The NEC3 contract philosophy; collaborative and proactive

NEC3 is a less adversarial contract, and can offer distinct benefits to particular projects.

Willie Aherne, Director at Linesight, talks through the NEC3 contract and why it may be of benefit to certain projects. 

The NEC3 contract is widely used throughout the public sector in the UK, and is seen by many involved in the construction industry as a less adversarial contract. Aspirations for its use grew considerably after the publication of landmark reports such as Constructing the Team (Latham 1994), Partnering in the Team (CIB 1997) and Rethinking Construction (Egan 1998). While only a handful of projects are using the NEC3 contract in the Republic of Ireland, it is the contract of choice for the public sector in Northern Ireland. 

Linesight is currently involved with a number of large infrastructure projects which use the NEC3 Engineering and Construction Contract (‘ECC’) form of contract.

Within this, there are 6 main options available, including:

• A: Priced contract with activity schedule (lump sum)
• B: Priced contract with bill of quantities (re-measurable)
• C: Target contract with activity schedule
• D: Target contract with bill of quantities
• E: Cost-reimbursable contract
• F: Management contract

The contract is comprised of core clauses (for each main option) used in conjunction with secondary options and other additional conditions of contract. Employer conditions are captured in the contract data and Z clauses.

The principal differences between the options are essentially the level of risk transfer between the contractor and employer, and the payment mechanism. 

Option A includes an activity schedule detailing the list of activities that the contractor must complete in order to provide the works. Each activity is priced by the contractor as a lump sum. With option B, a bill of quantities is used and the employer pays for work done on the basis of actual measurement of items with quantities.  

Options C and D are target based, which use open book cost reporting. They contain a contractor’s share clause, with cost overruns and savings shared between both employer and contractor in a prescribed manner. Open book contracts require extensive contract administration and cost reporting systems.

Option E is cost reimbursable, which is suitable for projects that are difficult to specify. Option F is a cost reimbursable management contract whereby the financial risk is taken largely by the employer.

The NEC3 contract can offer distinct benefits to construction projects, as a less adversarial contract form.

Looking at the administration pertaining to the NEC3 contract, the Project Manager manages the contract on behalf of the employer, and is authorized to issue instructions, notifications and other communications required under the contract. The role of the Supervisor in NEC3 is independent to the Project Manager and his/her sole responsibility is checking compliance with the works information, undertaking tests and inspections, and issuing defects certificates.

While cost related duties are the responsibility of the Project Manager under NEC3, these are usually undertaken by a Cost Manager.  A Cost Manager will therefore be directly or indirectly involved in valuations, measurement, claims for loss and expense, and for variations on a project. 

NEC3 requires the employer, contractor, Project Manager and Supervisor to act in a spirit of mutual trust and collaboration. The contract has a sharp focus on proactive management of risk in addition to allocation. While this is onerous from a contract administration perspective (as it requires risk registers, risk reduction meetings, early warning notifications, etc.), it is regarded as being highly effective from a Cost and Program Management point of view. For example, early warning clauses require both contractor and Project Manager to notify each other of events or factors which could impact on cost, time or quality, resulting in potential contractor’s claims being communicated and dealt with promptly. This compares with the reactive nature of some other contract forms, where an actual risk must have occurred before an obligation is put on the contractor to report it.

The contract deals with compensation events for time and cost together while other contracts may treat them independently. Also, under NEC3 there is a duty to notify of an underlying event or circumstance, which contrasts with other contracts, whereby a duty exists to notify of an entitlement to additional time or money.

The program is a central feature of NEC3 where there exists a concept of an ‘Accepted Programme’. The employer sets the frequency by which the contractor must submit initial and revised programs with financial penalties for late submission. The Project Manager is required to accept or reject the program and once accepted, it is used as part of change management, progress monitoring, early warning notification and compensation events assessment. 

In essence, the NEC3 contract differs considerably from others in its philosophy. It can have significant advantages, particularly in relation to the achievement of cost certainty and on-time completion. While administration costs may be greater than that of other contract forms, the proactive nature of the NEC3 contract should allow client organizations to promptly deal with issues as they arise, in a collaborative way with the contractor, leading to a successful project delivery.