A Critical Review of the Key Features, Personnel, Philosophy …

The Engineering and Construction Contract (ECC) is the third edition published by the Institution of Civil Engineers which is also referred to as the NEC3, as it was first called the New Engineering Contract (NEC). Sir Michael Latham paid tribute to the original New Engineering Contract in his 1994 Report ‘Constructing the Team’, stating that ‘the approach of the New Engineering Contract is extremely attractive’; he went on to list key features which should be present in all modern construction contracts and said that the NEC contains ‘virtually all these assumptions of best practice’. Since its introduction the Engineering and Construction Contract has become widely used by employers, consultants and contractors wishing to embrace the philosophy of partnering advocated in ‘Constructing the Team’.

The Engineering and Construction Contract was developed to offer an all-in-one document appropriate for traditional procurement, design and build, or management contracts, suited to most types of civil engineering and building work, from large scale projects to minor works. The flexibility of the contract allows for all traditional disciplines to be included, whether the contractor has design responsibility or not and it provides numerous tender options i.e. lump sum, target, cost reimbursable and management contracts. The contract has been designed with clarity and simplicity in mind, so it is written in ordinary language with relatively short clauses. This allows it to be exportable and understandable, which therefore leads to fewer disputes. The ECC emphasises the need for all parties to participate in a contractual spirit of mutual trust and co-operation ensuring that adversarial relationships are not created. This introduces a responsibility for honest and open discussion of problems as they happen, thereby reducing the risk of disputes which lead to project delays and subsequent increases in cost. The ECC objective of stimulating good management is based on two principles:

foresight applied collaboratively mitigates problems and shrinks risk

clear division of function and responsibility helps accountability and motivates people to play their part. – Guidance notes

A significant accomplishment for ECC is the endorsement from the Office of Government Commerce (OGC), which says: “OGC advises public sector procurers that the form of contract used has to be selected according to the objectives of the project, aiming to satisfy the Achieving Excellence in Construction (AEC) principles. This edition of the NEC (NEC3) complies fully with the AEC principles. OGC recommends the use of NEC3 by public sector construction procurers on their construction projects.” OGC also makes reference to NEC3 in the opening paragraph of their Procurement and Contract Strategies document, which says: “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.”

The Engineering and Construction Contract family contains twenty three documents that make up the box set and offers seven different procurement routes plus the professional services and adjudicator’s contracts.

NEC3 Engineering and Construction Contract (the black book).

NEC3 Engineering and Construction Contract Option A: Priced contract with activity schedule.

NEC3 Engineering and Construction Contract Option B: Priced contract with bill of quantities.

NEC3 Engineering and Construction Contract Option C: Target contract with activity schedule.

NEC3 Engineering and Construction Contract Option D: Target contract with bill of quantities.

NEC3 Engineering and Construction Contract Option E: Cost reimbursable contract.

NEC3 Engineering and Construction Contract Option F: Management contract.

NEC3 Professional Services Contract.

NEC3 Engineering and Construction Short Contract.

NEC3 Adjudicator’s Contract.

NEC3 Term Service Contract.

NEC3 Framework Contract.

The preparation of the ECC tender and contract documents requires substantial thought and effort as choices have to be made in order to produce an appropriate and favourable set of contract conditions. The choice of clauses and statements to suit particular circumstances are usually made by the employer, and this is crucial to the successful outcome of the contract. The ECC contract will therefore consist of the core clauses which are detailed in the NEC3 black book and these are obligatory to every contract. One main option must be selected from the six main options A to F (as detailed above); the selection of these options determines the procurement route, how the contractor is paid and the allocation of risk between the parties. After selecting the main option secondary options from X1 to X20 are to be incorporated as required, determining the allocation of further risks. W1 and W2 are the dispute resolution options and the latter is used when the UK’s Housing Grants, Construction and Regeneration Act 1996 applies to the contract. Additional conditions of contract indicated by the letter ‘Z’ can also be incorporated which are normally agreed between the parties. The contract data is in two parts containing information specific to the contract; part one being prepared by the employer and part two prepared by the selected contractor. Some information in the contract data takes the form of reference to other documents, which are thereby incorporated into the contract, for example the works information which are very important documents as they describe in detail what the contractor is required to do, normally comprising drawings and specifications; this cannot be changed once the contract has been entered into. There are no fixed limitations on the use of ECC, but the law of the contract, the language of the contract and the currency of the contract are entered in part one of the contract data. The prevention and resolution of problems is catered for by an early warning system and the contract conditions provide clauses to stimulate good management in dealing with issues such as changes, extensions of time and defects. There is an emphasis on effective programming and management so that matters which have implications on progress and cost can be properly considered at the earliest possible time by the project manager or contractor. As already stated a co-operative and non-adversarial ethos by all parties is the essential ingredient in managing a successful ECC contract.

The widespread adoption of a single, good (if not perfect) form of contract can only be a good thing for everyone except those of us that thrive on disputes Too many contracts spoil the job James Golden http://www.building.co.uk/story.asp?sectioncode=483&storycode=3143930

The NEC3 and its predecessors have become increasingly popular during the last few years with the Channel Tunnel Rail Link and the London Olympics being procured on the basis of the NEC form; this demonstrates that this contract will remain in widespread use for the foreseeable future.

‘Within a few years the ECC contract has replaced the ICE Conditions of Contract as the contract of popular choice………………………………………… With the support it has now built amongst clients and professionals, and with the range of contracts now available, there are real prospects that the New Engineering Contract in its various forms will become the dominant contract of the future’. Brian Eggleston, The NEC3 Engineering and Construction Contract, A Commentary, 2nd edition.

Question 2 – A discussion on how over-runs in time and money are dealt with in the two forms selected. What are the advantages and disadvantages inherent for each party?

NEC3

The NEC3 attempts to provide a simple, direct all-inclusive structure for dealing with change and minimising the scale and range of matters that can give rise to disputes i.e. change to the works information or programme which may cause over-runs in time and money; and it looks to put in place a system for agreeing the outcomes of matters of difference in advance. Much of this is dealt with through the ‘early warning’ and ‘compensation event’ system and the use of the ‘risk register’, which if applied correctly will enable the cost and time consequences of future change to be resolved in advance of the change taking effect. The contract requires the parties to give each other ‘early warnings’ of matters that could effect the time or cost of delivering the specified works on programme. The process is intended to be operated with a problem solving outlook determining the consequences and impact on the project with regard time and cost. This system is an example of resources being deployed on the management of the project at the right moment, supporting in the achievement of successful outcomes through the timely administration of points of difference without dispute.

When over-runs in time and money are encountered in traditional contracts parties generally adopt a defensive and contractual position. NEC3 has identified this approach can lead to entrenched disputes and therefore encourages both parties to adopt a partnering approach. Clause 16 of the contract called an ‘early warning’ requires the project manager to formally alert the contractor or vice versa of any issue that could increase the total cost, delay the completion date or affect the performance of the finished work. This is different from the long-established approach where the contractor issues the formal notice. It is then a requirement of the contract for the contractor and the project manager to attend an early warning / risk reduction meeting (clause 16.2) if either party requests it, with the purpose of the attendees discussing how the problem might be avoided or reduced, agreeing a solution and deciding on the actions. The aim of this approach is to avoid disputes with both parties co-operating at an early stage of a problem and working together to find a resolution in the most efficient manner. The approach of addressing the issues as early as possible allows the project manager to assist in the resolution, with the contractor receiving payment where applicable, called a compensation event (clause 60). This allows for both parties to amend the target cost / activity schedule, the risk register, method statements, resource plans, time risk allowances and programme essential to the project where applicable, while preparing the revised expenditure / cash-flow profile in conjunction. As the programme is fundamental and intertwined with the contract target cost and expenditure profile the detail within the document can be substantially beneficial to the contractor and project manager as it can also assist in agreeing the compensation events. To ensure that it is in the interest of the contractor to work in this manner should an early warning not be produced by the contractor for an issue they were aware of and subsequently an event arises, the project manager assesses the event as though they were able to identify a more efficient manner of resolution and the contractor will only be paid for that economic method of completing the event. Should an event occur that entitles the contractor to a compensation event for time and/or money from the request of the project manager, then contractor provides a quotation where he can vary either the price the programme or both if applicable. Generally the compensation event is calculated as a defined cost rather than using the rates in the activity schedule or bill of quantities (if those options are used). Should the project manager disagree with the proposed versions then he can ask for the contractor to revise the price or the programme or both as long as the reasons for this request are explained.

…………….the Contractor prepares a quotation for the valuation of compensation events that is based upon a forecast of the impact which the change or problem will have upon his cost of carrying out the work – as forecast by him at the time the event is assessed. Where as is often the case, alternative ways of dealing with the problem are possible, the Contractor prepares quotations for different ways of tackling the problem. The Project Manager selects one on the basis of which will best serve the interests of the employer. Criteria for such selection can include lowest cost, least delay or best finished quality, or any combination of these. – Guidance

As this system is the only mechanism in the contract for increasing prices and extending time, contractors and project managers could find themselves snowed under with the administration if there isn’t sufficient resource. The system can be time consuming both in the preparation and consideration, as the accepted programme and activity schedule acts as the starting point for the calculations and frequently submitted compensation events could slow up the system as the programme and activity schedule isn’t being updated as quickly. To ensure a contractor is entitled to a change in the prices or programme, they must notify the project manager within eight weeks of becoming aware of the event unless the project manager should have notified the event to the contractor. Therefore, if a contractor does not notify in the eight week period set aside in the contract any breach of contract, any time, or financial recovery could be lost. Also if the contract provides for the payment of delay damages the contractor cannot get additional time if he has failed to give the correct notice. This will be the case even if the delay has been caused by a breach of contract by the employer contuary to Peak Construction (Liverpool) Ltd vs McKinney Foundations Ltd. Another problem with the system is the assumption that the project manager is committed to identifying potential change and seeking quotations from the contractor. This can often be false as there could be reluctance on the project manager’s part to accept a change to the works information or that he prefers the compensation event to be valued on actual costs after the event rather than receiving a quotation. Also NEC3 places a commendable emphasis on promoting good management proctise, it places the project manager in an extremely demanding role which demands an intense use of resources and a certain amount of uncertainty relating to areas where his duty of impartiality applies (Costain v Bechtel).

In Peak Construction (Liverpool) Ltd vs McKinney Foundations Ltd it was decided as long ago as 1970 that liquidated damages are not payable by the contractor if part of the delay is the result of the employer’s breach of contract and there is no power in the contract to grant an extension of time. The employer can no longer insist on completion by the contractual completion date and is left to recover such losses as it can prove resulted from delay caused by the contractor.