by the sharing of risk. Risk, and how it is to be priced, allocated and managed, must be considered prior to entering into the contract and the works information, site information, contract data and risk register – which is coordinated by the project manager – must then be prepared to reflect the parties’ agreement.

All too often, the terms of the contract can easily be ignored by all parties and the contract left to gather dust. This may well work where the project proceeds without any unforeseen events impacting upon time or cost. But it will not work where problems do arise, and for a contractor to assume that everything will be fine if it ignores the contract terms is risky.

If matters are not addressed as they arrive and entitlements dealt with, the contractor will find himself in a very difficult position at final account stage.

That is not to say that the success of an NEC project is all down to the contractor – the contracts envisage pro-active management by all involved. The contractor stands to loose more by not taking the lead from an early stage. A project manager can hide easily behind a lack of knowledge due to the contractor failing to give it “early warning” and only in situations where the project manager did, or should have, issued an instruction to the contractor, will the contractor have a degree of protection.

In situations where the contractor carries the majority of the responsibility for design and coordination, it is in the contractor’s best interests to be proactive and ultimately be the master of its own destiny.

Are you prepared for NEC contracting? If not, then you would be well advised to seek advice before it is too late.

Construction week

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