Industry Insight No.16: NEC4 - a decade in the making
This article was first published by Lexis®PSL on 29 March 2017.
Construction analysis: Sarah Schütte of Schutte Consulting Limited provides her insight on the forthcoming NEC4 contracts. As part of this she looks at the background to the contracts, sets out her top 10 changes and explains why they will be key to NEC4’s success.
Industry has been getting used to NEC3 since 2005. Just when everyone has finally got the hang of it (more or less anyway), along comes an announcement that NEC4 is to be published. Hot off the press I have been looking at the forthcoming changes, been talking to clients and adjusted training workshops to cater for the transition period.
On 3 March 2017, at the Leeds conference for the Society of Construction Law, the NEC Users’ Group announced that the next generation of NEC contracts, the NEC4 suite, will be launched on 22 June 2017 at the NEC Users’ Group Annual Seminar 2017 (see: NEC4 announced). The new suite of contracts is described as 'evolution not revolution'.
The subsequent published Guidance Note "NEC4: The next generation: An explanation of changes and benefits" briefly describes the key changes which are coming in.
The authors say 'all of the changes are a direct result of feedback from industry, to support methods and provide solutions which Clients are demanding'. Given my clients’ experiences at all tiers of the contracting chain, I would agree that the changes are attuned to industry needs and the current market.
Why the interest in the contents of the contract?
Much industry sector research cites the failure to administer, complete, understand or read the contract as key sources of disputes. So understanding key aspects and terms of the NEC will facilitate better advice and service to clients, whether as lawyers or technical project professionals.
History—key events highlighting how far NEC has come
Over 30 years ago, the New Engineering Contract was first conceived by the Institution for Civil Engineers (ICE) as a result of its 'fundamental review of alternative contract strategies for civil engineering design and construction with the objective of identifying the needs for good practice' (1985), which followed observation of collaborative working in the USA.
The three stated characteristics were, and remain, that the contract would be:
a stimulus to good management—of the relationship between parties and hence of the work
usable in a variety of commercial situations—worldwide, any size or type
a clear and simple document—the language and structure could be easily understood
It took 15 years for real action. This was against the backdrop of the 1999 UK government standards 'Achieving Excellence in Construction', which were launched to improve the performance of Departments as clients of the industry, and were triggered by high profile court cases and significant time and cost overruns on public projects (eg Holyrood, Royal Devonport Dockyard) and private projects (eg Wembley stadium). The government for the first time set challenging targets in management, measurement, standardisation and integration, all aiming to deliver the optimum combination of wholelife cost and quality in order to meet user requirements. It advocated collaboration and 'Best Value for Money', thus putting the taxpayer at the forefront of benefit realisation as a project stakeholder (see Industry insight: Stakeholders—managing the challenges and opportunities). This all sat well with NEC (edition 2, at the time).
Later, in 2005, NEC3 achieved a breakthrough via three significant endorsements:
• the recommendation by the OGC (now the UK Cabinet Office) that public sector procurers should use it as it 'fully complies with Achieving Excellence in Construction principles'
• the Olympic Delivery Authority announced in April 2006 that it would use the NEC3 suite wherever possible for Olympics contracts
• in August 2006, Sir Michael Latham waxed lyrical about NEC3 'remain[ing] at the forefront of best practice, becoming the first contract to meet all criteria of the Achieving Excellence in Construction initiative'
The government has continued (eg through its Construction Strategy) to try to reduce public sector project cost and mandating (in all but name) NEC3. Crossrail is currently the biggest user, having let £15bn+ contracts using the NEC3 suite. JCT still rules in the private sector and, in my opinion, this is not going to change with NEC4. JCT is also publishing new contract forms (its 2016 edition), which I will look at in more detail next month.
In addition, the government’s target of 20% reduction in public sector industry spend (which is c.40% of the total industry spend of c.£120bn) by 2020 is almost certain to be missed. I wonder whether NEC4 can play a part?
NEC4—my top 10 changes
My starting point is that nothing in NEC4 significantly changes the carefully-balanced risk allocation. As well as providing new features, the authors’ aim is firmly to reduce the volume of Z clauses (ie amendments to the standard form), many of which are marketdriven and commonplace. Over the past 10 years I have seen increasing numbers of Z clauses, but many are relatively easily agreed. Accordingly, there is a definite need for a 'new broom', and I agree that if we can sweep these up into core clauses or Options, then the aim will be achieved, and moreover the contract will remain userfriendly, and short, as was always intended.
So here are my top 10 changes to NEC4:
1. Terminology changes Often thought of as quite dull, these are philosophically important:
gender neutrality, ie 'it'
'Employer' changes to 'Client', imposing accuracy in the description and, to my mind, reflecting a more international outlook (although not stated)
The 'Risk Register' becomes the 'Early Warning Register', reflecting consistency throughout clause 16 and avoiding confusion with true risk management activities
'Scope' is used throughout to encompass all documents describing the works
'parent company guarantee' becomes 'ultimate holding company guarantee' to reflect the complexity of corporate structures (Option X11)
'partnering' becomes 'multiparty collaboration' (Option X12)
2. Programme Regular followers will know that I am very happy to see these changes:
cl 31.1—if the Project Manager does not respond to the Contractor’s submission, then the programme is treated as accepted. This is a major step forward for ensuring the programme submission cycle is not broken, and for recognising the centrality of project management and planning to the success of the NEC4 suite. It is already making a positive impact on my project controls practice as we are building this into their contracting strategies and risk management plans
'implemented compensation events' are not to be shown in the programme. This had caused confusion so clarification is welcome
3. Dispute resolution procedure (section 9) NEC3 has highlighted the importance of dealing with problems effectively for 2 reasons, which won’t change with NEC4:
the contract form provides numerous management tools, but is complicated to understand and administer properly and effectively
the contract form is largely untested, so little judicial guidance exists. Why? Because of what I term the 'contractual context' (lots of mechanisms to promote settlement) and the 'human context' (people like to resolve issues)
NEC4 now pushes this further, to my mind, by introducing two new concepts:
a four-week period for escalation and negotiation (new core clause)
the use of a Dispute Avoidance Board (new secondary Option W3)
Both are non-mandatory if Option W2 is used (ie the statutory right to refer to adjudication at any time). Again, the changes are driven by common market practice of having a tiered dispute resolution procedures via Z clauses, so a reduction is welcome.
4. The NEC family grows: two new forms of contract
The Design Build Operate Contract (DBO) gathers design, construction, operation and maintenance works and services into a single agreement, to be provided pre, during and postworks. Note that it does not include provisions for the Contractor to fund the construction. Perhaps this is something for NEC5?
The Alliance Contract (ALC) is published in consultation form initially. It is in essence a partnering contract (although the authors prefer the phrase 'multiparty'—see item 1 above), whereby the Client engages several suppliers of works and services using one contract. The philosophy is of collaboration and risk/benefits sharing.
It is great news that the authors have expanded the NEC suite! With these introductions they are definitely responding to market demand. I have seen many bespoke versions and the Users’ Group will have taken the best parts in drafting these two new additions to the NEC family. These changes should reduce the need (and the cost!) of non-standard contracts.
To my mind, they serve a wider purpose too—they will lead to better risk management and more streamlined subcontractor and subconsultancy agreements, which is good for the whole industry!
5. Streamlining of costs provisions
Estimators and quantity surveyors can find the Schedule of Costs Components complicated, especially Defined Costs and Disallowed Costs. NEC4 introduces flowdown of Defined Cost to the Professional Services Contract, Term Service Contract and Short Contract, which promotes userfriendliness. It also makes the technical process of costs assessment easier and promotes more resolution-as-you-go-along, which is a key NEC tenet.
6. Improving outcomes via Early Contractor Involvement
The supplement becomes an X Option—the stated aim is 'to identify and eliminate problems and risks and incorporate construction considerations at an early stage'. I agree with this: I think it will drive down risk, and cost, and cement collaboration.
7. Third parties
- Collateral warranties are now provided for via an X Option, despite Y(UK)3 promoting the Contracts (Third Party Rights) Act 1999, which no-one seems to have been using. This will neatly reduce volume and content of Z clauses. Agreed forms to be included in the Scope.
- Either party may assign (new core clause). However, in my experience it is common to prohibit the Contractor from so doing, notwithstanding what the authors say.
8. Payment procedure A number of changes are introduced to keep cash flowing and to bring certainty to the payment assessment process:
periodic assessment is introduced throughout the NEC4 suite, bringing about consistency, particularly useful at Contractor level
the Contractor has the power to initiate a review of Defined Costs, which is to take place within a 13-week period. Having this timescale pushes the parties to close out issues while they are reasonably fresh
final assessment by the Project Manager is take place within 4 weeks of the Defects Certificate but if it fails to do this, the Contractor may issue a final assessment. Either party has 4 weeks to challenge, then it becomes conclusive. This forces the parties to close out the project quickly
9. Compensation events There are two key changes to the regime:
the Contractor may now recover the costs of a quotation. This is a common complaint and a justified one in some circumstances
Contract Data Part 1 now includes space for projectspecific compensation events, which should reduce the use of Z clauses
NEC4 introduces a new X Option to support building information modelling (BIM). As the requirements of BIM on the public sector become better understood, and are due to increase, this standard wording is a welcome change, and a steadying force.
Conclusions for industry
NEC4 is a positive step forward for the whole industry. During this transition period industry, organisations could reflect on the following observations:
tendering contractors have to understand the documents comprising the contract. A contractor who takes time to review changes to the standard form will be at an advantage over other tenderers and should come up with a better quality proposal to the Client at a more accurate price
if the parties get the contents right up front, they are more likely to avoid interpretation or Scope issues
when both the Client and Contractor, as well as Project Manager and Supervisor, have a solid understanding of the project risks, this joint understanding is more likely to promote better contract management, smoother risk management and fewer unexpected hazards, and therefore improve the chance of project delivering success.