Management

It's widely used, but watch out for NEC's hidden traps

4 July 2013

Widely regarded as an easy-to-use and understand contract, NEC3 nonetheless carries risks you need to be aware of.

Construction contracts were once bespoke documents drafted for each project. But in 1879 RIBA had the bright idea of using a standard form for construction projects. Since then, there have been numerous attempts to create the perfect contract, not least the CIOB’s latest Complex Projects Contract.

One of these many contract forms, the New Engineering Contract, or NEC, was launched in 1993. The latest update to NEC3, launched in 2005, has just been released, and it’s in use throughout the world. Six options exist in the NEC family of contracts, CIOB members will most commonly come across the “engineering and construction” form. It’s becoming increasingly popular throughout both the public and private sector, notably on recent projects such as the Olympics and nuclear decommissioning programme.

The NEC has been heralded as easy to use and understand as a result of its simple language, and as an excellent tool for contract management – the idea that risks are managed pro-actively and identified as part of the contract, rather than battled out afterwards makes a lot of sense and appeals to those involved in the execution of projects.

Read Graham Clarkson's article Five ways to make NEC3 work in practice

However, NEC is not without its risks and challenges. Several lawyers and experts have suggested that some of NEC’s positive features can also create problems if not treated with care. EC Harris, for example, has warned: “We are seeing an increasing number of disputes with NEC contracts, clients and contractors don’t understand how different it is to JCT contracts and get themselves into a bit of mess.”

So what are the risks and how do you avoid them? This article will hopefully point you in the direction of some key aspects and clauses in the NEC form to take careful note of, and assist in avoiding the risks that have caused problems.

The language of the contract itself

In an attempt to escape the complexity and “legalese” of other more traditional contracts, NEC is written in plain English, in the present tense, and avoids the use of legal terminology.

However, it’s been argued that this creates ambiguity, particularly as much of the rest of the law and our legal system operate in a different style. At one of our CIOB Masterclasses last year, Mike Barlow of Scottish law firm MacRoberts highlighted this very problem. He pointed out that a high court judge complained of the use of the present tense because referral to adjudication or other tribunals were difficult to construe as a result.

Phrases such as “that Party notifies” and, “The tribunal settles” make it tricky for lawyers and judges to determine whether terms are to be interpreted mandatorily, optionally, or what alternatives are available. The judge said: “No doubt this approach to drafting has its adherents within the industry but … it seems to me to represent a triumph of form over substance.”

More recently, discussions arose over the interpretation of how to calculate costs – a fundamental issue in disputes. Three different lawyers and experts provided three different interpretations
of the same clause.

To give an indication of challenges posed by the clause in question, it reads as follows:

“The changes to the prices are assessed as the effect of the Compensation Event upon (1) the Actual Defined Cost of the Works already done; (2) the forecast Defined Cost; (3) the resulting fee.”

It then says:

“The date when the Project Manager instructed, or should have instructed, the contractor to submit quotations divides the Works already done from the Works not yet done.”

It’s not hard to see how three different people interpreted that in different ways. Caution in the interpretation of terms is clearly needed, lest they’re misinterpreted in another (or dispute) situation.

The risk of using the form internationally and/or amending

There are some risks involved in amending any contract, but NEC is particularly troublesome in this regard. Two issues have been highlighted at recent CIOB Masterclasses.

First, many are familiar with JCT forms of contract, and attempt to add JCT type clauses, or even directly take JCT clauses and add them to the NEC. However, there’s a risk that conflicting language of amended clauses (as discussed earlier) will lead to unpredictable results and unclear decisions should such a contract be the subject of a dispute. Good advice is needed when using amended clauses of any sort — whether they be the “z” or other clauses provided with the contract documents, or your own amendments.

Second, when working internationally, it’s crucial to use any form with great care. But the NEC in particular, because its language and nature warrants attention. Having been drafted originally for use in the UK, a particular criticism has been that when used internationally there may be risks of conflict with local laws and codes. Where such conflicts arise, local law will take precedence. For example, in Qatar, the Qatari civil code outlaws time-bar clauses – which are common in contracts such as NEC.

The management tool approach

The NEC introduces a raft of new concepts. Terms such as “risk register”, “activity schedule”, “compensation events” and various schedules will all be new to those who have not used this form before. Much is arguably a result of the collaborative “management tool” approach of the form, which some suggest has a negative impact on its usefulness as a contract document.

The management approach of the contract aims to ensure risks are clearly defined, monitored, identified and managed from an early stage. However, at a recent Masterclass, Rob Horne of law firm Trowers & Hamlins, and Nick Sunderland from Knowles highlighted the importance of understanding the “Early Warnings” mechanism at Clause 16. This requires the contractor and project manager to warn of specified project risks, and to deal with the risks and/or arrange a “risk reduction meeting”.

There is a danger, particularly for those used to the more adversarial JCT contract, that Clause 16 might be regarded as a tool (or perhaps a weapon?) for demonstrating entitlement to payment. In other contracts such clauses can ensure notice of delay has been provided to trigger an extension of time or liquidated damages. With NEC that’s not necessarily the intention. It’s important to ensure that active management mechanisms in the contract are used as such.

The project manager’s role

As the NEC3 Guidance Notes suggest, the conditions of contract are intended to stimulate effective project management.

The contract defines precise time limits for communication and responses by both parties, especially when dealing with the assessment of compensation events. Prescribed time periods tell contractors when to notify compensation events and project managers have to reply promptly to notifications and quotations. Failure to reply within the allocated time carries express sanctions within the NEC. Such provisions are drafted so that both parties agree the cost and time effect of compensation events in a prompt manner.

The NEC requires pro-active management, so it’s very important to ensure that an experienced project manager is in place who can make active decisions quickly and work in partnership with other parties in the project.

Understand where the risks lie

Finally, understanding risk apportionment under NEC3 is crucial. Nick Sunderland points out that Clauses 60.1 and 80.1 list events which are at the employer’s risk, which in turn entitle the contractor to an adjustment to the prices and the completion date. It is important to understand these to avoid being caught out by them, and more critically for a contractor, to make sufficient allowance in the prices and the accepted programme for events that are their risk. A clear understanding of project risk from the outset will therefore improve the cost and time predictability.

It would appear, then, that the key aspects for successful work with NEC are understanding, pro-active project management and communication. When coupled with good advice, working with NEC should be successful. Training and education abounds: there are LinkedIn groups, seminars and later this year there’s a Masterclass planned in London, so take advantage of these to ensure you have the latest knowledge and tools to stay ahead of the competition.

By Stuart Wilks ICIOB, senior manager of Hill International, and Nick Sunderland, a director of Knowles. Visit www.hillintluk.com for details of the forthcoming CIOB/Hill Masterclass

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