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The New Engineering Contract (NEC) was first published in 1991 by the Institution of Civil Engineers and revised in 1995. From slow beginnings it has become widely used and received a major boost when it was cited as the preferred form of contract by Sir Michael Latham in his report ‘Constructing the team’.

Now that this form of contract has a track record, it is an appropriate time for a review. A series of ten one-day seminars has recently been undertaken in the UK dealing with the NEC form. Many of the delegates had first-hand experience of using the form.

In workshop sessions, those who had used the form were asked to give their views in some detail of how successful they considered it to be. The views expressed are given under the following 10 individual headings.

Tender form and agreement

The NEC form does not come with a standard form of tender or agreement unlike the FIDIC forms of contract usually used for overseas work. This would seem to be something of a disadvantage, as it is necessary to draft these documents specially. The general consensus of opinion was that this was slightly inconvenient but did not prove in any way to be an obstacle.

Flexibility

The form provides for employer design with lump-sum agreements based on an activity schedule or bill of quantities; target contract with a shared risk using an activity schedule or bill of quantities; cost reimbursement and a management option.

There is also provision for full or partial contractor design. All those who had made use of the form appreciated this flexibility.

Contract documents

The forms do not specifically state what are to be regarded as the contract documents. It is clearly stated what constitutes the conditions of contract. There is, however, no reference to the tender or agreement being contract documents or, for that matter, where the specification, bill of quantities or activity schedule fit into the picture. Difficulties could arise where discrepancies between various documents occur. Which takes precedence and what is the contractor deemed to have priced? Those who had used the form were not aware of the potential problem, and it may be concluded, therefore, that there is no problem — unless, of course, a dispute arises.

A key feature of the form claimed by its authors is that it provides a stimulus to good management. The production of an up-to-date and realistic programme is a major item in the conditions. A programme must be submitted by the contractor within the timescale laid down in the contract, which begins to run from the date the contract is entered into. The programme must include such matters as the order and timing of each operation, provision for float, time-risk allowance and health-and-safety requirements. For each operation, the programme must include a method statement, which identifies the equipment and other resources the contractor intends to use. The project manager has two weeks to accept or reject the programme.

It was the unanimous view of all who had used the form that it is impossible to comply with these requirements. In most cases, the majority of the work was to be undertaken by subcontractors who had not been appointed by the time the programme was due to be submitted. The procedure which has, therefore, developed is for the programme to be submitted on a piecemeal basis.

The most popular clause with the delegates is the early-warning clause. Either the project manager or the contractor can require the other to attend a meeting following the service of an early-warning notice. The express purpose of the meeting is to discuss any matter which could increase the price or delay completion. It seems that this clause is being used frequently, and is most definitely helping to head off problems.

Compensation events

Unlike FIDIC conditions, there is no separate clause for extensions of time with the additional cost-recovery clauses spread throughout the form. There is one clause only, which deals with matters that entitle the contractor to both additional time and more money, referred to as ‘compensation events’. The number of compensation events runs to 18, with provision for optional additional ones. With the intention of keeping cost and time overruns under control, the contract requires the contractor to submit a quotation in respect of each compensation event, which includes, of course, variations to the works by the employer. If the programme is affected, the contractor is required to submit a revised programme.

The timescales laid down in the contract stipulate that the contractor must submit the quote and revised programme within three weeks of a request from the project manager, who has only two weeks to reply. It was the general view of those who had used the form that this clause is totally impractical. One delegate described it as a nightmare. The time scales in nearly every case went out through the window, and the parties did the best they could to reach agreement as soon as possible.

Increased contractors’ risk in the event of bad ground

The unforeseen adverse physical conditions clause in the FIDIC form is a notorious spawning ground for bad-ground claims. The test is whether the conditions encountered were reasonably foreseeable by an experienced contractor. If they are not, then the contractor is entitled to levy a claim. The NEC form is more onerous for contractors in that they must include in their price the risk of bad ground; only if adverse conditions arise which an experienced contractor would have judged to have a small chance of occurring, does an entitlement arise. It would seem that on most civil-engineering projects, the project manager is the old-school engineer who operates the clause as if it were the FIDIC contract.

Bonus for early completion

The provision for an early completion was popular with both those who represented employers and also contractors and subcontractors.

No retention

The core conditions make no provision for retention. If the employer intends to deduct retention, it is essential that the optional clause, which allows for the deduction of retention, is used. Needless to say, the absence of retention was popular with contractors, but unacceptable to all those who represented employers.

Co-operation clause

The NEC contract requires the employer, contractor, project manager and supervisor to act in a spirit of mutual trust and co-operation. It was felt that the presence of this clause made a difference for the better to the attitudes of the personalities involved with the project.

Conclusion

The generally expressed view was that, despite the shortcomings of the form, it was in most cases working well. The drawback is that due to the onerous aspects of the programming requirements and the time consuming nature of the compensation events clause, there is a need for an extra planner and quantity surveyor on projects where the NEC form is used.

This a little article by an American lawyer so don't get all excited about us changing the UK law any time soon. But it does serve to illustrate the dangers of indemnity clauses;

Have you ever had a construction subcontract with an indemnity clause like this:

“Subcontractor shall indemnify, defend and hold harmless the Contractor, and its officers…from and against all liability, loss, cost or expense (including attorney’s fees) by reason of liability imposed upon the Contractor, arising out of or related to Subcontractor’s work or, whether caused by or contributed to by the Contractor, any third parties, or any other party indemnified herein.”

You can find yourself liable for property damage caused by others, OSHA fines caused by others environmental fines or damage.

All my construction clients are proud folks who will stand behind their work. A clause like this makes you assume the risk of parties beyond your control. Worse, the “arising out of the work” moves the standard from negligence to perfection. So if anything goes wrong (and in construction something will) and it arises out of or is related to your work you get to indemnify and defend.

Owners and developers often approach these clauses with a take it or leave it attitude. Let’s be honest these clauses are cooked up by bowtie wearing lawyers who want to reduce or eliminate their client’s liability. That’s why you get a lawyer to draft your contracts.

But on the other side subcontractors are caught between signing the contract and hoping that insurance will cover anything or fighting the clause and probably losing the job.

Well in the midst of all the hoopla in Austin there is a bill pending that we hope will pass. SB555 makes these clauses void as against public policy.

Sec. 502.002. AGREEMENT VOID AND UNENFORCEABLE. A provision in a construction contract is void and unenforceable as against public policy if it requires an indemnitor to indemnify, hold harmless, or defend another party to the construction contract, or a third party, against a claim to the extent that the claim is caused by the negligence, fault, breach or violation of a statute, ordinance, or governmental regulation or rule, or contractual breach of the indemnitee, its agent or employee, or any third party under the control or supervision of the indemnitee, other than the indemnitor, its agent, employee, or subcontractor of any tier, and the claim arises from:
(1) bodily injury or death, except for the bodily injury or death of an employee of the indemnitor, its agent, or subcontractor of any tier;
(2) damage to property;
(3) any other type of damage; or
(4) a fine, penalty, administrative action, or other action assessed by a governmental entity directly against the indemnitee.

Each party would be liable for its own negligence and could not transfer liability by contract or other means. Good news for my construction clients and I hope it passes."

Our Virtual Team have vast experience in construction and engineering related contracts and are available to help you to avoid the commercial and contractual risks of accepting onerous contract conditions.

The deduction of retention has been in the news for some time past. It has again hit the headlines following a report prepared by the National Specialist Contractor's Council which represents many subcontractors who operate in the construction industry.

Suzannah Nicol the chief executive is quoted as saying that quantity surveyors working for main contractors are responsible for withholding money owed to specialist subcontractors. The initial findings of an NSCC survey revealed that 250 specialists are owed £25m in retentions a figure which rises to £680m if extrapolated to include all the NSCC's 7000 members.

Holding retention is a basic provision in most forms of construction contract. It is the job of the QS to comply with the requirements of the contract and not to pick and choose as to which clauses he of she feels are fair and just. It would therefore seem unjust to blame the QSs for merely doing their jobs. The pressure is on however from the subcontracting sector of the industry to remove all retention from the standard forms of contract.

The time would seem right for a balanced view to be expressed as to the rights and wrongs of withholding retention. It is necessary to examine why in the first place retention came to be withheld from money owed to contractors and subcontractors. Each construction project is unique; even if the design has been used before it will be located on a different site.

The chances of things going wrong are therefore quite high. Whilst inspections take place on a regular basis to ensure that work is constructed strictly in accordance with the contract experience tells us that once work has been completed there are usually items of non-compliance which come to light after the facility has been taken over.

History also tells us that the industry is littered with examples of failure on the part of contractors and subcontractors to return to the site to correct defective work. The industry holds all the records for companies going out of business and being unable to return to correct defective work. Employers, to protect themselves, have insisted on retention clauses in main contracts to reduce the financial risk of this kind. Main contractors take the view that this risk should be passed down to subcontractors and therefore retention clauses appear in nearly all standard forms of subcontract.

For contractors and subcontractors to successfully argue that it is unjustified for retention clauses to appear in contracts they must either show that their work is consistently fault free or provide some other mode of protection for the employer.

Retention clauses to show fairness must comply with a few basic rules. Is the amount withheld in reasonable proportion to the likely loss to the employer if defects are not made good? It is wrong for a worst case scenario to be assumed and therefore sums equating to 10% of the contract sum being withheld as retention are way too high. The JCT 2005 suite of contracts provides for 3% which does not seem unreasonable.

When should retention be released? Half is usually released when the main contract works have been completed. In many forms of contract, and the JCT is no exception, the balance of retention is held in full until all defects have been corrected. It would seem far more reasonable for retention to be released as defects are made good.

It would be fairly obvious once the defects schedule had been produced at the end of the defects period as to whether the sum held exceeds the cost of the necessary corrective measures. It may therefore be appropriate to release some of the retention at this stage and gradually release the remainder as the defects are corrected.

In many forms of subcontract the subcontractor is not entitled to release any retention until the main contractor has completed, when half of the total is due for release. The subcontractor may have completed work many months, and in some cases years, earlier.

Subcontractors also find themselves in the unenviable position of having completed all defects in their work but still the retention is held. This is because under most standard conditions of contract retention is not due for release until all the defects on the project have been made good.

It would seem reasonable for half the retention on subcontractors work to be released when they complete the work with the balance released at the end of a set period following completion of the subcontractors work. Under the present arrangements subcontractors who have finished their work and made good all their defects are not aware of the date when all defects have been corrected on the project which leads to release of the balance of retention. They are left with the task of constantly contacting the main contractor for news as to when they can expect to receive the balance of retention. This situation cannot be right.

The JCT in its 2005 editions has made provision for a retention bond as an alternative to the withholding of retention. It is early days yet for this type of arrangement but it does seem to have many attractions. The success or otherwise will depend upon how easily bonds can be secured and at what cost.

It seems that the present system cannot continue for long but it is unlikely that the answer is to do away entirely with retention and put nothing in its place. If this occurs the temptation for those who certify work on behalf of employers will be to undervalue the work until all defects have been corrected.

If you are having problems receiving payment of Retention or an Interim Application or Invoice we will action it on your behalf completely Free Of Charge.

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