What is an NEC Contract?
Since the original NEC was designed and drafted by the late Dr Martin Barnes CBE in 1991, the Institution of Civil Engineers has developed a series of NEC standard contracts to stimulate good management of the relationship between the parties to a contract, and of the work included in the contract.
- General – further to the opening requirement to ‘act as stated in the contract … in a spirit of mutual trust and co-operation’ described above, this section deals with matters including definitions, interpretation and law, the need for good communications, the roles of the Project Manager and Supervisor, early warnings, Contractor’s proposals, requirements for instructions, corrupt acts, and acts of prevention. Please note that the provisions relating to the giving of ‘early warnings’ are essential in respect of the assessment of subsequent compensation events, where the failure to give early warning of such events (where applicable) can result in disallowed costs.
- The Contractor’s main responsibilities – detailed NEC’s requirements in respect of the provision of the Works, Contractor’s design, design of Equipment, people (key persons), working with the Client and Others, Subcontracting and other responsibilities.
- Time – amongst other things, this section contains detailed requirements in respect of the programmes that are to be offered to the Project Manager for acceptance which, once accepted, have contractual status. Further, this section covers site access, instructions to stop or not start work, ‘Take over’ of the works (not to be confused with Completion), and ‘Acceleration’ whereby the Completion Date may be brought forward.
- Quality management – this section details NEC’s use of quality management systems (where the Contractor is required to use any such system as described in the Scope), tests and inspections, and how to deal with Defects (noting that, unless Defects are accepted … the ‘Contractor must correct all Defects which would prevent the Client from using the works or Others from carrying out their work …’ before Completion).
- Payment – details NEC’s payment provisions which are to be applied in conjunction with the provisions of secondary option Y(UK)2, where The Housing Grants, Construction and Regeneration Act 1996 (as amended), also known as the ‘Construction Act,’ applies. Assessment leading to payment is different for Main Options A to F (detailed below), and so particular attention is needed in respect of the additional payment clauses included under those Options. It should also be noted that NEC4 now includes a provision in respect of the ‘Final assessment.’
- Compensation Events – these are events which, if not arising due to the Contractor’s fault, allow the Contractor to be compensated for any consequent change to the Prices, Completion and/or Key Dates. This section of the contract provides the main list of compensation events, and details NEC’s requirements in respect of notification, quotations, assessment, proposed instructions, and implementation of compensation events. Further provisions are included under the Main Option clauses (detailed below), and other compensation events may be found elsewhere in the NEC Contract, such as in the Contract Data. Caution: many NEC contracts are amended to remove compensation events (such as Clause 60.1(19), that relates to prevention) and so it is imperative that the Contractor fully review any contract amendments (typically in the ‘Z clauses’ – see below).
- Title – this relates to the NEC provision whereby the Client may secure ownership of large / expensive items of Equipment, Plant or Materials that are being manufactured or stored off site (i.e., outside of the Working Areas); which is particularly important under Main Options C, D & E where the Client must pay the Contractor for these when the Contractor pays its supplier.
- Liabilities and insurance – risks and contractual liabilities are imposed on the parties throughout the NEC Contract. However, this section is included to deal specifically with liabilities for death, and losses and damages caused by or in connection with the works (by the Parties/Others) – and details the necessary insurances that are required.
- Termination – the concluding section of the core clauses detail the Parties’ rights to terminate the contract, reasons for termination, the relevant procedures, and the making of any payment on termination.
In addition to the core clauses, additional clauses are added in respect of Main Options:
- Option A: priced contract with activity schedule – based on lump sum prices included in the activity schedule. The Prices are the lump sum prices for the activities on the activity schedule, which may later be changed in accordance with the contract (say, due to the effects of a compensation event). Note that the Activity Schedule is to be closely reflected by corresponding activities on the Accepted Programme. Payment is made in respect of completed activities.
- Option B: priced contract with bill of quantities – based on a Bill of Quantities, with specified quantities provided by the Client (that should reflect the drawings, specifications, etc., in the Scope), with rates provided by the Contractor to derive the tendered total of the Prices. The Prices are lump sums and amounts obtained by multiplying the rates by the quantities for the items in the Bill of Quantities. The Price for the Work Done to Date is the total of the quantity of completed work by reference to the Bill of Quantities, and a proportion of any lump sums contained therein.
- Option C: target contract with activity schedule – again, based on an Activity Schedule. Under Option C, the ‘Target’ price is the tendered total of the Prices (as Contract Data, and by reference to the lump sum prices for activities on the Activity Schedule, unless later changed in accordance with the contract, e.g., adjusted for the effects of compensation events). This is then compared with the Price for the Work Done to Date which is by reference to Defined Cost (amounts paid to Subcontractors … and as per the Schedule of Cost Components, less Disallowed Cost) and is the total Defined Cost which the Project Manager forecasts will have been paid by the Contractor before the next assessment date plus the Fee. The difference between the ‘Target’ and Price for the Work Done to Date is then apportioned according to the share ranges and share percentages shown in the Contract Data. The Project Manager makes a final assessment of the Contractor’s share (the pain/gain share) using the final Price for the Work Done to Date and the final total of the Prices. Payment is based on Defined Cost, plus Fee.
- Option D: target contract with bill of quantities – similar to Option C, with the ‘Target’ price relating to the Bill of Quantities (unless later changed, e.g., ref. compensation events), and the Price for the Work Done to Date relating to Defined Cost. As above, the pain/gain share is assessed by the Project Manager.
- Option E: cost reimbursable contract – the Prices are based on Defined Cost plus the Fee, and the Price for the Work Done to Date is the total Defined Cost which the Project Manager forecasts will have been paid by the Contractor before the next assessment date plus the Fee.
- Option F: management contract – as Option E, the Prices are based on Defined Cost plus the Fee, and the Price for the Work Done to Date is the total Defined Cost which the Project Manager forecasts will have been paid by the Contractor before the next assessment date plus the Fee. However, the Defined Cost is ascertained by reference to amounts paid to Subcontractors and the prices for work done by the Contractor itself (i.e., the Schedule of Cost Components, which is used with Options C, D & E, does not apply to Option F).
- Dispute Resolution Options W1, W2 & W3 (notably, Option W2 is to be used in the UK where the Construction Act applies).
- Secondary Options X1 to X22, that deal with (when applicable): Price adjustments for inflation, changes in the law, multiple currencies, ultimate holding company guarantees, sectional completions, the bonus for early Completion, delay damages, undertakings to the Client or Others, transfer of rights, information modelling, termination by the Client, Multiparty collaboration, performance bonds, advanced payments to the Contractor, Contractor’s design, retention, low performance damages, limitation of liability, KPIs, whole life cost, and early Contractor involvement, then
- Secondary Options Y(UK)1 – project bank account, Y(UK)2 – ref. the ‘Construction Act’, and Y(UK)3 – The Contract (Rights of Third Parties) Act 1999.
- Z clauses (additional conditions of contract – see “Contract amendments” below).
- The Schedule of Cost Components (and Short Schedule of Cost Components, which is only used in NEC4 for Option A & B compensation events) to be used in respect of Defined Cost and the assessment of compensation events, and
- Contract Data (provided by the Client and Contractor).
- The NEC Contract also includes for: Site Information (such as SI Reports), the Scope (which will include drawings, specifications, and the like), the Accepted Programme, documents in respect of certain Secondary Options (e.g., a Performance Bond), an Activity Schedule or Bill or Quantities … Note: it is essential to review all the Contract documents upon receipt, and certainly before the Contract Date, which is when the contract came into existence, to identify, verify and/or query what is included in your contract. Otherwise, you may be stuck with onerous amended contract clauses/provisions that provide little remedy.
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