Early Warning Notice under NEC 3

Posted on March 14, 2011 by admin

NEC 3 addresses the key recommendations of Sir Michael Latham in his report Constructing the Team; including:


The contributors to the operation of NEC contract to do so in a spirit of mutual trust and co-operation Firm duties of teamwork, with shared financial motivation to pursue those objectives A wholly interrelated package of documents which clearly defines the roles and duties of all involved, and which is suitable for all types of project and for any procurement route A choice of allocation of risks appropriate to each project according to the party best able to manage each risk Provision for changes to be priced in advance with reference to independent adjudication, if agreement cannot be reached Flexibility as to interim payments by milestones, activity schedules or otherwise

Early Warning Notice Clause in NEC 3 Contract One aspect of ECC 2 (the Engineering and Construction Contract), which attracted attention and commendation was that it provided for early warning. Early Warning notice is to be given of potential problems. Its operation in practice has been generally successful. This did much to enhance the status of ECC 2 as a collaborative contract. NEC 3 retains provision for early warning but they are now integrated with the risk reduction matters. Early warning meetings are also re-named risk reduction meeting. What is NEC3 Clause 16 Early Warning Notice all about?

The purpose of early warning is to make binding the obligation on both the Contractor and the Project Manager to give an early warning notice to the other as soon as either becomes aware of anything which may
   

Affect the contract price Delay completion Impair the performance of the works in use and Delay meeting key date

The project manager is motivated to give early warning in order to maximise the time available to consider the problem with the contractor and thereby to increase the likelihood of finding the best solution (in the spirit of mutual trust and cooperation) to meet the Employers interest. Early warning issues The early warning clause 16.1 provides that the contractor may give early warning to the project manager of any other matter which could increase his total costs. The clause goes on to state that the project manager enters early warning matters in the risk register and that early warning of a matter for which a compensation event has previously been notified is not required. Some things which would obviously come within the scope of mandatory part of the clause are discovery of unforeseen ground conditions, design problems, insolvency of key subcontractors, materials or plant shortage and the like. Considering the wordings of the clause, it is clearly more than a mechanism for one party informing the other of its faults. But in the spirit of mutual trust and co-operation, one could say, that this is the core value and culture of NEC forms of contract, it requires disclosure of the parties own fault. One of the difficulties of the early warning clause is that it is unclear how rigidly its mandatory parts are to be operated. Some degree of common sense and some tests of reasonableness and seriousness must be applied to avoid trivial matters obscuring the true purpose of the provision. The additions to clause 16.1 in NEC 3 address three separate matters:

Discretionary early warning by the contractor of matters which could increase his total cost. The purpose of this is not quite explicit. Under Options C, D, E and F of ECC 3, increased total costs could increase the total of prices would seem, therefore, to come within the mandatory part of the clause.However, it may be argued that the mandatory part is worded to strictly and for Cost Reimbursable Options it is not practicable to require early warning notices for every price increase. In so far that the discretionary provision applies to Options A and B it is perhaps, simply early warning that the contractor may be looking for claim opportunities or may be running into financial difficulties. If an early warning is given by either the project manager or the contractor, the project manager is required to make an addition to the Risk Register to cover the matter. Both mandatory and discretionary matters seem to be included.

Early warning is not required for matters previously notified as compensation events. This remedies a procedural defect in ECC 2 and remover duplication of notices. However, it raises questions, as to whether all compensation events should be entered into the Risk Register.

Consequences for failure to give early warning notices: The sanction on the contractor for failing to give a required early warning notice is found in clause 63.5. This relates to the assessment of compensation events. This means that if the contractor does not give a required early warning then the assessment of a compensation event cannot be greater than the assessment which would have followed the notice. It is important to note that obligation on the contractor under clause 16.1 is to give notice as soon as becoming aware of any matter requiring notice. However to apply clause 63.5 to assessment of compensation event arising, the project manager must first have notified the contractor under clause 61.5 of his decision that the contractor did not give early warning which an experienced contractor could have given. It is possible that early warning could have allowed actions to be taken which would have reduced costs and save time. It is worth noting that there no express sanction in NEC 3 for failure by the project manager to give early warning. But, acting in the best interest of the employer, the

project manager would be expected to be conscientious in doing so. Any proven failure by the project manager to give early warning of a matter which he became aware would have potentially be a breach of clause 10.1 and arguably entitle the contractor to damages for breach against the employers or payment under the compensation event clause 61.8. Risk Attendance Reduction Meetings Clause 16.2 Clause 16.2 authorises the project manager or the contractor to call a risk reduction meeting at any time to discuss any problems or potential problems. This clause provides instruction to attend the meeting, however the consequences of one party find the instructions inconvenient or impertinent and failing to attend are not addressed. Clause 16.2 also provides that either the project manager or the contractor may instruct other people to attend if they both agree. Literarily, this would depend on the project manager or the contractor having it within their power to instruct to attend. What this means is that it he project manager and the contractor so agree then either can invite other persons to a risk reduction meeting if they think their presence would be helpful. It is worth noting that the supervisor has no automatic right to attend and therefore, he can only attend if the contractor and the project manager agree that he can. Risk Reduction Meetings Clause 16.3 Clause 16.3 of NEC 3 is a version of clause 16.3 of ECC 2 expanded to refer to and include for risk reduction. The intention of the requirement for the contractor and the project manager, and any other people attending the meeting, to co-operate is to ensure, as far as possible, that actions are taken and decisions made which avoid or mitigate the effects of identified risks on cost, quality and time. Clearly the obligation to co-operate only extends to those who are bound by the contract but it does raise some questions on whether it really is intended to be an obligation or merely exhortation. However, given the obligation in clause 10.1 of the contract for the parties to act in a spirit of mutual trust and co-operation it may be a breach of a contract not to co-operate.

Revision of the Risk Register Clause 16.4

This clause in NEC 3 requires the project manager to revise the risk register to record decisions taken at each reduction meeting and to issue the revised risk register to the contractor. The clause also provides that if a decision needs a change to the works information, the project manager should instruct the change at the same time. It is useful for the project manager to record any decisions about actions to be taken, stating not only who will take them but also when action when action will be taken. In conclusion, early warning and its operation in NEC 3, is one of the features of dissimilarity to existing standard forms of contract. It is essential to understand that NEC 3 is a collaborative contract, when you consider the requirement for principal contributors (i.e. the employer, the contractor, the project manager and the supervisor) to the operation of NEC 3 contract to do so in a spirit of mutual trust and cooperation, operating the early warning notice clause is key to achieving this objective. Although the NEC 3 is designed to motivate and inspire all contributors to execute the contract in a collaborative and continuous improvement performance, however strong management discipline and change of organisational culture may be required to achieve this aims.