NEC Contracts
New Engineering Contracts (NEC)
NEC Contracts were first published in 1993 as the New Engineering Contract. It is a suite of construction contracts intended to promote partnering and collaboration between the contractor and client. It was developed as a reaction to other more traditional forms of construction contract which have been portrayed by some as adversarial.
In 1994, NEC was strongly recommended in the Latham Report (Constructing the Team) which investigated the perceived problems with the construction industry, describing it as ‘ineffective’, ‘fragmented’ and ‘incapable of delivering for its customers’, proposing that there should be greater partnering and teamwork.
The NEC contracts are intended to:
- Stimulate good management.
- Be clear and simple, written in plain English, in the present tense and without legal terminology.
- Be useable in a wide variety of situations from minor works to major projects.
If you have an urgent problem relating to an NEC contract and would like some Free Advice** please call us now on 01773 712116 or email: info@streetwisesubbie.com
Introduction To The NEC
The NEC was first published in 1993 as the New Engineering Contract. It was introduced to promote partnering and collaboration between the contractor and client and was developed because other more traditional forms of construction contract were perceived by many as too adversarial.
It was a radical departure from existing building and engineering contracts and written in what the NEC says is plain language (the contract is not without its critics who would say otherwise) and designed to stimulate rather than frustrate good management.
In 1994, the NEC was strongly recommended in Sir Michael Latham’s Report (Constructing the Team) which investigated the problems with the construction industry.
The NEC contracts are intended to:
- Stimulate good management.
- Be clear and simple, written in plain English, in the present tense and without legal terminology.
- Be useable in a wide variety of situations from minor works to major projects.
The second edition, called the NEC Engineering and Construction Contract, appeared later together with a new Professional Services Contract, Adjudicator’s Contract and a back-to-back set of short forms and sub-contracts.
The suite of documents was updated and enlarged to some 39 documents in April 2013, and it has been endorsed by governments and industry worldwide and has been used on some high-profile projects including the London 2012 Olympic and Paralympic Games venues.
The NEC4 suite of contracts has now been introduced in order say the NEC to reflect user feedback, industry developments and user best practice.
The Language And Characteristics Of The NEC Contracts
If you have never used the NEC contract before and there are still lots of Specialist contractors that haven’t, you are in for shock. It has introduced a whole set of terminology and procedures that are unique to the NEC.
You should not under estimate the difference between the NEC and any other form of contract and it will punish you if you get it wrong.
Here are some examples of the terminology used;
NEC Accepted Programme
The Accepted Programme must be identified within the Contract Data or during the project and will be superseded by a later programme as and when things change.
NEC Compensation Events
Compensation Events deal with changes and what would otherwise be called variations or loss and/or expense under other forms of contract.
NEC3 contracts are underpinned by a philosophy that the Contractor (and indeed you the Subcontractor) should not lose out, nor benefit from a windfall, as a result of an event which occurs and is at the Employer’s risk. Compensation events entitle a Contractor to be compensated for any impact the event has on the prices, completion or key dates in the contract.
NEC Contract Data
This is very often the source of disputes.
This information must be completed as part of the necessary contract documents.
It is in two parts; part one provided by the Contractor and part two provided by the Subcontractor.
NEC Core Clauses
Most NEC3 contracts have ten core clauses which follow the list below from the ECC:
- General terms.
- Contractor’s main responsibilities.
- Time.
- Testing & defects.
- Payment.
- Compensation events.
- Title.
- Risk & insurance.
- Termination.
- Defect.
NEC Defined Cost
A defined term used in the ECC and other NEC3 contracts to give the parties a definition of Contractor’s cost for different use in different main Options. They only include the amounts calculated using rates and percentages in the Contract Data and other amounts at open market/ tendered /discounted rates.
NEC Early Warning
The contractor and project manager should notify each other, as soon as practicable, of any matter which could affect the cost, completion, progress or quality of the works.
Criticism, Problems and Pitfalls
NEC3 is not without its critics. It has been described as requiring too much expertise to operate, focussing too much on project management and generating too much paperwork. In 2010, Justice Edwards-Stuart described it as a “triumph of form over substance” (Anglian Water Services v Laing 2010).
The NEC contract brings many benefits to all involved parties, providing the rules are closely followed by all concerned. However, there are some significant problems awaiting the unwary.
Whenever we are asked about the NEC contract we advise that there is nothing wrong with the NEC contract itself, but in practical terms there are three significant problems for subcontractors;
- It is rarely set up properly.
- It is not understood by either party.
- It is not administered properly.
These three issues inevitably come back to haunt subcontractors in one way or another! So, on that cheery note we will touch on a few of the other problems as follows;
Starting Out On The Right Foot
One of the most common causes of NEC problems is when the subcontractor commences his works in the absence of properly agreed and detailed subcontract data.
The NEC depends on all the various elements of the subcontract data being completed and agreed. If the parties commence an NEC relationship without having even agreed the most basic details (and that is often the case!) it is no wonder that the result is chaos and financial agony for the subcontractor.
So, it is vital that every aspect of the sub-contract is agreed and put in writing before work commences. The NEC is no place for ‘letters of intent’, vague or otherwise.
The NEC’s Dreaded ‘Z’ Clauses
Why are Z clauses problematic? The biggest problem with Z clauses, and in fact any extra clause inserted into any contract, is that they can change the nature of the contract.
Z clauses are often used by unscrupulous Contractors to make life very difficult for their subcontractors.
Indeed, in its worst case we have seen over 100 pages of Z clause which made a complete mockery of the aims of the NEC.
If you are struggling to understand the methodology of an un-amended NEC contract, just think how much more difficult it is going to be to understand one that has onerous amendments!
The NEC And The Importance Of The Programme
Arguably, the programme is the most important document in an NEC contract. After all the deduction of 25% of all payments until such times as an NEC compliant programme is submitted should be telling you something!
As the majority of Contractors and Subcontractors do not comply with the strict requirements of the NEC in respect of programmes can soon result in a loss of entitlement for you the Subcontractor!
If you do not have the resources to carry out programming as required by NEC contracts, it is important that you either re-train your staff, or employ the services of someone who fully understands the NEC requirements and processes.
Ignore The NEC’s Rules At Your Peril
In the event of the rules being ignored, then it will be you the subcontractor who pays the penalty in terms of loss of your entitlements. You must therefore maintain a systematic way of dealing with all early warning notices and compensation events and responses/lack of responses/disagreements etc.
If the Contractor fails to respond in the prescribed manner and time scale, this needs to be followed up immediately.
To operate the procedures will inevitably require additional technical staff. You cannot operate the NEC on a shoestring!
All in all, we would advise all Subcontractors to approach and conduct the NEC contract with:
- Very careful preparation.
- Appropriate tender allowances for conformance.
- An enlarged job staff.
- A proactive attitude which reflects the NEC philosophy.
- Pre-contract training of all technical, supervisory and administrative personnel.
- Diligent adherence to the rules and time limits.
If the correct approach is adopted, and the rules closely adhered to, then the NEC contract has a great deal to offer all concerned. However, a careless, under-resourced and/or unprepared approach will very likely lead to disaster.
If you simply haven’t got time to deal with all of this or have an NEC related problem, or are still unsure about what to do, then why not give our friendly team a call on 01773 712116 and get some Free Advice** or email us on info@streetwisesubbie.com.
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