Construction Contract Administration (CON3372) NEC

Chapter 6 An Introduction to New Engineering Contract (NEC)

The Construction Industry Review Committee (CIRC) in its report in 2000, highlighted

the fundamental problems that exist in the construction industry such as

 Adversarial culture and fragmentation chain with different parties in the

procurement of a project

 Lack of collaboration and lack of efficiency

In response to the recommendations in the CIRC report, the SAR Government have

examined suitable form of contract embracing partnering approach into a contractual

relationship and have decided to try out the NEC form of contract. NEC promotes co-

operation, mutual trust and collaborative risk management between contracting parties.

It is composed of a family of contracts which is as listed below :-

The NEC (New Engineering Contract) - Family of Contracts

 Engineering & Construction Contract (ECC) - between an Employer and a

Contractor. The ECC is for the appointment of a Contractor for construction

works using a wide range of procurement routes and including any level of

design responsibility. It is suitable for capital works contracts.

 Engineering & Construction Subcontract (ECS) - between a Contractor and

a Subcontractor. It is for the appointment of a Sub-contractor where the

Contractor has been appointed under the ECC. It may also be used to appoint a

Sub-contractor under other forms of main contract.

 Professional Services Contract (PSC) - between an Employer or a Contractor

and a Consultant. The PSC is for the appointment of a consultant to provide

professional services, such as project management, quantity surveying,

architectural and engineering services.

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 Adjudicator’s Contract (AC) - between two contracting parties and an

Adjudicator.

The AC is for the appointment of an adjudicator under an NEC3 contract’s

dispute resolution provision. It may also be used to appoint an adjudicator under

other forms of contract.

 Engineering & Construction Short Contract (ECSC) for “simple” work (not

necessarily low value). ECSC as an alternative to ECC and is for use with

contracts which do not require sophisticated management techniques, comprise

straightforward work and impose only low risks on both the employer and the

contractor.

 Engineering & Construction Short Subcontract (ECSS) for use with the

ECC or ECSC.

As a subcontract to ECC or ECSC and is for use with contracts which do not

require sophisticated management techniques, comprise straightforward work

and impose only low risks on both the contractor and the subcontractor.

 Term Services Contract (TSC) where the contract is for a period of time rather

than a single project.

 Framework Contract (FC) for the appointment of one or more

Suppliers/Contractors/ Consultants to carry out construction works or to provide

professional services on an "as instructed" basis over a set term.

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What are the characteristics of the NEC Contracts in general?

1) Flexibility

 The NEC contracts are flexible modular of forms of contract for e.g. ECC

(Engineering Construction Contract) contains core clauses and a choice of main

Options regarding pricing, risk allocation and payment mechanism (e.g. Lump

Sum, target cost etc.).

 The form can be coupled with other option to tailor the contract to suit project

specific requirements.

2) Clarity and Simplicity

 The NEC suites of contracts are written in non- legal language, using concise

sentences and a limited use of legal terminology.

 Less clauses/words and the use of simple language (avoid legal jargon)

 Clear definition of responsibilities

 Guidance notes and flow charts are used to help to explain the intent of clauses.

3) Stimulus to Good Management

 Good project management requires all parties to work collaboratively, and the

NEC achieves this by clear division of responsibilities and function to promote

accountability and transparency.

 Includes detailed set of PM procedures

 Early risk identification

 Collaboration amongst parties via mutual trust

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Who are the Main Parties to the ECC contract?

Parties Named in ECC (Engineering & Construction Contract)

 The Employer

 The Contractor

 The Project Manager – appointed by the Employer and administers the contract

on behalf of Employer.

Role of the PM

 Review and acceptance of programmes

 Issue instructions

 Certify payments

 Assess compensation events and their impact on time and cost

 The Supervisor – administers testing, inspection, quality of work and defects

(similar to Clerk of Works or Resident Engineer)

 The Adjudicator (appointed jointly by the Employer and the Contractor)

 Others - people or organisations (e.g. design team and cost manager) who are

not the above, or any employee, Subcontractor or Supplier of the Contractor

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Overview of ECC – Core Clauses

Core Clauses (common to all contracts)

1. General

2. The Contractor’s main responsibilities

3. Time

4. Testing and Defects

5. Payment

6. Compensation events (19 CEs: EOT + Direct Loss and Expenses)

7. Title

8. Risks and insurance

9. Termination

And a list of Secondary Optional Clauses such as

X1. Price adjustment for inflation (used only with Options A, B, C & D)

(sim. “Fluctuation Clause”);

X2. Changes in the law;

X3. Multiple currencies (used only with Options A & B);

X4. Parent Company Guarantee;

X5. Sectional Completion;

X6. Bonus for Early Completion;

X7. Delay Damages (sim. Liquidated and Ascertained Damages);

X12. Partnering;

X13. Performance bond;

X14.Advanced payment to the Contractor etc.

X15. Limitation of Contractor’s Liability for design to reasonable skill & care

Etc

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What are the Key Differences between an NEC contract and a Traditional

contract used in Hong Kong?

The key differences can be summarized in the following terms:-

i) In the Drafting philosophy, unlike the traditional contracts which are

commonly used in Hong Kong, NEC embodies partnering concepts (e.g.

mutual trust and co-operation (clause 10.1) and multi-party partnering

(Option X12)) and collaborative management working towards common

goals.

ii) Management Approach - The contract form requires not only timely

decision making by the parties but also promotes transparency in such

decision-making process. For example, it requires the Project Manager to

state reasons for his decisions which is not common in other traditional form

of contracts.

Through the innovation of the early warning notification system, the risk

register and the risk reduction meetings, NEC encourages proactive risk

identification and problem solving in an open and collaborative manner.

iii) Risk Management Approach – NEC incorporates innovation of early

warning notification system, the risk register, risk reduction meetings and

encourages proactive risk identification and problem solving in an open

manner.

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iv) Contractual Practices - There are a number of key differences between NEC

and other traditional form of contracts. Terms such as provisional sum,

prime cost sums, and contingency sums are not used in NEC3. Procedures

for claiming additional payment and extension of time which are usually

separate have been replaced by a consolidated compensation event

procedure.

Generally, the NEC contracts focus more on project management than other forms

traditionally used in Hong Kong. Compared to the traditional forms of contract, the

NEC is more procedural and management intensive. Parties should be aware that

training will ideally be required before the contracts can be used effectively.

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