2018 – Driving change with NEC4
NEC has remained true to its core values in its latest update of contracts in the form of the NEC4.
There is still a clear focus on issuing a contract in simple English which drives good project management and flexibility. The NEC website is keen to highlight this fact by describing the new suite of NEC4 contracts as “significant evolution, not revolution”.
The last update of NEC contracts was issued in 2005 and it is clear that the updates have been driven by direct feedback from the construction industry and how the contracts are being used on the ground. NEC is still used heavily in government projects and the NEC is keen to maintain this client base whilst ensuring contracts are accessible and appropriate to all potential clients.
The suite of NEC4 contracts aims to reduce the number of Z clauses used to amend the standard forms and generally modernise the contract. Clarity is still at the heart of contract to drive effective project management.
New forms of contract
The NEC has issued two new forms of contract; the Design, Build, Operate (“DBO”) and, in draft form, the Alliance Contract (“ALC”).
The DBO aims to provide an “integrated whole-life delivery solution”.
NEC has recognised that increasingly and particularly for complex infrastructure projects, there may be one contractor who provides the design, construction, operation and maintenance of the project and the DBO provides for all of these services from pre-construction to facilities management services. This ensures that buildings are reaching the required performance levels post construction.
The ALC has been issued in draft and aims to be a true form of partnership agreement.
This contract is aimed at larger and more complex projects where a number of parties wish to enter into a single collaborative contact. The underlying principle of the ALC contract will be that all parties will work together to achieve the client’s objectives and will share the risks and benefits of doing so.
This contract encourages a much deeper collaboration between parties and seeks to reduce the grounds for dispute and find early solutions to problems as they occur.
NEC has made a number of changes to the ways its contracts operate, both legally and practically. Although by no means exhaustive there a number of different key points NEC users should be aware of.
The NEC has amended some of the key terms used throughout the contracts and has made them gender neutral.
Key term changes throughout the contract include “Employer” changing to “Client” and the term “Scope” now being used in all contracts to describe the services / works being provided. This provides consistency across all NEC4 contracts and ensures that all the standard forms are properly integrated.
NEC4 introduces a new option to specify how a communication is delivered under the contract. This is reflective of the fact that in practice contract management is often carried out digitally and this provision allows for this to be specified in the contract. This gives NEC users greater flexibility to agree a communication system that reflects their working practices.
It was crucial for NEC users to adhere strictly to the communication and notification provisions in the standard form NEC3, and so it follows it is crucial for NEC4 users to adhere strictly to the chosen communication system. There is a risk that should a party not follow the communication system it could be argued that a potentially important communication was not effectively made in a way that is binding under the contract.
A new assignment clause has been inserted in keeping with current practices and to reduce the need for Z clauses. The implications of this new clause should be considered carefully given that either party can simply give notice if they intend to assign, rather than requiring the other party to consent to such assignment. It is unlikely that Clients, especially where funders are involved, will accept this clause in the current form given that Contractor is able to assign the contract freely.
It is also slightly unusual given that if the Client attempts to assign the contract to someone else the new Client must act in a spirit of mutual trust and co-operation. Given that only the rights under a contract (and not any obligations) are generally transferred in assignment, it is difficult to understand the reason behind this wording unless it is intended to discourage the assignment of claims
Under the NEC4 the scope can now stipulate in what form the programme is to be provided for ease of contract administration.
In addition to the changing timescales for submitting and accepting programmes the provision now allows for deemed acceptance of the programme if acceptance doesn’t occur when required. This is worth noting for all Clients and Project Managers.
The amendments to the payment process are largely administrative but the obligations to submit applications for payment before the assessment date and the inclusion of a new final account mechanism are worth noting, especially for Contractors.
NEC4 has redrafted and added to the clauses dealing with compensation events to reduce the need for Z clauses and to clarify the process.
There are two new compensation events. The first new compensation event allows for the Contractor to recover the costs of preparing a quote for a proposed instruction. The Client and the Project Manager should be aware of this before issuing any proposed instructions and the fact that this is a compensation event should be notified in the notification. The second new compensation event allows any compensation events agreed between the parties to be inserted into the contract data.
NEC4 has also clarified when the dividing date is depending on what caused the compensation event. If a compensation event arises from the Project Manager or Supervisor giving an instruction, notification, issuing a certificate or changing an earlier decision the dividing date is the date of that communication. For any other compensation dates the dividing date is the date that the compensation event is notified.
Title to objects and materials within the site
The title to materials from excavation and demolition from the site is automatically vested in the Contractor unless the Scope states otherwise. This completely reverses the approach from the NEC3. The potential for dispute as to the boundaries between this clause and the clause dealing with objects of value or historical or other interest (in which title vests in the Client) should be noted.
Liabilities and insurance
NEC4 takes a completely different approach to the NEC3 in respect of allocating risk between the Contractor and Client. Previously, in the NEC3 there was a list of risks which were the Client’s responsibilities, and all other risks were Contractor risks. Alternatively, the NEC4 provides a definitive list for both the Contractor and the Client. NEC users will need to be careful when using this clause unamended to ensure there are no risks in a project that do not clearly fall on either the Contractor’s or the Client’s list of risks.
In addition the indemnity in relation to claims, proceedings, compensation and costs has been deleted and replaced with a recovery of costs clause. NEC drafters claim this is because not everyone is familiar with indemnities but this represents a potentially significant change in the basis for making claims under the contract. Nevertheless, the removal of these broad indemnities makes NEC4 consistent with other commonly used standard forms.
Dispute avoidance board
NEC4 includes a new clause in the form of a dispute avoidance board to try and minimise the risks of any disputes crystallising. In short the dispute avoidance board (DAB) is appointed consensually by both parties who become familiar with the project before the dispute arises. The DAB make regular site visits as and when requested to help to find an amicable solution between the parties. If no solution is found they make a recommendation and the matter will only go through a formal dispute resolution process if the recommendation is not accepted.
A new clause has been inserted so that the Contractor gives undertakings to other parties (such as funders, purchasers and tenants) as opposed to collateral warranties and this is stated in the Contract Data.
It also allows a provision to request that sub-contractors will also provide undertakings to the Client and to other parties should they be carrying out any of the works requiring undertakings and stated in the contract data.
This removes the needs for collateral warranties but given that the undertakings take the form of a separate document that is prepared by the Client there is no significant legal distinction. Clients may prefer to continue to use collateral warranties given that they are deemed ‘safer’ and that the Client will know they are generally acceptable to funders and other institutions.
The information modelling clause has been included to reflect the updated practices on government projects on which BIM is now a requirement. As with other standard form contracts, the NEC has not set out a standard form protocol. This gives Clients the freedom to use their own protocols and easily incorporate them into the contract.
The clause stipulates who is to collaborate on the BIM models, who owns the BIM models and who is liable for what risks on the BIM models. NEC users will want to consider this clause in its entirety to ensure that the clause reflects their anticipated use of the BIM model in practice.
Termination at will
The Client is now able to terminate the contract at will, but it is not clear if this right can be used to engage an alternative third party to carry out the works.
There has been a subtle shift in the burden of proof in relation to liability for the Contractor’s Design but this change could significantly impact claims under NEC4. Under the NEC3 it was the Contractor’s responsibility to prove that they carried out the design with reasonable skill and care. However, under the NEC4 it is now the Client’s responsibility to show that the Contractor did not carry out the design with the requisite skill and care, a change clearly favourable to Contractors.
Whole of life costings
Under the NEC4 the Contractor may suggest amendments to the Scope in order to reduce the cost of operating and maintaining an asset. This represents a recognition that the cost of maintaining and operating an asset form a significant part of investment in the asset.
Early contractor involvement
This new clause involves appointing a Contractor early on in the project to participate in the development of the design and proposals. This allows the Contractor to raise any potential issues or concerns at an early stage when it can be easily rectified or indeed to propose any improvements or innovations that had not occurred to the Client.
This has the potential to save the Client significant costs and it also provides a good basis for collaboration between the Contractor and the Client, with the benefit to the Contractor of being paid agreed sums for its early involvement.
All NEC users will need to familiarise themselves with the contractual changes in the NEC4 series, and will need to ensure that any and all Z clauses are appropriate for the new form of contract. Users will also need to ensure they are confident in the procedural changes in the NEC4 to ensure that they are meeting the requirements under the contract, especially in relation to the communications, compensation events and the programme.
For further information and guidance, please contact our Construction team.
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