12 Top Tips if you are using an NEC Contract

http://www.jrknowles.com/upload/files/AIS_NEC_GF_June_2011.pdf The NEC contract is very different from the traditional contracts that construction companies are familiar with. Whilst the NEC is not written in ye olde Englishe like other contracts, and is generally easy to read, it does contain some unique provisions. If you are being asked to tender for works using an NEC contract, the tips below are a good introduction to some of the main provisions to watch out for. If you havent used this contract before, it is definitely worth organising some training for your company to ensure that you do not fall foul of its provisions. Knowles has been delivering seminars and workshops on NEC contracts for many years. 1. Learn a new language The NEC contract introduces a number of new terms which are peculiar to the NEC contract, such as Compensation Events - similar to variations, extensions of time and loss and expense under other contracts, Contract Data there are two parts Part 1 is completed by the Employer as part of the Invitation to Tender documentation, and Part 2 is completed by the Contractor as part of his tender. If the Contract Data is not completed properly, then it will be very difficult to properly administer the contract Project Manager (PM) similar to the Architect / Contract Administrator under other contracts Schedule of Cost Components and the Shorter Schedule of Cost Components Crucial in the assessment of Compensation Events Works Information - Significant in understanding the scope of work, and in describing the constraints in providing such work Risk Register assists in creating awareness about project specific risks Fee percentages there are several fee percentages that need to be tendered in respect of assessing cost, and a knowledge of their application is crucial when formalising an NEC 3 contract Activity Schedule under Option A this document is a series of lump sums, and payment is only due if the activity is completed (similar to milestone payments). Careful consideration of the Activity Schedule will maximise the contractors cash flow within interim payments. 2. Know your options There are six main options to choose from, and the choice will reflect the balance of risk under the contract. At one end of the scale you have the more traditional options A and B, which are lump sum contracts with the pricing risk with the Contractor. At the other end of the scale is Option E, which is cost reimbursable, and in between we have target contracts C and D. Here, costs are evaluated on an open book basis, with savings and even cost overruns shared between the parties. The. most commonly used options are A and C. 3. Communications All communications must be in a form which can be read copied and recorded, meaning that no verbal communications are permitted under the contract, but emails are

permitted. 4. Notices, notices, notices There are two ways in which the parties can correspond with each other via notices or via communications. The contract is very prescriptive with regard to notices in particular under clause 13.7 which states A notification which this contract requires is communicated separately from other communications This means that a notice of Contractor delay or incurring additional cost cannot be simply written into the progress report or into the programme, and the progress report or programme relied on as a notice, instead a separate communication is required for each compensation event. 5. Key dates This provision is used in addition to sectional completion, and is effective when the Employer wishes to have certain milestones (or conditions) fulfilled by a specified date. Such dates are contained in Contract Data (P1), and failure to meet such milestones will attract damages! 6. Notifying compensation events A condition precedent!! It is vital that anyone using the NEC is very familiar with clause 61.3. The clause states that if a Compensation Event happens or is expected to happen (e.g. the Contractor incurs delay / additional cost for a reason stated in clause 60.1) then he must give a notice within 8 weeks of becoming aware of the event. If he fails to give this notice (remember a separate communication is required for each notification) then he loses his rights to an adjustment to the Prices and the Completion Date. 7. Programming To say that the NEC is big into programming would be a massive understatement. Under most JCT contracts, the Contractor is required to provide a programme, and usually if he wants to claim an extension of time in the future he will use the programme to illustrate the delays incurred. Under the NEC, the Contractors first programme must be provided within the period for reply stated in Contract Data Part 1 (usually 2 weeks) if the Contractor fails to provide the first programme, the PM can deduct 25% from all payments until the programme is provided in the correct form. clause 31.2 gives specific requirements for the programme ie that the Contractor must show expected items such as start and finish dates, key dates etc, but also items that Contractors would not normally show, such as o Float o Time risk allowances 8. Payment for materials on or off site Under Option A, unless the Contractor has Activities on the Activity Schedule which specify materials on / off site with a figure against them, the Contractor will not be entitled to payment for them, and will then have to wait for payment until the Activity is completed. 9. Design liability Unlike other forms of contract, the NEC does not have a specific design and build option, instead where the Contractor is responsible for design, this should be clearly set out in the Works Information (which may be many pages long). Note that the Contractor automatically has a fit for purpose obligation (unless secondary option X15 is chosen) 10. Early warning and risk reduction

Both the Contractor and the Project Manager, must issue an early warning notice as soon as either is aware of any matter which may delay the works, or increase costs. If the Contractor fails to issue an early warning notice, and then such matter results in a compensation event, this failure will enable the Project Manager to assess the compensation event as if early warning had been given. This allows the Project Manager to consider all those mitigation measures that the Employer could have otherwise undertook. 11. The infamous Z clauses The NEC expects that the Employer will insert additional conditions of contract, and this is where the Employer may push additional risks on to the Contractor. Such additional clauses can include Passing the liability for ground and other physical conditions to the Contractor Increasing the payment periods Reducing the period for notification of compensation events from 8 weeks to, say, 4 weeks 12. Selecting the secondary options The Employer can also chose from 15 secondary options (confusingly numbered between X1 and X20). If any of these options are chosen, then it would be stated in Contract Data part 1. The options include: X5 Sectional completion X7 - Delay damages ( liquidated damages) X15 Limiting design liability to a standard of reasonable skill and care X17- Low performance damages In summary, if not administered properly, this contract could seriously damage your companys wealth. Do not agree to use this contract without properly assessing your risks and responsibilities. Geraldine Fleming Vice President, Knowles, Daresbury
Previously appeared in AIS journal August 2011