Document 6440036

the new
engineering
contract
USERS’ GROUP
newsletter
I S S U E
N o . 1 5 • O C T O B E R
2 0 0 0
NEC Partnering Agreement now available
by Martin Barnes, NEC Panel
The NEC Panel has produced for consultation a simple
new Partnering Agreement to link parties in one or
more NEC-procured construction projects in a comprehensive partnering relationship.
It is designed as an ‘umbrella’ agreement to be used
alongside conventional NEC contracts, providing everything needed to create a full partnering process and
culture around the designers, contractors, subcontractors and suppliers as well as the client and other key
stakeholders.
The original NEC contracts were designed to stimulate collaborative working between any two parties in a
single project but this was some years before the modern concept of partnering was defined and then promoted by the Egan report Rethinking construction.
However, because so much of what a partnering contract requires is already in the basic NEC contracts, the
new agreement is very short and straightforward.
It has been prepared in consultation with experts
and is fully compatible with existing NEC standard contracts. The content is derived from the guide to project
team partnering published by the Construction Industry
Council (CIC). All requirements of the CIC document not
already in the NEC bi-party contracts are covered.
Going further than the CIC proposals, it allows for both
multi-project and single-project partnering and enables
the composition of the partnering team to be changed
from time to time as projects evolve.
C O N T E N T S
ECC adapted by Yorkshire Water
2
Chairman’s message
3
Housing trust uses ECC
4
Using the target-cost option
4
ICE procedures questioned
6
Common problems
6
NEC diary
8
NEC USERS’ GROUP NEWSLETTER•No.15•OCTOBER 2000
What it contains
The agreement follows the normal NEC structure in
that it is made up of clauses, data and information but
does not have options, as these are unnecessary. It
does not duplicate provisions of the appropriate existing contracts in the NEC family, which should continue
to be used for the individual contracts.
The agreement includes agreements for joint pursuit
of objectives, for working towards achievement of key
performance indicators and for the work of the partners to be monitored by a core group of managers
from the principal members of the team - all as recommended by the CIC.
The most important performance indicator is perhaps
achievement of the client’s objective. This is the objective for ‘the programme of projects’, if more than one,
or for ‘the project’ if only one. The objective should be
expressed quantitatively if possible (the business case)
and should also include the partnering objectives.
Just like works information in the Engineering and
Construction Contract, the agreement includes partnering information. This comprises project-specific
requirements for such things as
● use of common information systems, sharing of
offices
● attendance at partners’ and core group meetings
● participation in partnering workshops
● arrangements for joint design development
● value engineering and value management
● risk management.
How it can be used
The document is intended to be used as a multiparty agreement supplementing the bi-party NEC contract which each party has with the body paying for its
work. The parties to the agreement should be all the
bodies that are intended to make up the project team.
The agreement is given legal effect by including it
in all appropriate bi-party contracts by means of an
additional clause (for example as option X12 in the
ECC). It is not a free-standing contract but a part of
each bi-party contract that is common to all contracts
in a project team. Because organisations will join the
team at different times, the agreement does not have
Wilmott Dixon, Chairman Sir Michael Latham unveils
palque at Priory Court housing development in London –
another ECC success (page 4)
a date but an identifying number reference instead.
The underlying bi-party NEC contract will be for a
contribution as contractor or consultant, the work content of which is sufficiently defined to permit a conventional NEC contract to be signed. In the early
stages, for example, it may be desirable to appoint a
contractor on the Professional Services Contract with
the partnering agreement to cover the contractor’s upfront advisory role before any physical work can be
defined. An ECC can be substituted later. Similarly,
many team members may have to be appointed under
a time-based payment option in the early stages until
the partners have worked out exactly what work has to
be done and can make a price commitment to it.
As with all NEC documents, the agreement is intended
to have wide-ranging application. It can be used internationally, for projects of any technical composition and as
far down the supply chain as required. It is also intended
that the agreement should work with both common law
and civil law systems and that it should be compliant
with EU procurement regulations. It should prove to be a
very effective and useful addition to the NEC family.
Copies of the agreement can be obtained from John
Hawkins at the ICE on 020 7665 2217 or
[email protected] ●
1
Yorkshire Water adapts ECC
to suit rolling programme
Graph showing how risk is narrowed during the three
sections of each scheme
By Richard Patterson, Mott MacDonald
Yorkshire Water Services (YWS) has successfully used a
simply modified version of the NEC Engineering and
Construction Contract (ECC) to allow new parcels of a
programme of work – from feasibility studies to construction at different sites – to be let on a reimbursable,
lump sum or target-cost basis within a single contract.
As part of its second asset management plan (AMP2)
programme, YWS is upgrading service reservoirs at some
60 sites throughout Yorkshire. The company wanted to
have feasibility studies and resulting new-build or refurbishment works procured by an ‘entity’ with single-point
responsibility. In this respect the project was a test of
the company’s plan to let the whole AMP3 programme
to a series of contractor-consultant teams.
Final details of each scheme would only be known as
the feasibility studies carried out under the contract
were completed. The client thus needed a form of contract that was flexible enough to deal with both the feasibility studies and the resulting construction work. It
also wanted to use the knowledge and skills of the
framework contractors and consultants with which it
had been working for 3 years and, most importantly, to
facilitate an early start and rapid delivery of the project.
Procurement process
The client selected three of its framework consultants
with reservoir experience: RKL-Arup, EarthTech and my
firm Mott MacDonald. Each consultant was asked to
approach contractors to form three teams, each of
which was assigned to one of three geographical regions
in Yorkshire. We chose to work with Taylor Woodrow
(TWC) and regional contractor J N Bentley (see chart).
Structure chart of one of the three contractor/consultant teams
● each section could be reimbursable, target-cost or
lump sum.
In addition
● ‘actual cost’ was redefined
● there was no ‘work’ to be priced at tender.
The client’s main driver initially was to award a contract and begin building the team. Each consultant and
contractor had a track record with the client and costs
could be benchmarked against previous schemes. For
this reason the client was able to invite tenders based
on rates only. At the time of the tender there was no
identified work to price and the contract became known
by the implementation team as the ‘hollow’ contract.
Projects divided into three sections
Within the same contract, new sub-projects were
added as new sections of the works, with separate sections at each site for
● feasibility
● defining the works sufficiently to price them
● detailed design and construction.
This allowed sensible risk management with cost and
time control and the need for employer authorisation
before the commencement of each phase. The process is
illustrated in the flow chart.
Flow chart showing the authorisation process for
each scheme
Define problem
Proposed compensation event
for feasibility (reimbursable)
Forecast
acceptable
Yes
Carry out feasibility.
Proposed compensation event
for outline design (reimbursable)
The consultants were asked to develop jointly a tender document reflecting our requirements. This work was
co-ordinated by the contract advisors from each firm
who, thanks to their role in the contracts task force
within the framework, were already accustomed to working together. Mott MacDonald was responsible specifically for the modifications to the ECC conditions and the
payment mechanism and Ove Arup led the preparation
of the works information.
The result was an identical tender document put out to
the three contractor/consultant teams for three separate
contracts, one for each area. The document was reviewed
and ‘challenged’ by a fourth consultant, Montgomery
Watson, which also carried out tender evaluations and
subsequently audited the implementation of the contracts.
Innovations with the ECC
The principle when modifying any form of contract
should be to work within its structure rather than to add
to it. The clear and structured provisions of the NEC were
used as far as possible and amended as little as possible.
The best innovations are often the simplest. The key
innovations with the ECC were
● treatment of work at new sites as new sections,
each introduced as a compensation event
2
Forecast
acceptable
No
Yes
Carry out outline design.
Proposed compensation event
for detailed design and construction
(large or lump sum)
Target
(or lump sum)
acceptable
● on a new site
● with new site information
● as a new section.
This new power was constrained by the requirement
for specific authorisation by the employer.
The fact that the work was identified as a new section
automatically allowed data, such as completion dates and
key people for that section, to be introduced. Selection
and extension of the ECC’s secondary option L (sectional
completion) allowed the ECC’s inherent procedures for
dealing with sections to be automatically applied.
Contract data items, specific to the section, were
included in an ‘Appendix to Contract Data’ for each section. Perhaps most importantly, the new section was
treated as a compensation event, the ECC’s mechanism
for dealing with employer-initiated change and events at
the employer’s risk. This automatically allowed and forced
the use of the procedures for notifying, quoting for and
implementing change that are key to the ECC. The works
information at tender was generic in nature with specifics
for each site introduced with the instructions for each
new section. In this way the client was able to go to tender and sign contracts before the work was defined.
Reimbursable, target and lump sum
options
No
employer should make appropriate provision for them.
Under the ECC, the project manager has the power to
instruct a change to the works information. The required
additional flexibility was achieved merely by extending
the power of the project manager to introduce work
Negotiate
revise
requirements
or
cancel scheme or, possibly, seek quotation from alternative team
No
Yes
Carry out detailed design
and construction
The gradual effect of narrowing the necessary risk
allowances in the cost estimates for construction at various stages is illustrated in the graph. At the time of
setting the ‘total of the prices’ (the target-cost), risk
must be discussed openly with those risks carried by the
contractor included within the total. Those carried by
the employer are outwith the target-cost but the
The ECC is an excellent risk management tool allowing through its ‘main options’ for a contract to be let on
either a reimbursable, remeasurement, target-cost or
lump sum basis. However, without modification, all the
works under a contract have to be under the same main
option. For the service reservoirs contract, sensible risk
management dictated that some sections should be
reimbursable, some target-cost and others lump sum.
The ECC option C (target contract with activity schedule) provides for interim payment based on a defined
actual cost. Pre-defined share percentages set out the
pain/gain mechanism to determine the contractor’s
share – the share of any saving or overspend compared
with the target.
The flexibility of allowing individual sections to be effectively either reimbursable, target-cost or lump sum, was
achieved simply by adopting the ECC option C, but defining
the share percentages separately for each section. For each
section, the share percentages could be either
● set at 0% to represent a reimbursable contract
● set at 100% to represent a lump sum contract
● set to achieve a true target-cost basis.
The project manager, in consultation with the
employer and the contractor, determined the appropriate option for each section. The corresponding share
percentages were set, along with other section-specific
information, in the appendix to contract.
Redefining actual cost
The ECC’s definition of actual cost was changed to
tendered rates for resources. At the time of tender, the
NEC USERS’ GROUP NEWSLETTER•No.15•OCTOBER 2000
volume of work to be carried out was not fixed so proposals and rates were included for the establishment and
maintenance of the core team and its facilities and
accommodation needed to manage the programme. This
was based on the best estimate of the volume of work.
On award, the first section of the works was to provide
the core team and those facilities. The contractor was
required to employ a stated framework consultant at
stated rates.
For all sections, the total of the prices was built up as
the forecast actual cost as is the standard requirement
for all compensation events with the ECC. As actual cost
had been redefined as the tendered rates, it was these
rates that were used to build up each quotation.
Similarly, it was the redefined actual cost that was paid
in interim payments and ultimately compared with the
accepted quotation to determine any share at completion of each section.
The contractor was required to code its actual costs
separately to each section.
Implementation and progress
The nature of the works and the contract necessitated the establishment of a core team consisting of
● three staff from the contractor
● three full-time staff from our firm, supported by
specialist resources including designers, planners
and estimators.
A series of key performance indicators was developed, allowing benchmarking by the auditing consultant
with time and between teams. As part of the framework,
the teams met regularly to share lessons learnt. The success of the project, the procurement route and the team
is evidenced by the fact that
● 78 new sections have been introduced covering
work on 26 sites
● of these, 20 were refurbishments and six were newbuild reservoirs
● the £3 million spent to date has been considerably
under the employer’s budget for the works
● £1 million of additional new schemes has been
allocated to the team.
The contract included a dispute resolution ladder preceding adjudication, but there were no disputes.
Lessons learnt
The relatively simple modifications to the already
flexible ECC successfully enabled the delivery of a varied
programme of design and construction services. As ever
there were lessons to be learnt.
The need at tender for rates to allow comparisons to
be made meant there was an inevitable gap between the
‘defined’ costs for which the contractor was paid and
the ‘real’ costs seen through its management accounts.
For the extended relationship facilitated by the contract, there may have been advantages in defining actual cost better to match the contractor’s real costs so
that all the team could focus on a single stream of costs
and on reducing those costs.
A recently closed PFI contract in the health sector,
with which we have been involved, used the NEC
throughout for design and construction. The actual cost
was redefined to be as the ‘contractor’s standard costing system’, after those systems had been audited by
the client’s advisors. However, some defined and tendered actual cost is often required to allow meaningful
competition.
Various writers have stressed the need for adequate
training for staff from all parties that are new to the
ECC. When the structure of the contract is augmented in
any way, additional training is required. With the benefit of hindsight, more training for staff on the innovations described here would have shortened the learning
curve and been a worthwhile investment.
The flexibility and structure of the ECC allowed the
desired procurement strategy to be implemented; in no
way did the ECC dictate strategy.
The ECC is a contract for any project and is not limited to a particular discipline. We have already adapted
the model for situations where some parts of the project
can be identified and priced at tender and this has
found favour with a number of our clients in sectors as
diverse as water supply, wastewater and bridge repairs.
It meets a common need to roll out a programme of
work when, at the start, only a portion of the requirements is known in detail.
Reimbursable payment, up to a point when a target
contract price can be agreed, is a common scenario for
novel and complex projects, especially when a rapid
start is required. This has been facilitated using heavily
modified IChemE ‘Green Book’ conditions, but the modified NEC model described here can also be adopted for
such an approach. Outline design could be included as a
reimbursable section awarded at tender. The subsequent
target-cost section would be awarded only once an
acceptable target-cost had been developed.
The various stepwise innovations have other possible
uses. The notion of different share percentages applying
to different sections might facilitate sensible risk management under the same contract when different parts
of a project would be best procured on a reimbursable,
target or lump sum basis.
The NEC can, once properly understood and in safe
hands, be used or adapted to suit a client’s needs. It is
more flexible than perhaps even its authors imagined.
A more detailed version of this article will be published in the February 2001 issue of the ICE Civil
Engineering journal. For further information please the
author can be contacted on 01223 463606 or
[email protected]. ●
Message from Users’ Group chairman
By Graham Clarkson, NEC Users’ Group chairman
Following my introduction as the new chairman of the NEC Users’ Group at this
summer’s workshop, I would like to start by thanking my two predecessors David
Williams of BAA and Richard Bliss at London Underground Limited for establishing
the role and providing guidance to the group over the last few years.
When Richard approached me earlier in the year about taking on the role I was
a little unclear as to the aims and objectives of our group, which is, after all, run
by us as users for our benefit. I was also unclear on how we interface with the
NEC Panel, Thomas Telford Publishing and the ICE in the promotion and development of the suite of contracts through Haro Bedelian.
As a result I proposed a set of aims and objectives at the summer workshop, on
which I have received some feedback - albeit limited! I presume that on the basis of
your response you are generally in agreement with our aims and objectives, which I thus set out as follows.
● Organise forums to bring NEC users together to exchange information and experience on the use of the NEC.
● Provide a regular newsletter which advises members of NEC developments and through which members
can communicate information on their usage of the NEC.
● Provide a helpline facility to answer members’ questions.
● Provide free or discounted access for members to a range of NEC products and services.
● Act as a conduit whereby the views of members can be passed to the NEC Panel and vice versa.
● Provide presentations on the NEC for new or prospective users and consultancy services for existing users.
● Receive feedback from its members on their experience of using the NEC to enable continuous improvements to be made to the suite of contracts.
● Share ‘best practice’ on the use and application of the contracts within the NEC suite.
The aims and objectives provide the framework in which the chairman can act. I thus believe my role is to
● act as a figurehead in representing the users in appropriate forums
● act as chairman in formal NEC Users’ Group seminars and workshops
● act as a liaison point between the Users’ Group and the NEC Panel on issues as they affect group members and the general development of the NEC
● provide an input into Thomas Telford on how the Users’ Group is run and managed and the services
it provides
● promote where possible the wider use of the NEC.
In respect of the last duty in the above list I have been actively involved since my appointment in June,
through my project management organisation, on introducing the suite of contracts to a number of employers.
For example, we are now using the Short Contract on a construction management procurement route on
a new £6 million health and leisure club for Holmes Place plc. We have also introduced the Professional
Services Contract to the directorate of estates and facilities management of Oxford Brookes University,
which proposes to use option A for the appointment of consultants on its projects. This will bring about
greater clarity and transparency with regards to the employment of its professional team.
I am keen to broaden the level of promotion and would welcome the opportunity to talk to any other
users who may need support in converting potential users. Changes in the engineering and construction
industries are abound these days, which all help in breaking down traditional barriers and encouraging customers and their suppliers to look at ways of improving the process of delivering new facilities.
I therefore look forward to working with members of the Users’ Group and acting as your figurehead
over the next two years.
Possible future applications
The YWS service reservoirs project was a typical programme of works but procured in an innovative way that
encouraged co-operation and continuous improvement.
NEC USERS’ GROUP NEWSLETTER•No.15•OCTOBER 2000
For further information the author can be contacted at [email protected]. ●
3
When and how to use
the target-cost options
Two of the main options of the NEC Engineering and
Construction Contract (ECC) are the ‘target-cost’
options
option C: target contract with activity schedule
option D: target contract with bill of quantities.
Target cost contracts are a development of costreimbursable contracts - option E of the ECC - where
the contractor is reimbursed its costs plus a fee. The
fee in the ECC is expressed as a percentage of actual
costs and therefore covers anything not defined in the
contract as actual cost.
The development from cost-reimbursable contracts
is that any cost over-run or under-run compared with
the target is split in pre-agreed proportions. The principal difference between the two target-cost options
is how the target is broken down at tender - either
using activity schedules or bills of quantities.
Whichever option is chosen, the contractor is reimbursed its actual costs plus fee as the contract progresses.
When to use target-cost contracts
Target-cost contracts are traditionally used in less
extreme circumstances to pure cost-reimbursable contracts, such as in the following situations.
● When time or quality is more of a priority than
minimum cost. This is because any cost under-run
or over-run is shared and therefore affects the
contractor’s profit less compared with a pricebased contract, so he is less motivated to concentrate on minimising cost. An example of this
in construction could be on a prestige office
block in a city: the works would be time and costdriven and, while the scope has to be sufficiently
developed for the target to be agreed, details will
change as construction proceeds.
● When there is a relatively high amount of
unquantifiable risk: it simply is not known how
much risk is involved. For instance, early contracts in the North Sea were let as cost-reimbursable contracts. As conditions became known
and the technology developed, these contracts
briefly became target contracts before becoming
fixed-price contracts;
● When there is a relatively high risk, where the
contractor may be best-placed to manage the
risk, but not to carry it. The contractor would
therefore include a high-risk premium in a pricebased contract. Some employers would be unwilling to pay this premium for risk that may not
happen, recognising that in the long term they
are obtaining poor value for money. Further, if
the risk occurs, the risk premium would not cover
the financial effects, leading to confrontation
rather than good management of the risk.
Therefore, the risk is shared in order reduce the
4
amount of risk premium the employer would otherwise pay.
Various research projects up to the mid 1980s
found two other benefits from using target-cost contracts.
● Providing good financial administration procedures were in place, then the open-book accounting procedure gave transparency of costs, which
in turn led to openness in other areas.
● A higher degree of co-operation appeared to be
present when compared with price-based contracts. This is due to the alignment of motivations from sharing of risk and reward. Unlike in a
priced based contract, it is directly in the employer’s interests to contribute to cost reductions as
he gains some of the benefit.
More recently, with the rise of partnering, targetcost contracts have been used specifically because of
these benefits. Usually, it is a combination of these
factors that leads to their adoption. Having decided
to use a target-cost contract, what are the key implementation points?
Ensure the target is realistic
The first is to make sure the target is realistic and
both parties agree which risks are included in the target and what allowances are made for them.
Past literature consistently states that it is important for the employer to evaluate and be satisfied
with the realism of the target. If it is too low, then
the contractor will be losing money from the outset
and, rather than concentrating his efforts on decreasing costs, may turn his attention to increasing the
target. If the target is too high, then the employer
may feel aggrieved and stop co-operating.
A comparatively new phenomenon is the holding of
joint risk-management workshops prior to signing of
the contract and / or employers asking how much the
prices (in ECC terminology), be it on a price-based or
target-cost contract, will increase if a specific risk is
included within the prices. If the amount of the risk
allowance and what it is specifically for are not understood, then it can lead to a deterioration in relationships once into the contract.
Set share fractions with care
Different share fractions for different degrees of
cost over and under run combine to form a share profile for a particular contract. This share profile both
affects the amount of risk premium included within
the target and the motivations during the contract
should a particular circumstance appear.
It is worthwhile noting that the share fraction
● need not be split 50 : 50
● need not be linear.
By Jon
Broome,
University of
Birmingham /
JB Project
Consulting Ltd
For example, some employers take a much higher
share of significant cost over-runs, while others tend
the other way, including capping their commitment
above a pre-determined over-run. These are somewhat
misleadingly known as guaranteed maximum price
contracts. Unfortunately for practitioners, there is
currently no detailed guidance on this aspect,
although some will be published by the author in late
2001.
Greater employer involvement
Greater involvement from the employer at a managerial level should be encouraged both during the
construction and detailed design, if the contractor is
primarily responsible for it. This is because the
employer will be working together making decisions
that trade time, cost and quality off with each other.
It could be argued that if the contractor is not
given any leeway to reduce costs in the design phase
and the employer can contribute nothing to decreasing costs in the design (e.g. through taking part in
value engineering exercises) and / or in the design
construction phases (e.g. through helping gain early
access to a working area), then it may be more appropriate to adopt a lump-sum approach.
Operate a good financial administration
system
Robust, transparent and efficient financial administration systems are needed. Reports up to the early
1980s found that more time was needed to administrate cost-based contracts. With the advent of information technology, this can be much reduced, but it
does take time for the parties to familiarise themselves with each other’s systems.
However, numerous benefits flow from having such
a system in place at the start of the contract. These
include the following.
● The time taken to account for and agree what
actual costs have been incurred on the contract is
much reduced.
● Monitoring is much improved with, in some cases,
planned progress and costs being compared with
actual progress and costs on weekly basis. This
leads to rapid intervention and correction of the
root causes if a divergence starts to occur.
● The transparency aids the quick and amicable
agreement of any adjustments to the target /
prices due to compensation events.
● Risk allowances and base costs can separated.
Risk management techniques can be jointly
applied to the risk element and value engineering
techniques to the base costs.
In short, a good financial system administrated by
good people can dramatically increase the benefits
which both parties can gain from the use of targetcost contracts.
NEC USERS’ GROUP NEWSLETTER•No.15•OCTOBER 2000
Don’t ignore ‘cultural’ issues
As with ‘partnering’ generally and use of the NEC family of contracts, cultural and skills issues need to be
addressed. It is not worthwhile doing something different unless people know and understand why it is different, so they have reasons for doing their ‘thing’ differently! Communication, training and involvement are key.
In summary, target-cost contracts are suitable for
use when time and quality are a greater priority compared with cost; when the contract contains higher
than normal amounts of risk; and as the contractual
framework which underpins partnering, both because
of the manner in which objectives are aligned and the
transparency and openness they engender.
However, more time and thought is needed to set
them up right - to evaluate the realism of the target,
to set the share profile intelligently and to set up and
establish the financial administration system. More
employer involvement is also required during the contract. For this reason, they may not be worthwhile on
small one-off projects.
The advantages that flow from setting up the contract correctly can include
● a more pleasant working environment as both
parties have the financial motivation to work
together rather than against each other
● reduced overall project costs for the employer
and increased profit to the contractor
● greater certainty and knowledge of the outcome
at any point in the contract for both parties
● more rapid agreement of final account.
The benefits are ones that the NEC family of documents tries to promote whatever contract or option is
chosen through its clauses and procedures. Targetcost contracts add in the aligned motivations and
transparency, which is why more experienced NEC
users have progressively used them more and more.
For more information, the author can be contacted
on 07970 428 929 or via www.jb-projectconsulting.co.uk. ●
Housing trust
puts faith in NEC
shared between the contracting parties. On the
We recently used the NEC Engineering and
Construction Contract (ECC) option C (target contract Priory Court project, significant savings have been
made which have been reinvested to enhance the
with activity schedule) for a £14 million refurbishoverall environment of the estate. This has clearly
ment and new-build project at Priory Court, a
been very much welcomed by the residents.
London Borough of Waltham Forest 600-unit estate
at Walthamstow, east London. We chose contractor
Willmott Dixon, wholly on non-cost criteria, to be our project partner.
ECC option C chosen for the £14 million
From a client’s standpoint the NEC
Priory Court housing project
contract works much better than more
traditional contracts such as JCT. It
worked particularly well on Priory Court,
and on the other projects in which
Willmott Dixon are engaged with us,
because of the nature of the working
relationship we have developed with the
company. This relationship has actually
led to what we believe is the UK’s first
strategic partnership between a housing
trust and a contractor.
The result of the approach is that
both parties are completely open with
each other on costs, together with the
underlying assumptions being made to
reach the cost build ups. As a consequence we both know what risks are
being entered into and can manage the
project together so much more effectively and efficiently.
Payments based on activity
NEC savings reinvested
The NEC lends itself very well to the partnering
approach because, amongst other things, it allows
the allocation of risk to be varied. This is very important because it means we can take on more risk as a
client, which I believe enables costs to be reduced.
Under more traditional forms of contract we paid
heavily for the contractor to take more of the risk.
Another big advantage, which also supports the
partnering approach, is the construction share provisions which allow savings, and overruns, to be
NEC USERS’ GROUP NEWSLETTER•No.15•OCTOBER 2000
The main issue we faced with the ECC option C was
the payment method, which didn’t really work. The
form of contract requires actual costs to be paid on a
monthly basis, but by the time costs are accounted
for and invoiced, months can pass by which creates
cash-flow difficulties for both the contractor and the
sub-contractors. We have overcome this by paying
against activity levels on a monthly basis. However,
to ensure that actual costs are properly monitored
and controlled, the contractor is obliged to track and
report actual costs on an ongoing basis.
By Graham Watson, Circle 33
The contractor finds the NEC requires much more
work in administration than more traditional contracts
- mainly because it calls for a complete re-working of
the programme after each and every compensation
event (client variation) with an obligation to report
the revised cost and completion timing implications.
This is a workload issue for the contractor
and many sub-contractors are just beginning to gear up for the administrative
requirements.
A charter for partnering
However, the contractor has found the
NEC’s plain and simple language more
user-friendly than traditional contracts
such as JCT. It is also seen as more flexible, allowing use on many types of projects and, following the Egan principles
for partnering throughout the supply
chain, provides a family of contracts
which also cover subcontractors and consultants.
Supporting the projects we have undertaken with the contractor has been the
development of a separate partnering
charter which is jointly agreed and which
lays out clearly the obligations of each
party throughout the project. A special
pre-construction agreement is also used on
each project to identify all the activities and costs prior
to start on site. Both documents are filed as an
addendum to the formal contract.
At the end of the day, because of the excellent
working relationship we enjoy with Willmott Dixon
and the positive attitude both sides bring to the
table as a result of this, the form of contract has
been a less important factor in the success of the
projects on which we have worked with them.
For more information, please contact the author
on 0207 4473023 or Garry Hague at Willmott Dixon
on 01462 671852. ●
5
ECC
a review of
frequent problems
the situation that exists. The main contractor will
include a subcontract price, inclusive of the subcontractor’s fee, and then apply its own fee percentage
in addition. It should naturally follow that this also
extends to compensation events, especially as this
situation could already prevail if clause 63.9 is effected (agreements to use bills of quantities pricing in
lieu of the schedule of cost components).
The Institution of Civil Engineering Surveyors’ (ICES)
commercial management practices committee recently
decided to ask ICES members whether the NEC
Engineering and Construction Contract (ECC) was fulfilling its stated aims and objectives.
In advance of a questionnaire being sent to ICES
members, an article was published in the institution’s
journal Civil Engineering Surveyor highlighting six
key problems that seemed to be common among ECC
users. For the benefit of Users’ Group members, these
are repeated here.
Equipment charges for internally owned
equipment
Use of the term ‘Actual Cost’
The term ‘Actual Cost’, especially to those first
using the ECC, can and does cause confusion because
it is, quite naturally, aligned to the generally understood meaning of this phrase as representing the
contractor’s actual cost (i.e. those costs which its
internal reporting systems state that it has incurred
on any particular project).
However, ‘Actual Cost’ should be seen as no more
than a defined term used in the contract in exactly
the same way as other defined terms are used, for
example a ‘Defect’ or the ‘Accepted Programme’.
A scrutiny of the definition of ‘Actual Cost’ will
show that the extent of this term is determined by
the very detailed statements within the schedule of
cost components, not all of which would constitute
the normal understanding of actual cost. For instance
● rates for the contractor’s own equipment may
not be the same as its own internal plant company charges the site
● overhead recovery (‘Working Area Overheads’) is
normally made on a percentage basis in relation
to the cost of ‘People’ - depending on the level
of that percentage quoted by the contractor at
time of tender, more or less recovery than actual
cost may be achieved.
The NEC Users’ Group has debated the use of an
alternative terminology to ‘Actual Cost’ in an attempt
to avoid the confusion. No firm conclusions have
been reached, and I am sure the NEC Panel would
welcome further suggestions from members.
Different meaning of ‘Actual Cost’ within
main options
To compound the problem of the meaning of
‘Actual Cost’, the term also has different meanings
within the various ECC main options. There are three
definitions used within the options
● conventional contract (options A & B)
● target-cost / cost-reimbursable (options C, D &
E)
● management contract (option F).
While it is logical to have a different definition for
option F, that same logic does not, and should not in
6
By Alan Bates, Carillion Engineering
and Construction and ICES Project
Management Committee
my opinion apply to the other two categories. For
those not familiar with the problem, the difference
lies in the treatment of subcontractor charges and
the resultant application of the fee percentage.
Under options A and B, subcontracting is effectively not recognised and the subcontractor resources are
dealt with in exactly the same way as the contractor’s
under the definition of ‘People’. The contractor’s fee
percentage is then added to this combined total.
What this means in practice is that the contractor
then passes to the subcontractor the relevant portion
of the ‘net’ cost as per the schedule of cost components plus the subcontractor’s fee percentage which
can only be paid out of the contractor’s fee.
The consequence of the mechanism is that, at time
of tender, the contractor has to second guess
● the predicted value of the compensation events
for the whole of the contract
● which subcontract trades those compensation
events will affect
● the level of the various subcontractors’ fee percentages.
From these three assessments the contractor must
then attempt to compile a weighted fee percentage
that will be sufficient to satisfy its subcontractor’s
requirements and also provide a mark up for itself.
Such guesswork and risk should, I believe, play no
part in a form of contract that purports to compensate the contractor fairly and in accordance with the
rules of common law in the event that a compensation event arises.
By contrast, under options C, D and E, the contractor is paid the full subcontractor’s account (which
includes that subcontractor’s fee) plus its own fee
It has been argued that the system under options
A and B has been put in place to avoid the ‘fee on
fee’ situation. However, within the pricing of the bills
of quantities or activity schedules, this is precisely
Equipment charges for internally owned equipment
are set out at clause 22 of the schedule of cost components. While the principle behind the provisions is
designed to prevent the contractor from gaining two
mark ups - one for the internal plant company and
the other through the fee percentage - the details
that have to be produced are extensive.
Taken to extremes the contractor would have to
produce a calculation for every pump, compressor
and dumper on site, giving rise to a variety of rates
for similar items simply because of their age, initial
purchase price and current condition.
In my experience the terms of clause 22 have
never been strictly followed and the parties have
always agreed a schedule of plant rates, either based
on some form of published list or by reference to
market prices. If this situation is common throughout
the industry then there is some justification for the
NEC Panel to have a re-think on how contractors’
internal equipment should be realistically charged to
the project.
Agreeing the value of compensation
events
Irrespective of which main option is used, the
underlying principle is that compensation events
(CEs) should
● be evaluated and agreed before any work on the
CE is undertaken or the contractor incurs any
costs in relation to the CE
● not be revisited to adjust the agreed value once
the actual circumstances and costs are known.
There are exceptions, but the general rule is as
stated above. From the contractor’s point of view it is
therefore important to include, if any, the consequential delay, disruption and increased risk costs
within the evaluation of the CE.
Human nature being what it is, there will
inevitably be differences of opinion as to the level of
these allowances to be included. The unfortunate
outcome being that CEs tend not to be agreed at the
time and mount up to be addressed after the event,
sometimes in a typical claims-type forum which the
ECC so desperately tries to avoid.
I believe that such a situation is not fundamentally
the fault of the drafting of the ECC, but arises
through different perceptions that both parties will
NEC USERS’ GROUP NEWSLETTER•No.15•OCTOBER 2000
have of the ‘indirect’ costs. This situation will only
get better as the parties become more familiar with
the form of contract and with each other in the
ongoing development of the ‘mutual trust and cooperation’ philosophy.
Cash-flow problems – options C and D
Under clause 11.2 (23) the contractor receives the
‘Actual Cost‘ ‘which the contractor has paid’. This
indicates that the contractor must have paid out for
all the resources used in the month prior to being eligible to submit an application for payment. Thus the
contractor will always be in a negative cash flow situation (not accounting for the fee).
The application of retention also exacerbates the
problem. It is acknowledged that financing charges
form a legitimate part of reimbursement under the
schedule of cost components but, in contractor
organisations, financing is usually provided for and
controlled centrally and is not normally allocated to
individual projects other than perhaps on some
notional basis. Thus it is usually impossible for contractors to conclusively demonstrate the actual cost
of finance on a project by project basis with the
result that no recompense is generally made.
A simple solution to the problem would be to pay
the contractor for projected liabilities to the extent
that a neutral cash position is generated -a forward
projection of some 2-3 weeks beyond the month end
should suffice.
Option B – are the quantities remeasurable?
The answer to whether quantities are remeasurable under option B will obviously depend on any
specific statements regarding the status of the bills
of quantities within any project. Assuming that no
such statements are made then the normal ECC provisions apply.
Clauses 60.4 to 60.6 detail circumstances where a
change in quantities shown in the bills of quantities
may become a compensation event. It should be
noted that there is no ‘carte blanche’ authority for
remeasurement as, for example, under the ICE
Conditions of Contract (clause 56 (1)).
However, if reference is made to the definition of
the ‘Price for Work Done to Date’ (clause 11.2 (25)) it
will be seen that payment is made for ‘the quantity of
work that the contractor has completed” indicating
that payment is made against actual, as opposed to
bills of quantities, quantities - that is a remeasured
contract. This is especially so when the phrase under
clause 11.2 (21) ‘unless later changed in accordance
with this contract’ is read in the context of clause
11.2 (25).
For such a simple matter as ‘is the contract subject
to remeasurement or not’ the wording is somewhat
ambiguous and certainly less than clear.
For further information, the author can be contacted at [email protected]. Based on an article
in Civil Engineering Surveyor, July/August 2000. ●
Case
studies
By Rekha Thawrani, NEC Manager
Due to the rapid expansion in usage of the
NEC family of contracts, the Users’ Group
has decided to produce selected case studies of NEC projects to promote the contract
to potential clients as well as to provide a
database for users.
The case studies will be included within
the NEC corporate brochure for marketing
nationally and internationally as well as on
the NEC website.
Case studies proformas will be sent out
shortly to the Users’ Group members. It is
hoped that each member will be able to
provide at least one case study.
ICE procedures called into question
By Drick Vernon, NEC Panel secretary
The widely accepted procedures in ICE contracts that
require parties to establish and identify matters in
dispute have been questioned by a UK Technology
and Construction Court judge.
In John Mowlem v Hydra Tight Ltd, JudgeToulmin
QC commented on the dissatisfaction procedure contained in clauses 90.1 to 90.4 of the NEC Engineering
and Construction Contract option Y(UK)2. He said in
an ‘obiter dictum’ (passing comment) that clause
90.5 conformed to the UK Housing Grants,
Construction and Regeneration Act 1996 if taken on
its own but not if taken in conjunction with clause
90.4.
As far as the parties were concerned this was not
the issue before the court as they both had agreed
previously to disregard the Y(UK)2 option, meaning
that the Construction Act’s statutory scheme for construction contracts would apply.
The option starts with clause 90.1 by stating that
the purpose of the dissatisfaction procedure is ‘for
the avoidance and settlement of disputes’. Further
clauses state that within 2 weeks of a notification of
dissatisfaction, the parties and the project manager
should attend a meeting to discuss and seek to
resolve the matter.
The procedure is considered to be good practice by
both the industry and the courts. The ACA Project
Partnering Contract launched earlier this month
under the chairmanship of Sir John Egan has provisions for pre-adjudication dispute avoidance between
NEC USERS’ GROUP NEWSLETTER•No.15•OCTOBER 2000
partners, presumably believing it not to be good
partnering practice to go straight to adjudication.
The Construction Industry Council is also considering
adding a ‘pre-adjudication’ notice to its model adjudication procedure.
The Pre-Action Protocol for Construction and
Engineering Disputes has a general aim
‘to ensure that before court proceedings commence:
ii each party has had an opportunity to consider
the other’s case, and to accept or reject all or
any part of the case made against him at the
earliest possible stage;
vi the parties have met formally on at least one
occasion with a view to
• Defining and agreeing the issues between
them; and
• Exploring possible ways by which the claim
may be resolved;
The expression ‘at the earliest possible stage’ is
not accidental and presumably does not mean at the
court steps. It would appear that the intention of
this protocol is the clear identification of that which
is in dispute and, if possible, its resolution without
course to litigation. Compare this with clause 90.1.
Section 108(1) of the Construction Act sets out
that a party has a right to refer a dispute under the
contract to adjudication. Furthermore it states: ‘For
this purpose ‘dispute’ includes any difference.’ The
Act is silent on whether the parties to a contract may
or may not agree as to what constitutes a ‘dispute’ or
‘difference’ between them . In effect it is therefore
the responsibility of a party to decide when it is in
dispute with the other party and exercise its right to
go to adjudication to resolve the issue. The ICE procedures are intended to assist this process of identifying what is in dispute and the redress sought. The
parties accept this on signing the contract. The ICE
has developed, over several decades, procedures for
identifying, defining and resolving disputes and
these have been accepted as good practice.
In a recent article, a Technology and Construction
Court judge acknowledged that the courts may have
to give guidance on what constitutes a ‘dispute’..
This was stated in the context of the private finance
initiative but it is difficult to believe such guidance
would not affect a contract between two parties.
The ICE will await such guidance from or decision
of the court on this issue before considering amendments to its contracts in the belief that good engineering practice should prevail. It should be remembered that during the case of Trafalgar House v
General Surety, the ICE was urged to change its form
of bond. Successive courts reversed decisions of a
lower court and the final outcome was, in effect, that
the status quo before all the court cases still existed.
For further information, the author can be contacted at [email protected] ●
7
NEC Users’
Group workshop
23 OCTOBER 2000
By Kelvin Hughes, NEC Users’ Group secretary
The next NEC Users’ Group workshop will be taking
place at the Institution of Civil Engineers in London on
Monday 23 October 2000.
As stated in the last edition of the newsletter, the
success of the Users’ Group workshops has prompted
the planning of a series of smaller, more focused workshops in order to maintain the invaluable interactive
nature of the first two events.
It is clear from Users’ Group queries received
through the fax helpline that a number of members
are experiencing some difficulty in managing and pricing compensation events. The morning session of the
forthcoming event will thus mainly consist of interactive discussion on compensation event management
and evaluation.
The morning will conclude with an open discussion
forum, where members will have the opportunity to air
views on any NEC topic of their choosing.
The afternoon session has been allocated for discussion and consultation with the NEC Panel on the
following ECC 3 rd edition matters
●
●
●
●
●
●
The cost of the workshop is £295 + VAT. Gold members are entitled to three free delegates and a 25%
discount for additional delegates. Silver members are
entitled to one free delegate place and a 25% discount
on additional delegates. Bronze members receive a
25% discount for one delegate.
To book places on the workshop, please contact NEC
manager Rekha Thawrani on 020 7665 2446 or
[email protected]. ●
schedule of cost components simplification
compensation events process
risks and insurance
application to the building sector
NEC as a management process
general brainstorming – use of IT.
PROGRAMME
9.15 – 9.30
9.30 – 9.45
9.45 – 11.00
11.00 – 11.20
11.20 – 12.15
12.15 – 13.00
13.00 – 14.15
14.15 – 16.00
Registration and coffee
Welcome and introduction
Notification, pricing and assessment of
compensation events under the NEC
family of contracts
Notification procedures, use of the
schedules of cost components, quotations – basis and preparation, assessing
compensation events
Coffee
Notification, pricing and assessment of
compensation events under the NEC
family of contracts (contd)
Open discussion forum
Buffet lunch
NEC Panel consultation on ECC 3rd edition matters
SCC simplification, compensation
events process, risks and insurance,
application to the building sector, NEC
as a management process, general
brainstorming – use of IT
NECDIARY
Date
Event
Venue
23 October
NEC Users' Group Workshop
ICE, London
1 November
6 November
8 November
ECC introductory training course
ECC compensation events training course
ECC post-contract training course
Ascot
Altrincham
Ascot
5 December
6 December
13 December
Professional Services and Adjudicators Contracts training course
ECC pre-contract training course
ECC introductory training course
Watford
Ascot
Cardiff
11 January
ECC introductory training course
Sutton Coldfield
7 February
7 February
20 February
27-28 February
ECC introductory training course
ECC pre-contract workshop
Short Contract training course
ECC for contractors and subcontractors (NEW)
Falkirk
Sutton Coldfield
Ascot
Ascot
6 March
7 March
13 March
ECC pre-contract training course
ECC post-contract training course
ECC introductory training course
Falkirk
Sutton Coldfield
Altrincham
4 April
10 April
24 April
26 April
ECC compensation events training course
ECC introductory training course
Short Contract training course
ECC pre-contract training course
Sutton Coldfield
Ascot
Bristol
Altrincham
NEC Users’ Group members
New members shown in bold
A B Rhead & Associate Limited
AEA Technology plc
AMEC Civil Engineering Ltd
Amec Utilities Ltd
Anglian Water Services Ltd
Ashridge Construction Limited
BAA plc
Balfour Beatty Major Projects,
Channel Tunnel Rail Link
Barton Plant Ltd
Bayfield Associates
Berkeley M.S. Ltd
BG TransCo Plc
Birse Construction Limited
BNFL Engineering Limited
Breach Associates
British Waterways
BT plc
Bullen Consutlants Limited
Cammell Laird (Tyneside)
Carillion Plc
ChandlerKBS
Circle 33 Housing Trust Limited
City of Glasgow Council
Comhairle Nan Ellean Siar
Contracts Consultancy Limited
Cornwall County Council
Currie and Brown
Cyril Sweet Limited
Dean and Dyball Construction
Limited
Debevoise & Plimpton Solicitors
Department for International
Development (DFID)
Department for Regional
Development Roads Service
DLA Solicitors
DOE (NI)Water Service
Doig & Smith
Doncaster Metropolitan Borough
Council
Earth Tech Engineering
EC Harris
Edmund Nuttall Limited –
Newcastle upon Tyne
Edmund Nuttall Ltd – Camberley
Electricity Supply Board
Emirates Telecommunications
Corporation
Environment Agency – Cheshire
Environment Agency –
Peterborough
Ernest J Bayton
ESKOM
Faithful & Gould
Forsters
Forward Consult Limited
Frank Griffiths Associates Limited
Franklin & Andrews
Galliford Northern
GDG Management Ltd
Gleeds
Halcrow Group Limited
Hannah Reed and Associates Ltd
Hanson Construction Projects
Harbour & General Works Limited
JMP Consultants
K Home Engineering Ltd
Kilroot Power Limited
Kirkham Board Associates
Laing Limited
Lancashire County Council
Lincolnshire County Council
London Underground Limited
London Underground Limited –
Crossrail Projects
Lovell White Durrant
M J Gleeson Group Plc
Mabey Construction Company
Limited
Mansell plc
Masons Solicitors
Miller Civil Engineering Ltd
MK International Ltd
Montgomery Watson Ltd
Morrison Construction Ltd
Mott MacDonald
Mouchel Consulting Ltd
National Power plc
Needlemans Ltd
North Lincolnshire Council
Neath Port Talbot County
Borough Council
Northumbrian Water Limited
One North East
Oval (717) Ltd
Ove Arup & Partners
Pell Frischmann Consultants Ltd
Peter Brett Associates
Railtrack
Rock DCM
Roger Lewendon Assoc.
Royal Hong Kong Jockey Club
Sainsbury's Supermarkets Ltd
Scott Wilson Kirkpatrick
Shawater Limited
Shepherd Construction Ltd
South African NEC Users Group
Association
Staffordshire Engineering
Consultants
Suffolk Waste Disposal Co. Ltd
Symonds Travers Morgan
The Nottingham Trent University
Thurlow Associates – South Africa
TPS Consult
Trett Consulting
UK Nirex Ltd
UKAEA
Union Railways Limited
University of Hong Kong
W S Atkins
Walter Lawrence Civil &
Mechanical Limited
Webfell Group Limited
West Lothian Council
Wheeler Group Consultancy
Wiggins Gee Construction Ltd
Wrekin Construction Company
Limited
Yorkshire Water Services Ltd
Constructive contributions to the newsletter are
always welcomed and should be emailed to the
editor Simon Fullalove at [email protected]
(telephone +44 (0)20 8744 2028, fax +44 (0)20
8891 2462). The current issue of the newsletter is
also available on the NEC web site at
www.newengineeringcontract.com. All other
enquires should be made to the NEC manager
Rekha Thawrani, Thomas Telford Ltd,
1 Heron Quay, London, E14 4JD,
+44 (0) 7665 2446, fax +44 (0)20 7538 2847,
e-mail [email protected] ●
For further details of courses, please see the Thomas Telford web site at www.thomastelford.com or contact Diane Lewis on +44(0)20 7665 2457.
8
NEC USERS’ GROUP NEWSLETTER•No.15•OCTOBER 2000