Other Standard Forms of Construction Contracts: NEC, ICC, ENNA, IChemE, Orgalime, AIA, VOB
Other Standard Forms of Construction Contracts: NEC, ICC, ENNA, IChemE, Orgalime, AIA, VOB
13.1 Common standard forms of construction contracts
The most frequently used international standard forms of construction contracts are the FIDIC forms, the NEC3 and the ICC Model Turnkey Contract for Major Projects. Other respected forms include ENAA, IChemE and Orgalime (Grutters and Fahey, 2013). The German standard VOB and the American Standard prepared by the AIA are both worth mentioning because of their long tradition and established use in their home jurisdictions.
FIDIC forms are used almost universally. They have the widest geographical acceptance because of their strong tradition, support of lenders, well-known familiar principles and greatest flexibility of use (for a discussion of FIDIC forms, see Chapter 12).
While NEC forms are gaining increasing popularity, they bring a new, but unfamiliar style and most users face a significant learning curve. Moreover, precise NEC project management tools are hard to implement universally.
13.2 The NEC (New Engineering Contract)
The New Engineering Contract (NEC) was published in 1993 for the first time with the second edition of the box set (launched in 1995), adding several new documents to the family, including a professional services and adjudicator’s contract. This led to 10 years of extensive and successful usage with significant feedback from the industry on the contract in practice. This feedback was integrated into the development process and culminated in the launch of NEC3 in 2005 (reissued in April 2013 with minor changes).
With an estimated total cost of £14.5 billion and a peak workforce of 14,000 people by 2013, Crossrail in London is Europe’s largest construction project and the biggest ever to be procured by NEC3 contracts.
The London 2012 Olympic Park is also one of the most successful projects where NEC3 contracts were used. With risk to the Olympic Delivery Authority very high and enormous pressure to deliver under public scrutiny, a solid procurement strategy was fundamental. According to Ken Owen, after handling in excess of 50,000 compensation events over the life of the project, only one issue went to adjudication.
The NEC was created by the Institute of Civil Engineers as an attempt to move away from traditional forms of contract which were only about legal rights and obligations and to create a contract which would encourage good project management as well as being easy to use. It is the UK government’s contract of choice at present.
The NEC form of contract was referred to in the report published by Sir Michael Latham in 1994, entitled Constructing the Team. That report reviewed the construction industry in detail and called for greater collaboration and for parties to align their commercial interests to avoid disputes. This report also led to the government introducing legislation which regulated construction contracts by requiring certainty on payment and giving each party a right to refer disputes to adjudication with an enforceable decision on payment within 28 days (The Housing Grants, Construction and Regeneration Act 1996b as amended by the Local Democracy, Economic Development and Construction Act 2009).
The Latham Report was followed by Rethinking Construction, a report produced by Sir John Egan in 1998. That report also called for greater collaboration and a move from the traditional ways of managing construction projects. It identified the key drivers for change as committed leadership, a focus on the customer, integrated processes and teams, a quality-driven agenda and commitment to people.
It was the recent financial crisis, however, that provided a real driver for change because it was necessary to find ways of reducing the costs of infrastructure projects. These issues were covered in two reports produced by Constructing Excellence; Never Waste a Good Crisis, and Infrastructure in the New Era.
On the basis of these developments, the UK government has also looked at the UK’s spending on infrastructure. In 2011, it published a National Infrastructure Plan to provide a full and coherent strategy for infrastructure in the UK (updated in 2012). In March 2013, the UK government published for consultation its Infrastructure Routemap where it sets out how it will provide cost savings and improve infrastructure projects. In 2014, the UK Government had trialled three new methods of procurement: Cost Led Procurement, Integrated Project Insurance and Two-stage Open Book to achieve the most cost-effective and value for money solutions by integrated project teams working collaboratively.
The use of the NEC form of contract has been endorsed as a contract which also promotes collaborative working. NEC is designed as an international contract and the first clause of the NEC sets out an overarching obligation on the parties to act in accordance with the terms of the contract and in a spirit of mutual trust and cooperation. This is intended to emphasize the collaborative nature of the contract and the expectation that parties will cooperate to help each other. In that respect, it should be noted that under English law there is no general duty of good faith and such obligations may not be enforceable.
Unlike other forms of contract, the NEC is short, written in simple language and meant to be used by people on site. It is intended as a tool for good project management and is more than a mere contractual document.
An important feature of the NEC contract is the concept of ‘early warnings’. The principle is simple and means that whenever a party (whether employer or contractor) identifies an issue that could affect cost, time or performance in general, it should notify the other party. The parties would then meet to discuss how that risk can be avoided or limited. This is a step away from the traditional ‘who has the liability?’ approach and recognizes that it is in both the employer’s and the contractor’s interest to avoid risk, regardless of whose risk it is.
The programme plays a key role in the NEC contract. It is intended as a joint tool which sets out the obligations of both parties. There is a detailed list of what the programme must include. For example the order and timing of works by other parties, float and time allowed for risk, dates where information from other parties is needed and, for each operation, a statement of how the contractor plans to do the work and identifying the equipment and resources.
The programme is therefore used by the project manager to monitor and manage the works and to assess the entitlement to an extension of time in the event of changes or other employer risks (known as compensation events). The programme has to be updated on a regular basis (usually every four weeks) and submitted for approval. When this is done, both parties will have a comprehensive updated programme which helps to manage the works efficiently and to determine any potential entitlement more accurately.
Under the NEC, change and other employer risks lead to compensation events and they provide one single process for assessing additional costs and extensions to the completion date. A contractor must submit a quotation within three weeks and the project manager must make an assessment within two weeks. The intention is to deal with payment and delay as they happen and on the basis of forecasts so that price and the period for completion can be updated within a very short period. As a result, there should be no need for a final account process as issues should be decided as the works progress.
The NEC has six main options which set out different bases for payment. The most popular form appears to be Option C, which is a target cost contract.
If there is a dispute, it must be referred to adjudication in the first instance before court proceedings or arbitration. The NEC provides for a decision to be made within a four-week period, which will be binding unless a party serves a notice within four weeks.
Adjudication has proved very popular in the UK because it allows a quick resolution of disputes in a short period at a much lower cost than arbitration or court proceedings. In many cases, the outcome is acceptable to both parties and they can move on instead of having to direct resources to a lengthy arbitration process. This is especially the case where the identity of the potential adjudicator can be agreed to in advance in the contract. Adjudication may not, however, be suitable for all types of disputes.
It is important to appreciate that using the NEC form or its principles will require a change in culture and thinking, as well as an effort to manage change and risks as they happen. Nonetheless, if used as intended, such an approach can benefit both parties.
13.2.1 NEC forms of contract
Based on the information at www.neccontract.com, NEC sample forms of contracts for works encompass purchases such as the construction of buildings, highways and major process plant and equipment. The contracts for services include purchases of both professional services such as engineering, architectural and consultancy works along with more composite maintenance or management services such as soft/hard facilities management, cleaning, catering, security services, maintenance of a specific plant/building, data processing and ambulance services.
A contract for supply includes the supply of high value goods and associated services such as transformers, turbine rotors, rolling stock, loading bridges, transmission plants and cables and process plants together with lower risk goods and associated services such as building materials, simple plant and equipment, stationery, PPE, manufacturing parts, components and store items.
The NEC contracts for works are namely:
- NEC3 Engineering and Construction Contract (ECC). This contract should be used for the appointment of a contractor for engineering and construction work, including any level of design responsibility.
- NEC3 Engineering and Construction short Contract (ECs). This contract is an alternative to ECC and is for use with contracts which do not require sophisticated management techniques, comprise straightforward work and impose only low risks on both client and contractor.
- NEC3 Engineering and Construction subcontract (ECs). This contract should be used for the appointment of a subcontractor for engineering and construction work where the contractor has been appointed under the ECC and is written as a back-to-back set of terms and conditions.
- NEC3 Engineering and Construction short subcontract (ECss). This contract can be used as a subcontract to ECC or ECsC. it should be used with contracts that do not require sophisticated management techniques, comprise straightforward work and impose only low risks on both the contractor and subcontractor.
The NEC contracts for services are namely:
- NEC3 Term service Contract (TsC). This contract should be used for the appointment of a supplier to maintain a service or manage and provide a service. These services may include elements of design and relate to physical works or soft services such as facilities management. They may have discrete packages of project works, though where the bulk of the scope is about delivering a physical end product it may be appropriate to use the ECC/ECsC as an alternative. The TsC contains a call off facility.
- NEC3 Term service short Contract (TssC). This contract is an alternative to TsC and is for use with contracts which do not require sophisticated management techniques, comprise straightforward services and impose only low risks on both client and a contractor.
- NEC3 professional services Contract (psC). This contract should be used for the appointment of a supplier to provide professional services such as engineering, design or consultancy. Unlike the TsC, which is about maintaining an asset, this contract concerns the provision of professional advice. This contract, like the TsC, contains a call off facility.
The NEC contracts for supply are namely:
- NEC3 supply Contract (sC). This contract should be used for local and international procurement of high-value goods and related services including design.
- NEC3 supply short Contract (ssC). This contract should be used for local and international procurement of goods under a single order or on a batch order basis, and is for use with contracts which do not require sophisticated management techniques and impose only low risks on both the purchaser and the supplier.
Other NEC sample forms include:
- NEC3 adjudicator’s Contract (aC). This contract should be used for the appointment of an adjudicator to decide disputes under the NEC3 family of contracts. It may also be used for the appointment of an adjudicator under other forms of contract.
- NEC3 Framework Contract (FC). This contract should be used for the appointment of one or more suppliers to carry out construction work or to provide design or advisory services on an ‘as instructed’ basis over a set term. This umbrella contract must be used in conjunction with one or more of the other NEC3 contracts and comes with a sophisticated call off mechanism.
The ECC, ECS, PSC and TSC offer a range of options to select from that builds up the contract terms to suit the works or services. At the heart of the contract conditions are the core clauses which contain the essential common terms. To this must be added a main option, which will determine the particular payment mechanism. Finally, the selected secondary options are combined with the core and main option clauses to provide a complete contract.
Based on the information at www.neccontract.com, this approach gives even greater choice to contracting parties to assemble the appropriate contract conditions to suit. The ECC, ECS, PSC and TSC offer different basic allocations of financial risk between the parties through the main options. The ECC main options are as follows:
- Options A and B: these are priced contracts with the risk of carrying out the work at the agreed prices being largely borne by the contractor.
- Options C and D: these are target cost contracts in which the out-turn financial risks are shared between the client and the contractor in an agreed proportion.
- Options E and F: these are cost-reimbursable types of contract with the financial risk being largely borne by the client.
The particular options lead to the following basic forms of contracts:
- Priced contract with activity schedule
- Priced contract with bill of quantities
- Target contract with activity schedule
- Target contract with bill of quantities
- Cost-reimbursable contract
- Management contract
- Term contract
- Cost-reimbursable contract
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 and encourages a creative environment with proactive and collaborative relationships.
Based on the information at www.neccontract.com, NEC offers a range of measures from which the parties can select some to give best value for any particular project or programme of work. These are present at a bi-party level and there can be common incentives across a number of partners when Option X12 Partnering is used. The range of NEC incentives includes matters that affect time, cost and quality. The following list gives some examples:
- Bonus for early Completion – in ECC there is provision for introducing a bonus for each day the contractor completes the works ahead of the contractual Completion Date.
- Target cost – in ECC, TSC and PSC, the client can utilise target cost arrangements if the supplier delivers the out-turn cost below the level of the final target. Savings are then shared according to a pre-agreed formula. A similar sharing arrangement of over-run reciprocates this arrangement.
- Key Performance Indicators (KPIs) – KPIs can be introduced through Option X12 Partnering and Option X20 for any matter the parties care to agree upon. Examples include the number of defects, whole project costs to the client, rate of progress of certain works, whether client satisfaction levels were reached, whether the asset is cheaper to operate and maintain than expected, and so on.
13.3 FIDIC forms versus NEC3
NEC is intended for global application and has been adopted in many multi-disciplinary projects worldwide. However, the NEC’s common law pedigree continues to cause problems in an international construction law context. To quote Lloyd (2009):
[S]ince NEC3 is written in plain and simple English, it ought to be capable of being used throughout the world without the possibility of its meaning varying with whatever law governs it. That may not always be true, if only because whoever is to decide what the contract means may not have the requisite background or experience or simply because some of the assumptions upon which the NEC has been constructed are implicit or not sufficiently explicit.
In terms of risk allocation, NEC3 is based on similar principles to FIDIC, i.e. a balanced risk allocation.
Both FIDIC forms and the NEC3 include re-measurement and a lump sum form. The NEC3 has a special form for construction management (management contracting) and cost plus price determination (cost-reimbursable). The FIDIC Blue Book also uses the cost plus approach and the White Book uses the Construction Management delivery method. The most popular, however, is the target price option for which is no equivalent under FIDIC forms. There is not a contract with EPC risk allocation (e.g. such as the FIDIC EPC/1999 Silver Book) under the NEC forms.
In terms of the interim payments, the NEC3 requires works to be paid on the basis of forecasts (of payments to subcontractors) plus a fee. FIDIC is based on retrospective valuations.
The approach to risk allocation and claims are similar. Both forms enumerate employer risks and contain ex contractu claims (compensation events in the NEC3).
The NEC3 supports best practice project management by using early warning notices, risk reduction meetings, time bars, deemed acceptances, prompt resolution of problems and assessment of financial implications of claims. In comparison to the 1999 FIDIC forms, those instruments represent a positive development but the question of whether they can be used successfully outside the UK remains.
If the contractor claims a compensation event under the NEC but fails to give an early warning, Sub-Clause 63.5 states that its entitlement to an extension of time and financial compensation will be assessed ‘as if the contractor had been given an early warning’ (Downing, et al., 2013). Such events must be entered into a risk register for their influence to be decreased in risk reduction meetings.
The NEC3 contains an eight-week time bar in Sub-Clause 61.3 in contrast to 28 days in FIDIC forms. According to Lloyd (2009), employers are usually concerned about the effectiveness of contractual sanctions. From this aspect, Sub-Clause 61.3 is a key provision for notifying compensation events stating that:
The contractor notifies the project manager of an event which has happened or which he expects to happen as a compensation event if:
- the contractor believes that the event is a compensation event; and
- the project manager has not notified the event to the Contractor.
If the contractor does not notify a compensation event 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 event to the contractor but did not.
If the project manager does not respond to a claim for a compensation event or a quote, the contractor can warn them of this. If no response is received within two weeks, their acceptance is deemed (see minor changes in Sub-Clauses 61.1, 61.3, 61.4 and 63.1 in the NEC3 2013 edition).
A significant difference arises in claim quantification. Under FIDIC, claims by the contractor are evaluated retrospectively. Under the NEC, the project manager is required to assess the impact of a compensation event on the programme and budget by forecasting its time and cost effects. This is done based on the information available at the time. Once assessed, the compensation event cannot be revisited and reassessed if the forecasted effects turn out to be inaccurate or are overtaken by later events. Where the effects are too uncertain to predict, it can state the assumptions on which the assessment is based. If any of these assumptions are found later to be wrong, a correction can be made. From the contractor’s perspective, it must ensure that its quotations are comprehensive. Quotes cannot be revised once submitted, even if the contractor discovers that they have failed to allow for all additional costs or delays. The basic principle is that claims should be dealt with and finally resolved on an ongoing basis even if this means accepting an imprecise, ‘rough and ready’ approach. The underlying philosophy is that it is better to dispose of claims promptly, rather than allowing them to remain unresolved and potentially sour the relationship between the employer and the contractor (Downing, et al., 2013).
FIDIC does not contain an express good faith obligation such as the NEC duty to act in ‘the spirit of mutual trust and cooperation’. The phrase ‘mutual trust and co-operation’ implies not only honesty and reasonableness but an obligation to do more than the contract calls for if it is truly to be performed co-operatively (Lloyd, 2009).
On the other hand there is an obligation of the project manager to act fairly and impartially. This fact was established in the case Costain Ltd.v. Bechtel Ltd  EWHC 1018 (TCC) where the court held that the project manager does, under the NEC3, have a duty to act impartially where they act as a certifier or assessor of claims.
Under the NEC3, the employer must be fully engaged in the project’s daily routine in contrast to the FIDIC EPC/1999 Silver Book approach, for example. Instead of an engineer, the employer appoints a supervisor to monitor the quality of the work to identify defects. The key administrative role is then undertaken by the project manager. The project manager (either an independent consultant or an employee of the employer) and supervisor can be one person. In practice, this means that further project management resources must be hired on behalf of the employer.
The importance of the project manager is defined by their extended responsibility. For example, when both the employer and the contractor want to terminate the contract, they must notify the project manager and receive a certificate to that effect from the project manager.
Contract administration is done by the project manager who has a key role under NEC according to Lloyd (2009). There are numerous references to what is expected of the project manager. For example, the employer has to appoint someone who will discharge a wide range of duties as required by the contract. The employer is free to replace the project manager on the giving notice of the name of a replacement (see core Clause 14.4), though the employer’s freedom must not infringe core Clause 10. The core clauses on payment (section 5) and compensation events (section 6) envisage that the project manager will make assessments as to money (section 5) and of compensation events (section 6). According to Lloyd (2009), the NEC3 appears to provide no mechanism whereby the project manager can revise a decision, for example, where there has been an over-estimate of additional time required (and, with it, cost).
The time schedule (programme) is a key instrument under the NEC. The requirements of the time schedule are much broader under the NEC than under FIDIC, e.g. the project manager can withhold 25% from interim payments until the first programme is submitted by the contractor – a concept unknown to FIDIC (Downing, et al., 2013).