The NEC Construction and Engineering Contract
The NEC contract continues to grow in popularity. You might be tendering for a project on the NEC form and be unfamiliar with how it works or how it differs from other standard forms of construction contract. Or you might be engaged in an ongoing NEC contract and have questions about how its procedures are to be followed or what is to be done in a particular circumstance.
The NEC contract is unlike other standard forms in some significant ways. It is highly specialist, can be difficult to understand, and can, when not properly followed, result in very costly disputes.
Commercial and administration resource
The NEC requires the parties to conduct what it considers to be good project management processes by incorporating them into the contract itself. What this means in practice is that NEC contracts require significantly more commercial and administration resource than other standard forms and, when they work well, they work very well, but where they are not followed, parties can find themselves in extremely difficult positions. It is therefore extremely important that parties ensure that they are doing what the contract requires of them.
Early warning notices and compensation events
The NEC requires the parties to issue early warning notices as a risk management tool. An early warning notice is to be issued by either party as soon as they become aware of ‘any matter’ which could affect the total of the prices, delay completion or a key date, or impair the performance of the works in use, while a contractor may also give an early warning notice relating to any matter which could increase its total cost.
The intention behind an early warning notice is to allow the parties to identify risks and take steps to mitigate them. In that vein, either party may instruct the other to attend risk reduction meetings to agree actions to mitigate the effects of issues that would otherwise affect the project.
Compensation events are the NEC’s ‘rolled up’ mechanism for dealing with variations, extension of time and loss and expense in a single clause. Notice of compensation events must be given promptly and within a certain strict time limit, otherwise entitlements to additional time and money will be lost. It is important to remember when pricing and following an NEC contract that its underlying philosophy is that change should be cost-neutral and compensation events are valued on the basis of change in cost (except where rates are specifically agreed) – a contractor that under-prices an NEC contract looking to make money on variations is likely to be in for an unpleasant surprise.
Where compensation event notices or quotations are not responded to when required then a further notice reminding the other party to respond can be given. If that further notice is ignored, then the NEC provides that they may become binding regardless.
Parties also often fail to understand that an early warning notice does not give any entitlement to additional time or money by itself – it must be followed up with a compensation event notice for there to be a claim. Or such notices might be entirely independent of one another; an early warning notice might not lead to a compensation event and a compensation event might occur without an early warning notice.
If a party fails to give an early warning notice when it should have done, then the sanction is that a related compensation event is assessed as if early warning had been given. In other words, it is assessed as if the other party had been given the opportunity to mitigate the effects of the issue, which will often reduce the entitlements of the party claiming a compensation event.
The Accepted Programme
The NEC requires an Accepted Programme to be produced, agreed, and updated at regular intervals and specifies the information which it is to include. Understanding and properly following the procedures relating to the Accepted Programme is fundamental to success under an NEC contract as the Accepted Programme forms the baseline against which change in a project is assessed.
Use of language
The NEC contract is written in the present tense and its language is by design intended to be easy to use in comparison to the sometimes archaic language of the JCT, particularly for persons for whom English is not their first language. Sometimes that however means that the provisions are not as clear as they could be, particularly to inexperienced users of the NEC.
Flexibility
The NEC is flexible. Main options A, B, C, D and E provide for an array of different procurement approaches from lump sums with priced activity schedules to cost plus contracts which may or may not have pain/gain share mechanisms. Other options provide for NEC contracts to be tailored in numerous ways. For example, there are options to allow for delay damages, sectional completion, and limitations of liability. Parties also often include their own Z clauses which allow bespoke changes to the NEC but must be used with care given the highly technical nature of the NEC contract.
How we can help
CCC has helped many companies by providing advice on and assistance in relation to the NEC contract, either on an ad hoc basis or as part of structured training. We can assist you in reviewing and setting up contracts, dealing with the procedural requirements such as notices as it progresses, and assist at final account stage and beyond.
Free initial enquiry
All initial enquiries from new clients are free of charge, so please do not hesitate to contact us by phone, email or using our contact form for a free initial consultation to discuss how we can help you in relation to NEC contracts, whether you are looking to put together a contract for use on an upcoming project, or whether you need advice in relation to an existing project.
