Construction Futures Wales - NEC Contracts Overview Workshop

An Introduction to
30th March 2017

WELCOME
To an Introduction to NEC3 Contracts
Jenna Goldsworthy
John Humphreys
Stuart Brisbane
Rachel Davies

Why Bother?
• Programme jointly funded by Welsh
Government and CITB in Wales
• Targeting Welsh Construction related SME’s
that want to grow and prosper
• Running until end of March 2018
Who or what is
Construction
Futures Wales?

CFW is here to help by providing companies with the
opportunity to
learn about improved business practices that can increase
a company’s turnover and profit, and
 provide a competitive advantage when tendering for
future work
CFW aims to help you:
improve customer satisfaction
reduce defects, cost & impact on the environment
improve safety & supplier relations and enhance
collaborative working
Aim

CFW is here to help by providing companies with the
opportunity to learn about improved business practices that
can increase a company’s turnover and profit, and provide a
competitive advantage when tendering for future work
CFW aims to help you:
improve customer satisfaction
reduce defects, cost & impact on the environment
improve safety & supplier relations and enhance
collaborative working
Aim

An Introduction to NEC3 Contracts
Stuart Brisbane

AgendaOverview of NEC Contract
1. History
2. Overview
3. Contract Choices
4. Layout and Clauses
5. A New Language
6. Roles and Responsibilities
7. Works Information
8. The IMPORTANCE of Program
9. Early Warnings
10. Compensation Events
11. Communication
12. Management of Risk
13. Points of Note
14. Proformas
15. Signposting

1. History
1985 ICE review alternative contract strategies
1986 ICE commissioned new style of contract
1991 First consultative edition produced
1993 Edition 1 published
1994 “Constructing the Team” Latham 1994, singled out NEC for good
practice
1995 Edition 2 published, all 13 Latham principles adopted
1999 Short form published
2005 Edition 3 published and existing contracts updated. New Term
Service and Framework contract published
2006 June 2006 amendments
2013 April 2013 amendments
Still the New Engineering Contract?

1. History
NEC3 April 2013 Edition
complete family of contracts
(39 documents including
guidance notes and flow
charts)
Currently £570

1. History
Available to Purchase from 22nd June 2017 – updates on NEC Website and via the
NEC user Group. Advanced orders being taken 10% discount

2. Overview
• Constructing the Team - Sir Michael Latham 1994 (11/13)
• Rethinking Construction – Sir John Egan 1998
• Achieving Excellence – OGC 2003
• HM Treasury
• Welsh Government
Why the NEC !

Basic Characteristics of NEC
• Contractor lead
• Mutual trust and co-operation (edition 2 onwards)
• Good management encouraged (not just rights and obligations)
• Procedure driven
• Programme given HUGE prominence
• Recognising risk and dealing with it as you go rather than allocating
blame afterwards
• Clear and distinct roles for those involved
• Minimises subjective phrases such as fair, reasonable, opinion
2. Overview

• Modular approach
• Interlocking contracts e.g. Subcontract, PSC, Adjudicator
• Logical contracts (can be described in flow charts)
• Written in simple English (and in the present tense)
• Certainty of actions and outcome
• Flexible approach allows use in multi discipline projects
and a wide range of projects
• Can be used internationally
2. Overview

•Bold and major initiative in the drafting of construction contracts.
Concepts are significantly different from other forms of contract, such as
the JCT Standard Building Contract 2005, requiring a cultural change in
attitudes and knowledge for those who use it.
•NEC produce comprehensive Guidance Notes and Flow Charts for each
contract to demonstrate how they should be used.
•Compatible and interlocking with the other NEC3 contracts such as the
ECC Subcontract, Professional Services Contract and Adjudicators
Contract.
•The first Core Clause states that all parties shall act in a spirit of mutual
trust and co-operation, supporting the contract’s use for Partnering
Frameworks.
2. Overview

• It requires far greater management
• Very Specific
• Needs attitudes to change
• There is no room for negotiation
• Must be aware of the requirements
• Activity Schedules
• Time Barring
2. Overview
There is as yet very little
legal precedent, but
some well respected
legal commentators have
expressed reservation
over what they consider
to be many unresolved
legal issues.
So It’s the brilliant way forward that we should all use !!!

NEC3 Suite of Contracts
• Works
• Engineering and Construction Contract (ECC)
• Engineering and Construction Short Contract (ECSC)
• Engineering and Construction Subcontract (ECS)
• Engineering and Construction Short Subcontract (ECSS)
• Services
• Professional Services Contract (PSC) – Architecture, Engineering
• Term Service Contract (TSC) – Maintenance, Management
• Term Service Short Contract (TSSC)
• Supply
• Supply Contract (SC) – Goods, Products
• Supply Short Contract (SSC)
• Others
• Adjudicator’s Contract (AC), Framework Contract (FC)
2. Overview

2. Overview
NEC3 Suite of Contracts

NEC 3 : Main and Secondary Options and Alternatives
3. Contract Choices
ECC main option is based on the completeness of works
information for example
• Employer has a fully designed scheme and requires a lump sum price
• Employer requires a contractor to design and construct works on a
fixed price basis
• Employer needs an immediate start to urgent works that are not
designed

Contract Options revolve around four main concepts
• Activity Schedule
• Bills of Quantities
• Cost Reimbursement
• Target Cost
3. Contract Choices

Main Options
• ECC has six main options, based on different mechanisms for
payment to the Contractor and basic allocations of risk between
the parties involved…
• Option A: Priced Contract with Activity Schedule
• Option B: Priced Contract with Bill of Quantities
• Option C: Target Contract with Activity Schedule
• Option D: Target Contract with Bill of Quantities
• Option E: Cost Reimbursable Contract
• Option F: Management Contract
Employer
Contractor
A
B
C
D
F
E Financial Risk
3. Contract Choices

Choice of option will be dependant on allocation of Risk
Contract Type Main
Options
Balance of risk
Employer Contractor
Priced
A (35%)
B (6%)
Target
C (55%)
D (>1%)
Cost reimbursable E (Low)
Management F (Low)
3. Contract Choices

Main Options – A & B
• Lump sum contract whereby the Contractor prices the information provided and this
forms the basis of the price paid by the Employer. Payment is made on completion of
the Activities or the Work, valued using the measured quantities or rates.
• The Employer carries minimal financial risk. Bill of Quantities carries more risk for the
Employer because they prepare it, whereas the Activity Schedule is prepared by the
Contractor. However the Employer may identify key activities to be included on the
schedule.
Employer
Contractor
A
B
C
D
F
E Financial Risk
3. Contract Choices and Strategy

Main Options – C & D
• Target Contracts are sometimes used where the extent of the
work is not fully defined or where the risks are anticipated to be
greater. Financial risk is shared between the Employer and the
Contractor using pre-agreed share percentages. This is
sometimes referred to as a pain/gain incentive scheme.
• The Contractor tenders a target price in the form of Prices using
either an Activity Schedule or Bills of Quantities. The target price
includes the Contractor’s estimate of actual cost plus a
percentage fee to cover overheads and profit.
Employer
Contractor
A
B
C
D
F
E
Financial risk can
also be shared with
the appointed
Consultants, such
as the Architect,
using an
interlocking PSC.
3. Contract Choices

• During the course of the contract, the Contractor is paid their actual cost plus
the fee. This is defined as the Price for work done to date (PWDD). The target
prices are adjusted for Compensation Events and for inflation if applicable.
• At the end of the contract, the Contractor is paid (or pays) his share of the
difference between the final total of the Prices and the final PWDD according to
pre-agreed share percentages stated in the contract.
• Example of Share Percentages within an Employer’s two-stage pain/gain
incentive scheme…
ITP = First-Stage Tender (Stage C)
FTP = Second-Stage Tender (Stage H)
Final Outturn Cost = Actual Cost (Stage K)
3. Contract Choices

• Worked example of an Employer’s two-stage pain/gain incentive scheme…
ITP = First-Stage Tender (Stage C)
FTP = Second-Stage Tender (Stage H)
Final Outturn Cost = Actual Cost (Stage K)
What affect does an
incentive scheme have
on the quality of the
completed building?
What stops the
Contractor and
Consultant value
engineering to reduce
the Final Outturn Cost
and increase their gain
shares?

Main Options – E & F
• Cost Reimbursable Contract (Option E) is used when the
definition or extent of the work to be carried out is not available
and an early start on site is required (i.e. rectifying fire damage).
The Contractor carries minimal financial risk and is paid actual
cost plus the tendered fee.
• Management Contract (Option F) is when the Contractor is
responsible for supplying management services and may not
directly carry out the work themselves. The works are pre-
defined and the Contractor is paid actual costs.
Employer
Contractor
A
B
C
D
F
E

Engineering Construction Short Contract (ECSC)
• For work that does not require all the procedures in the ECC
• Single Contract Data
• Price list for PWDD and:
– Quantity changes
– But not CE’s
• No express provisions for contractor design
• Flexible programme requirements
• No Main or Secondary Option but:
– can have “additional clauses”
– includes delay damages and retention

PSC & PSSC
Professional Services / Professional services short form contracts
• Used to appoint professionals (by Employer or
Contractor)
• Designers
• Project Manager
• Supervisor
• Same Objectives as NEC Main Contracts
• Same clause structure as the NEC ECC

Professional Services Contract (PSC)
• Main Option Clauses:
– A – Priced Contract with Activity Schedule
– C – Target Contract
– E – Time Based Contract
– G – Term Contract
• Options B, D & F are not used

Layout of the Contract
• User friendly layout which is split into sections that deal with
essential requirements and a ‘pick and mix’ choice of additional
requirements.
• The ECC includes the following sections…
• Core Clauses
• Main Option Clauses
• Secondary Option Clauses
• Schedule of Cost Components
• Contract Data
• Other documents appended to the contract are…
• The Works Information
• The Site Information
• Depending on the Main Option, further documents appended to
the contract may include an Activity Schedule and Bill of
Quantities.
There are risks involved in
providing a flexible form of
contract because the
various options can result
in conditions which some
lawyers regard as
producing great variability
and a risk of imbalance.
However it is more
preferable than amending
standard forms of contract
which, if needed, should be
undertaken with extreme
caution.

Layout of the Contract
• The option structure is Modular in form with five modules , normally chosen by
the employer
• ALWAYS have the core clauses and the Schedules of Cost Components
• Choose ONE main Option clause (A-F) which decides the mechanism for
payment
• Choose one dispute resolution option (W1 or W2)
• Choose as many secondary Option clauses as required (prefixed X or Y)
• Add any other additional Clauses (Prefixed Z) requirements.

Core & Main Option Clauses
• The Core Clauses are set out in nine sections and apply in all
contracts. The clauses allow for a flexible amount of Contractor
design.
• Section 1: General
• Section 2: The Contractor’s Main Responsibilities
• Section 3: Time
• Section 4: Testing and Defects
• Section 5: Payment
• Section 6: Compensation Events
• Section 7: Title
• Section 8: Risk and Insurance
• Section 9: Dispute and Termination
• The Main Option Clauses provide two options for the dispute
resolution procedure.
• Option W1: Used unless the HGCRA 1996 applies.
• Option W2: Used in the UK when the HGCRA 1996 applies.

Secondary Option Clauses
• The Secondary Option Clauses are set out under 22 headings and may be
incorporated or not as required. This gives great opportunity to tailor the contract to
suit the client and project requirements.
• You must elect to include them; No automatic incorporation
• Option X1: Price Adjustment for Inflation
• Option X2: Changes in the Law
• Option X3: Multiple Currencies
• Option X4 : Parent Company Guarantee
• Option X5: Sectional Completion
• Option X6: Bonus for Early Completion
• Option X7: Delay Damages
• Options X8-X11 (PSC)
• Option X12: Partnering
• Option X13: Performance Bond
• Option X14 :Advanced Payment
• Option X15: Limitation of the Contractor’s Liability for Design
• Option X16: Retention
• Option X17 : Low Performance Damages
• Option X18 – Limitation of Liability
• Option X19 : Not Used
• Option X20: Key Performance Indicators (not with X12)
• Option Y(UK)1 – Project Bank Account
• Option Y(UK)2: The HGCRA 1996
• Option Y(UK)3: The Contract (Rights of Third Parties) Act 1999
• Option Z: Additional Conditions of Contract

Cost Components & Contract Data
• The Cost Components are two schedules which contain cost information
supplied by the Contractor. They are used to assess payments to the
Contractor and the cost effect of Compensation Events. Costs are defined in
relation to people, equipment, plant and machinery, utility charges,
manufacture and fabrication, design and insurance.
• Known as the ‘Contract Particulars’ under JCT, the Contract Data provides
data required by the specific conditions of the contract. The section is split
into two parts
• Part 1 - Data provided by the Employer
• Part 2 – Data provided by the Contractor. Information includes...
• Name of Parties
• Insurance Details
• Start and Completion Dates
• Interest Rates
• Retention Percentage if applicable
• Rates for Delay Damages if applicable

Works and Site Information
• The Works Information specifies and describes the Works to be carried
out, including Contractor’s design responsibilities. Most information will be
given in a specification and on production drawings in the traditional
manner. However, it may also include…
• Statement of Constraints on how works are carried out
• Health and Safety
• Details of Contractor’s Design elements
• Information on Specialist Subcontractors
• Details of Tests
• Performance or Advance Payment Bonds
• The Site Information describes the site and its surroundings and is used
to assess compensation for site conditions. Information may include soil
investigations, contamination reports and details of below ground
services.

Managing Change
• NEC3 includes a clause which obliges the Contractor and
Project Manager to notify each other as soon as they become
aware of any matter which could increase the Prices or delay
Completion. This is called an Early Warning.
• Under the JCT Type, the procedure for managing change is
known as ‘Variations’. A Contractor’s Schedule 2 Quotation can
be used to obtain a fixed price quotation for a variation.
However, it is not mandatory and typically responsibility lies with
the QS to price variations. Disputes can arise and are often not
resolved quickly.
• Under the NEC3, the procedure is known as ‘Compensation
Events’ and an immediate assessment of the cost and time
implications are made. These are mandatory and binding, with
no provision for later review. They are events which do not
arise from the Contractor’s fault and entitle the Contractor to be
compensated for any effect the event has on the Prices and
Dates.
Compensation Events
are listed in the Core
Clauses and the
Options. The Contract
Data also has
provision for the
Employer to insert their
own additional
compensation events.

5. A New Language
Terms in italics are project specific
Defined terms have capital initials
These drafting principles make it easier to understand the contract
These principles should be adhered to when drafting documents & communicating
Clause 11.1:
Terms identified in the Contract Data are in italics eg. Period for reply, boundaries of
the site
Defined terms have capital initials, eg Accepted Programme, Completion, Defect
The index is useful to refer to as it details the links within the contract – it helps
build the intellectual map

5. A New Language
The NEC contract introduces a number of new terms which are peculiar to the NEC
contract, such as
Compensation Events - similar to variations, extensions of time and loss and expense
under other contracts.
Contract Data – there are two parts – Part 1 is completed by the Employer as part of the
Invitation to Tender documentation, and Part 2 is completed by the Contractor as part of
his tender. If the Contract Data is not completed properly, then it will be very difficult to
properly administer the contract
Project Manager (PM) – similar to the Architect / Contract Administrator under other
Contracts
Schedule of Cost Components and the Shorter Schedule of Cost Components – Crucial in
the assessment of Compensation Events

5. A New Language
Works Information - Significant in understanding the scope of work, and in describing the
constraints in providing such work
Risk Register – assists in creating awareness about project specific risks
Fee percentages – there are several fee percentages that need to be tendered in respect
of assessing cost, and a knowledge of their application is crucial when formalising an NEC
3 contract
Activity Schedule – under Option A this document is a series of lump sums, and payment
is only due if the activity is completed (similar to milestone payments). Careful
consideration of the Activity Schedule will maximise the contractor’s cash flow within
interim payments.

• There are 19 defined terms relevant to the core
clauses
• These are in alphabetic order
• Additional defined terms exist dependent upon the:
– Main Options
– Secondary Options
5. A New Language

Clause Defined term & comment Linkage
11.2(1) Accepted Programme – latest Accepted Programme
supersedes previous. Vital to have an Accepted
Programme in place for the good of the project
31.3, 50.3
(remedy)
11.2(2) Completion – the second bullet serves as a basic filter, the
first bullet allows the Employer to be very precise
X7.1 (remedy)
11.2(5) Defect – two bullets – one relates to the Works
Information, the other to applicable law & accepted design
45.1 & 45.2
(remedy)
11.2(9) Key Date – critical milestone from the Employer’s
perspective, often reflects interface between the
Contractor and Others
14.3 (alter),
25.3 (remedy)
Some Defined Terms and Basic Contract Linkages
5. A New Language

Clause Defined term & comment Linkage
11.2(10) Others – eg Local Authorities, Archaeologist 60.1(5)
11.2(14) Risk Register – consists of risks identified as part of the
tender process plus early warnings
Contract Data,
16.4
11.2(16) Site Information – factual information about the site 60.1(12), 60.2,
60.3
11.2(18) Working Areas – necessary for Providing the Works &
used only for work on this contract
15.1, SCC, SSCC
11.2(19) Works Information – specifies and describes the works
or any constraints
14.3, 60.1(1)
5. A New Language

Clause Defined term & comment
Main Option A,
11.2(20)
Activity Schedule (note the sequential clause numbering)
Main Option A,
11.2(27)
Price for Work Done to Date (PWDD) – completed activities
Main Option B,
11.2(28)
Price for Work Done to Date (PWDD) – bill items
Main Option C,
11.2(23)
Defined Cost – definition of what is paid for under Options C-F
Main Option C,
11.2(25)
Disallowed Cost – definition of what is not paid under Options C-F
X5.1 Sectional Completion – references equally apply to Sectional
Completion eg clause 16.1
5. A New Language

Key People
• The ECC sets out the responsibilities and roles of the following key
people:
• Employer
Not involved in administrating the contract – no power to issue instructions.
• Project Manager
Known as the ‘Contract Administrator’ under the JCT, the Project Manager manages
procurement of the Works for the Employer. Contract contemplates appointment prior to
the Consultants so that they manage the design process.
• Supervisor
Known as the ‘Clerk of Works’ under the JCT, the Supervisor exercises certain
responsibilities on site for the Employer, including testing, monitoring quality and issuing
the Defects Certificate.
• Contractor
• Subcontractors
• Adjudicator
• Note, no references to an Architect or QS by profession.
Unless delegated the
role or responsibility, the
Architect who produced
the Works Information,
may not have a role in
the Contract and
therefore have no
responsibility to monitor
quality and compliance
with the Works
Information. The
Supervisor may have
limited knowledge of the
Works Information and
this may affect the
quality of the completed
building. Traditionally as
Contract Administration,
the Architect has a
responsibility to monitor
quality.
6. Roles & Responsibilities

A typical project using NEC Contracts
Client
Project Manager
PSC or PSSC
Consultant Supervisor
PSC or PSSC
Contractor
ECC or ECSC
Subcontractor
ECS or ECSS
Suppliers
ECS or ECSS
Suppliers
SC or SSC
Consultant
PSC or PSSC
Adjudicator
AC

Project Manager
Consider – No Contract Administrator / No Clerk of Works/ No Architect / No Quantity
Surveyor
• Therefore the Focal Point of Contact
• Has a defined Role and responsibility
• Utilises a clear Matrix for Actions and Reactions
• Facilitator of a formulaic Approach to solutions
• Role is all about fair and impartial administration of the contract on behalf of the Employer with the
intention of achieving the Employers goals in terms of budget, program, quality and brief - (10.1)
• Duties include changing the works information, managing change and using expertise in management
and construction judgments.
• The employer has a relatively minor role (The PM running the show!!!)
• Supervisor ensures compliance with Works Information

Adjudicator
• The Adjudicator is appointed jointly by the Employer and Contractor and only becomes involved when a
dispute is referred to him.
• A Person independent of both the Employer and Contractor required to give decisions within stated time
limits
• If either party does not accept decisions then they may proceed to Arbitration
• Adjudicators fee is shared jointly between parties (Personal experience not so)
• Adjudicator only person to change a Project Managers decision
• Now witnessing insertions into Z clauses to remove adjudication
Delegation
• The contract enables the Project Manager and Supervisor, after notifying the Contractor, to delegate
their actions

Consider producing some sort of RACI for your project (Careful about
Growing legs and impact on Contract) – below selection of just three
pages from 25. (Nottingham Council Framework)

• The Contract Data ‘refers’ to the documents
which contain the Works Information.
– Contract Data Part 1 identifies the Employer’s
Works Information
– Contract Data Part 2 identifies the Contractor’s
Works Information for his design

• Clause 21.1 states
“The Contractor designs those parts of the works which
the Works Information states he is to design”
• If the Employer carries out most of the design, a list of
items designed by the Contractor may be stated. “The
Contractor designs the following …..”
• If, conversely, the Contractor carries out most of the
design, a list of items designed by the Employer may be
stated. “The Contractor designs all of the works with the
exception of the following …….”

• What happens if there are inconsistencies between
the Works Information provided by the Contractor
(for his design) and that provided by the Employer?
Clause 17.1
notify
Clause 14.3
Ability to
change
Clause
60.1(1),
Second bullet
Changing the Contractor’s WI to comply with the Employer’s is not a
compensation event. In that respect, the Employer’s WI is dominant

• What happens if the Employer’s WI contains
inconsistencies in drafting and/or is
ambiguous?
Clause 17.1,
Notify
Clause 14.3 –
ability to
change
Clause 63.8,
Employer
pays
The Employer compensates the Contractor for any inconsistency or ambiguity
TELEVISIONS – 42” or 24” – 63X £127.99 = £8063.37

• Under the JCT Types, the Contractor is required to submit a Programme but
it is not a binding Contract Document and there is no requirement to keep it
up to date.
• In contrast, the Accepted Programme forms part of the Contract Data under
the NEC3 and the Contractor is required to keep it up to date. Any changes
must be accepted by the Project Manager within 2 weeks. It is an important
document and is used to monitor/assess the time effects of Compensation
Events.
Programme should show…
• Start Date/Completion Date/Key Dates
• Planned Completion
• Order and Timing of Operations
• Time Risk Allowances
• Health and Safety Requirements
• Information from Required Others
• Float
8. Importance of Program

• The programme is key – it’s the ‘beating heart’ of the NEC
• The NEC programme is a joint programme
• It provides critical management data
• If the programme is not compliant/accepted it becomes
very difficult to objectively assess compensation events
• In order to ensure acceptance it is worthwhile considering a
joint review before final submission/acceptance

• To say that the NEC is “big into programming” would be a massive
understatement.
• Under most JCT contracts – Contractor provides a program uses to monitor
progress and possibly uses to illustrate delays if making a claim
• Under NEC the contractors first program must be provided within the period
for reply stated in the Contract Data Part 1 (usually 2 weeks)
• If the contractor fails to provide the PM can deduct 25% from all payments
until program is provided in the accepted form.
• Clause 31.2 gives specific requirements for the program – as usual start, end,
key dates but also items not usually previously submitted like float, risk,
resources.
• Clause 31.3 also gives the reasons why a Project manager may reject the
program

• Clear and objective requirement for a detailed
program with a statement of resources
• Regular updates which provide the essential
tool for the parties to manage the project and
to notify and manage the effect of problems
and delays etc.

• The programme needs to be accepted as a
priority
• Early warnings (time related) will be difficult to
identify without a good programme
• Compensation events will be very difficult to
objectively access without an Accepted
Programme and active early warnings process
Three Stimuli to Good Management:

• Meet to agree the first programme (whether accepted as part
of the tender or not):
• Project on the wall
• Hold meetings to agree Programs in draft before submissions
• Agree changes informally
• The programme is the project!
• An acceptance is then required
• This is a much more collaborative way of working
• We also develop our understanding and what the project
pressures are – this will aid the identification of early warnings
Practical Suggestions:

• Early Warnings are very important part of NEC
• They are about identifying potential problems before they occur
with a view to avoidance or mitigation
• Designed to avoid waiting until they have happened and seeking to
apportion blame
• There is no entitlement under Early Warnings
• They should not be viewed as claims however if not given or given
and ignored have consequences
• Under Clause 16.1 Contractor or PM can issue
• Consequences if Contractor not issued when could have – under
options C-F could be disallowed costs
• Clause 16.2 gives rights to PM or Contractor to Instruct attendance
at risk reduction meeting.
• Issue of EW entails PM must add to the Risk Register
• All about encouraging proactive and collaborative working
9. Early Warning

The early warning process
• The Project Manager should facilitate and
trouble shoot the process
• This is not about casting blame
• Its about mature project management –
recognising that both parties will encounter
problems
• Its about overcoming them collaboratively
9. Early Warning

The early warning process:
•‘Notify’ – separately
(13.7)
•4 reasons
•5th reason is
discretionary
•Protecting time,
quality and cost
16.1 Notify
•May instruct others
to attend
16.2 Instruct a
meeting
•How to avoid or
reduce
•Seek solutions
•Decide on actions
•Update
16.3 Mitigate
•Revise
•Issue to the
Contractor
16.4 Update
and issue
9. Early Warning

Impact if we don’t manage Early Warnings:
Clause 16.1
Notify (separate
communication:
clause 13.7)
The Prices
Clause 63.5: “…event is
assessed as if the
Contractor had given
early warning”
Disallowed Cost
Clause 11.2 (25)*….was
incurred only because the
Contractor did not ….give
an early warning….
Options A-F
Options C-F
Under Options C-F failure to notify early warnings can have a detrimental effect on the Prices (value)
and Defined Cost (cost)
*11.2(26) under Option F
9. Early Warning

Implementing the key
procedures: Early warnings
Procedures in contract
• Risk Register to be compiled by the
Project Manager
• Each early warning to be notified
and recorded in the Risk Register
• Mitigation & risk reduction to be
undertaken as per clause 16.3
Practical suggestions
• Ensure the ethos is right within the team
– early warnings are not a pre-empt to a
claim!
• Develop the Risk Register from the
tender process
• Consider a protocol of picking up the
phone and discussing initially. If both
parties agree/one feels strongly then
follow through with the paperwork?
• Ensure dialogue is maintained
• Consider a categorisation system eg. category 1 = critical (meet in the next 24 hours),
category 2 = non-critical (record and discuss at the next progress meeting)
9. Early Warning

Compensation events are defined as events which if they do not arise from
Contractors fault, entitle Contractor to be compensated for effect on the
Prices, Key Dates and Completion Date
Therefore it is important to remember that compensation events deal with both time
and money

What is a compensation event?
• Events which entitle the Contractor to be compensated for
the effect on the Prices, Key Dates and Completion Date
• Both time & cost are assessed in a single quotation
• Some compensation events may be negative eg omit work
from the Works Information (this will have a negative impact
on the Prices but will not bring forward the Completion
Date)
• This section rewrites the traditional rule book in terms of
change management
 Clearly defined timescales are in place
 Failure to comply with these timescales can result in the
Contractor being time barred
The timescales are clearly defined with sanctions in place for those that do not
follow the process!

What is a compensation event?
• Compensation Events are the ONLY way to
change price / and or Completion Date
• All in one place and treated in the same way
• Cost assessed at forecast change in cost
• Time forecast delay based on latest Accepted
Programme
• All to tight and defined timescale

What are the reasons for a compensation event?
• There are three main reasons:
• A change of mind/decision
• Failure to do something (a lot relate back to the
programme
• Something has happened that is beyond a reasonable
risk level

Where are they listed?
• There are four sources of compensation events:
• Clause 60.1 (19 reasons)
• A further 3 stated in clauses 60.4, 60.5 & 60.6 (Options B &
D)
• Also secondary Options X2, X12.3(6) & (7), X14.2, X15.2 &
Y2.4
• Potentially additional compensation events in Option Z

Summary of the compensation event clauses
Clause Description Relevant Clauses
60.1(1) Change to the Works Information 14.3, 27.3 & 44
60.1(2) Access and use of the site 33.1
60.1(3) Employer providing something 31.2
60.1(4) Stop or not start any work 34.1
60.1(5) Employer and Others working times and conditions 31.2
60.1(6) Replying to communications 13.3
60.1(7) Object of value 73.1
60.1(8) Changing decisions -
60.1(9) Withholding acceptance 13.8, 13.4, 24.1,31.3
60.1(10) Instructions to search 42.1
60.1(11) Test or inspection causing delay 40.5
60.1(12) Physical conditions 60.2 & 60.3
60.1(13) Weather -
60.1(14) Employer’s risk 80.1
60.1(15) Take over 35.2
60.1(16) Employer provides materials, facilities and samples 40.2
60.1(17) Correction to an assumption 61.6
60.1(18) Breach of contract -
60.1(19) Unforeseen events 19.1

The compensation event process – Overview:
• The compensation event process is clearly defined
• Section 6 is divided into 4 main sections: Notify, Quote,
Assess, Implement
• Timescales are in place with sanctions for either party
if they are not followed
• The timescales are about agreeing the impact not
when the work is done
• Both time and cost are assessed
• There is no separate prolongation/extension of time

The compensation event process – Overview:
• There is a defined process to agree (or impose)
the effects of a compensation event
• within defined time limits
• Notification (61)
• Quotation (62)
• Assessment (63/64)
• Implementation (65)
• Either Party can make sure that process and time
scales are adhered to

Implementing the key procedures:
Compensation events
Procedures in contract
• Clear timescales and procedures
detailed in section 6
• Both parties may ultimately be time
barred if they fail to follow the
timescales
Practical suggestions
• Meet to discuss appropriate
compensation events before final
submission
• Discuss any issues – the aim is to
informally agree before formal
submission
Agree to meet regularly & maintain dialogue
Consider the contractual loop and ensure keep client informed

Communication protocol: Clause 13.1
• Clause 13.1 clearly states the methods of communication which the contract requires in a form that can be
read, copied and recorded
• The contract requires professional record keeping
• The Project Manager should discuss and agree with the Contractor which method(s) of communication
will be used at commencement of the contract
• The NEC published guidance on communication in April 2013
• Good examples and suggestions are contained within this guidance
11. Communication
• As a minimum, the ECC pro-forma’s are recommended as the means of communicating
• They state the relevant clause
• The communications are structured
• This is not being contractual – it’s following what the contract requires (‘acting as stated’)

Media Pro’s Con’s
Letter/email • Easy to implement • Need to log each communication
• They can be ambiguous about
what is being drafted
ECC3 pro-forma • Clear communication
(as per April 2013
guidance)
• Need to log each communication
Collaborative
software
Speciality NEC
• Clear communication
• Automatically logs
communication
(systems do vary)
• Cost involved
• Require buy-in from the team
11. Communication

• ‘Notified’ matters need to be communicated separately!
• Each early warning should be notified separately
• Each defect should be notified separately
• Each compensation event should be notified separately
11. Communication

Full list of notifications under the ECC (clause 13.7)
Clause Issue
14.2 Delegation
14.4 Replacement of the PM or Supervisor
16.1 Early Warning
17.1 Ambiguities and inconsistencies
18.1 Illegal or impossible requirements
31.3 Programmes
40.3 Tests and inspections
42.2 Defects
61.1 Compensation Events
61.5 Decisions on Compensation Events
61.6 Assumptions on Compensation Events
62.6 Quotations for Compensation Events
64.3 Assessments of Compensation Events
64.4 Late assessment of Compensation Events
65.1 Implementation of Compensation Events
73.1 Discovery of objects of value etc
11. Communication

• The Risk Register is a new feature under NEC3.
• It is a live document that is formed by the Project Team post-contract (i.e. not a
contract document) and will change as the work progresses.
• Risks can be added to the Register as part of the Early Warning process, or
removed because of actions taken by the parties (i.e. soil investigations).
• Risks are allocated a likelihood of occurrence and impact, along with an
approximate cost effect. Regular Risk Reduction Meetings should be held during
the Contract.
12. Management of risk

• Clause 80.1 defines the Employers Risks under the contract
• Clause 81.1 sets out that all other risks are carried by the Contractor.
• Clause 83 each party indemnifies the other against events which are at its risk
• Often ITT’s are including preliminary risk registers to help prospective contractors understand what
getting into.
• Risk Registers are a practical project management tool , time or cost consequences should fall
outside of clause 83 and be addressed through other mechanisms (CE’s) Parties need to be very
clear as to how any such risks are allocated.
• Recent difficulties around final entry clause 80.1 which allows additional Employers risks to be
specified in the Contract Data in order to include a preliminary risk register .
• Employer will often append or refer to the risk register in the contact data and if that register
assigns actions to the employer could be argued that they become part of 80.1
• Broad consensus that risk register operates at a practical level and not intended to alter 80.1 and
81.1 however still limited case law and remains uncertainty.
• Prudent for clarity to amend the contract that items in the risk register are not employers risks.

Clause 80 Employer s risks (damage and 3rd party claims)
Clause 81 Contractor s risks (by difference)
Clause 83 Indemnity
» Each party indemnifies the other
» Net contribution
Clause 84 Insurance cover 4 No
Clause 85 Insurance policies
Clause 87 Insurance by Employer
Clause X18 Limitation of liability

13. Points to Note
Check the Z clauses – Advice is to minimise however increasingly seen used
• Introduction of Provisional Sums
• Significantly altering of periods (4 weeks to become time barred)

Key risks – physical conditions:
• Physical conditions (clause 60.1(12)) are a compensation event if they are over and
above the defined risk:
• …… an experienced Contractor ….. such a small chance of occurring
……unreasonable for him to have allowed for it
• When ‘judging’ if it is a compensation event – clause 60.2 lists what the Contractor
is deemed to have taken account of
The Contractor needs to take account of the risks which are within the parameters of this
definition
On most projects this represents a significant risk
Example: A new housing development on a disused hospital site: Discovery of a redundant
drain and telephone cables in different places to those shown on drawings is unlikely to be a
compensation event (?)
13. Points to Note

15. Signposting
https://www.neccontract.com/

https://www.neccontract.com/NEC4-Products/NEC-Users-Groups
Bronze - £365
Silver - £775
Gold - £1445
Platinum - £2575
Consider
Typical contract
booklets £20-£60
Bundles circa £80
Full Suite - £540
15. Signposting

15. Signposting
NEC eprint & ecorporate licences
eprint – Will allow a 1 user (1 machine licence) access to the NEC complete suite of
29 documents (the clauses in PDF format and the Contract Data and Forms in
standard word format – last priced Aug 2011 was £1095 + VAT 25% discount for
each aditional licence.
ecorporate - Unlimited access to the above for your organisation was £8,500+ VAT
or a corporate to minimise however increasingly seen used

• BOOK 1: Introduction to the Engineering and Construction Contract
• BOOK 2: Procuring an Engineering and Construction Contract
• BOOK 3: Managing the contract
• BOOK 4: Managing Change
• BOOK 5: Managing Procedures
Barry Trebes and Bronwyn Mitch
Publisher: Thomas Telford
15. Signposting

RecapOverview of NEC Contract
1. History
2. Overview
3. Contract Choices
5. A New Language
6. Roles and Responsibilities
8. The IMPORTANCE of Program
9. Early Warnings
11. Communication
12. Management of Risk
13. Points of Note
14. Proformas
15. Signposting

An Introduction to NEC3
Contracts
Stuart Brisbane
Thanks for Listening
30th March 2017

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