Industry Insight No.7: JCT vs NEC - weighing up the pros and cons for an informed contract strategy

April 28, 2016

 

Construction analysis: Sarah Schütte of Schutte Consulting Limited explores the differences between the JCT 2011 and NEC3 forms of contract, including contractual issues during the strategy and procurement phase and key aspects during the delivery phase.

 

Background

 

In the UK, JCT and NEC battle for the title of ‘most popular form of building contract’. Popularity can be defined by different metrics—the volume of contracts and the value of work are the two most obvious ones. Clients often ask how to choose which to use and if there are circumstances in which one is preferable to the other. This article seeks to set out key practical matters for procurement and contract professionals in the construction industry, who are wrestling with these issues.

 

How has the ‘battle’ come about?

 

For many years, the JCT form has been the building contract of choice in the UK. It was first published in 1931. The latest version was published in 2011, now incorporating Amendment 1 (CDM, April 2015), known as JCT11. Many jurisdictions with similar legal systems publish standard building contracts based loosely on its principles (eg, USA, Canada, Australia and New Zealand). The NEC (1st Edition) form was published in 1993. It is flexible for use in any jurisdiction. The JCT claims pre­eminence due to its longevity, whereas NEC (now in the 3rd edition, known as NEC3, last revised April 2013) markets itself as the modern kid on the block.

 

What are the main features of the contracts?

 

JCT11 is a ‘traditional’ (or ‘master and servant’) style of contract, whereby money is paid in consideration for works and/or services rendered.

NEC3 is, philosophically at least, different from JCT11. NEC3 aims to create a partnering ethos through a careful choice of terminology, and a specific collaboration clause. However, it is not a true partnering contract (unlike, say, PPC2000, amended 2013)—it sets out rights, obligations and consequences like JCT11 does.

 

With whom, and for what purpose, are the contracts popular?

 

Surveys repeatedly confirm that JCT11 remains the most popular form of contract by volume. It is the contract of choice for the private sector by a long way. People are used to it and the industry’s set up complements its use.

 

By contrast, NEC3 is all but mandated for public sector projects (following the Cabinet Office’s endorsement in 2008), but is rarely used in the private sector. Given that around 45% of the industry’s annual spend comes from the public sector purse, and given that the nature of public projects tends to be social benefit infrastructure, the volume is significantly smaller but the value is several zeros bigger. The challenge for NEC3 is achieving value to the taxpayer, as the industry and its client base are still relatively inexperienced in using it.

 

How might industry professionals tackle reading the contracts?

 

JCT11 is very dry, dense and contains many cross­references. It is structured and worded in a precise way, perhaps too precisely, trying to cater for every eventuality. By contrast, NEC3 is in different parts, concentrates on key principles and behaviours, and feels more user­friendly.

 

Focussing on the strategy and procurement phase, what contractual issues of practical significance should industry professionals be aware of as between JCT11 and NEC3?

 

My top five tips for procurement managers are:

1. Beware of additional clauses

Watch out for additional clauses (Z clauses in NEC3 and Schedules of Amendments in JCT11). There is a place for carefully thought­through project­ or industry­specific additional clauses, but they are often ‘dumped’ in without being properly considered, which can create interpretation problems, import risk and upset the balance of the standard contracting position. Ask if the clause is really needed, and if the other party says it is, ask why. They may not be sure when pressed.

 

2. Take time to plan

Take the time to invest in planning the project properly. Contracts are often hurriedly negotiated, and this leads to problems from the off. Early contractor involvement may be useful if design development is in its infancy (NEC3 produces an ECI Option, JCT offers a ‘Pre­Construction Services Agreement’).

 

3. Measure progress

Think about how you want to measure project progress and maintain an accurate account:

• if using NEC3, choose your project manager (PM) carefully, as the contract depends on solid project management. There are many ‘good’ PMs, who have some NEC3 experience, but not many ‘great’ ones who do. The ability of the PM to swiftly resolve early warnings, for example, can in my experience be linked directly to

the perceived success of the project, and the maintenance of relationships. For more on this see my earlier analysis: Industry Insight—making project managers ‘great’

• JCT11’s focus is on the accounting process, so experience in measurement is important. However, I suggest that it should go further, and a contract administrator (CA) with the skill to tightly control the account throughout the project is advisable (adopting NEC3’s approach which I liken to ‘pay as you go’ (PAYG)) to facilitate the final account process. I have often seen significant value, and goodwill, disappear at this time, when the parties have unresolved claims for time and money (arising from relevant events), which are difficult to unravel, and there is pressure to close the account and switch attention to other projects

 

4. Incentivise

Consider incentivisation as part of payment—NEC3 offers a sophisticated approach by motivating performance through fee entitlement, Disallowed Costs, pain-­gain and other contractual mechanisms. JCT offers a simple payment ­for­ work­ done mechanism.

 

5. Balance risk allocation

Take care to balance risk allocation between the parties. Whichever form of contract you use, if risk is too contractor­heavy then the employer will pay for it somewhere. Engage actively by asking: which risks can best be borne by which party? For example:

• in NEC3 if the contractor fails to notify of an event, which he expects to be a compensation event, within eight weeks of becoming aware of it, a time bar operates to prevent a claim for time and/or money from proceeding

any further (clause 61.3)—the aim is to encourage swift resolution (or close­out) of issues

• JCT11 is not as heavy­handed, but it pays to be mindful of where particular risks fall (ie relevant events), so as to accurately understand the price. If necessary, consider bolstering performance through additional security such as insurance or bonds.

 

What are the key aspects of JCT11 and NEC3 for contract managers during delivery phase?

Three particular delivery phase aspects spring to mind:

 

1. Collaboration

Both contracts contain collaboration clauses.

 

NEC3’s collaboration clause is the first clause of the contract, which I think is significant as it is hard to miss. It obliges the parties to ‘act in a spirit of mutual trust and co­operation’. It also obliges them to ‘act as stated in this contract’. Remember there is no overriding obligation to be ‘co­operative’ (ie to capitulate on your contractual rights). The clash comes when, as is inevitable, issues arise and are not resolved maturely (quickly), so people ‘retreat’ and collaboration is abandoned. To my mind, there is a gaping chasm of behaviour and culture which needs to change in order for this clause to be truly effective, even 20 years after Latham’s report.

 

The JCT introduced a collaboration clause in 2009. It may have been added simply to follow the NEC, or perhaps it was added to reflect the mood of the times, because of a wish for a more co­operative effort in getting to the (mutually desirable) end point, and to fulfil the government’s desire for parties to work together (with the aim of course of reducing taxpayer burden by requiring ‘best value’). However, in JCT the clause is buried at the back.

 

2. Project management and account administration

In JCT, the CA’s focus is on payment administration—receiving and assessing payment applications, keeping the account, and guiding the parties through procedure and process. The CA does not direct the parties in a proactive

manner.

 

In focussing on active project management, NEC3 connects all of the project parties practically (if not contractually). The PM is probably the only person who speaks to everyone, so it is in a unique, privileged—and responsible—position.

 

3. Programming and progress

NEC3 requires active programming input from the contractor and PM (although not from the employer, contractually, although in practice he will be involved). The programme is often described as the ‘beating heart’ of the contract. The programming obligations are very burdensome because of the requirement to periodically update the programme and submit it for acceptance, so it pays both parties to invest in the resource to support this work. This links to the ‘PAYG’ nature of obligations relating to early warnings, risk register management, assessment of compensation events and prospective analysis of expected consequences. Achievement is often less successful than the contract intends, however.

 

In JCT11, very little attention is paid to the programme, as there is no obligation to actively update it, but a secure and justifiable critical path remains the key to successful claims for relevant events, so the programme should not be overlooked, nor should the need for analysis (which is retrospective) to support the claims.

 

What is on the horizon for JCT11 and NEC3 which industry professionals should take note of?

 

Both publishers have active user groups which work on updates. JCT 2016 is set to be published soon, with the first contract update expected in May. It aims to:

  • simplify the payment regime (it is unwieldy in its present form)

  • reflect fair payment principles (ie to support the government’s Prompt Payment Code)

  • address problems associated with Insurance Option C (ie obtaining existing structures insurance for the contractor)

NEC keeps its cards closer to its chest. No official announcements have been made regarding any more revisions to NEC3 or perhaps an ‘NEC4’.

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