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Wise Up Wednesday: Beware The Hidden Dangers Of The NEC3 Subcontract

Beware The Hidden Dangers Of The NEC3!

This week’s “Wise Up Wednesday” is about avoiding the hidden dangers of the NEC3 Subcontract.

The NEC/3 Engineering and Construction Subcontract is becoming increasingly popular throughout both the public and private sector.

It’s meant to be easy to use and understand because of;

  • its simple language, and
  • its approach to effective management

The idea behind it is that risks are managed pro-actively and identified as part of the contract, rather than battled out afterwards.

This makes a lot of sense and appeals to those involved in the execution of projects, but the fact of the matter is that life is never that simple.

Risks and Challenges

The NEC3 is not without its risks and challenges and various experts have warned of the dangers. EC Harris, for example, said:

“We are seeing an increasing number of disputes with NEC contracts, clients and contractors don’t understand how different it is to JCT contracts and get themselves into a bit of mess.”

So, what are the risks and how do you avoid them?

Plain English – But Not Plain Enough?

In an attempt to escape the complexity and “legalese” of other more traditional contracts, NEC3 is written in plain English, in the present tense, and avoids the use of legal terminology.

However, it’s been argued that this actually creates ambiguity, particularly as much of the rest of construction, the law and our legal system operate in a completely different style. And even a high court judge has complained that the use of the present tense makes referral to adjudication or other tribunals difficult to construe as a result.

The judge said: “No doubt this approach to drafting has its adherents within the industry but … it seems to me to represent a triumph of form over substance.”

New Concepts

The NEC3 introduces a raft of new concepts. Terms such as “risk register”, “activity schedule”, “compensation events” and various other schedules including “Subcontract Data” will all be new to those who have not used this form before.

The collaborative “management tool” approach of the form, and its usefulness as a contract document can be negated by;

  • Lack of understanding
  • Being badly compiled (by the Contractor)
  • Being heavily amended (again by the Contractor)

Managing Risk

The management approach of the contract aims to ensure risks are clearly defined, monitored, identified and managed from an early stage.

However, most Contractors aren’t very good at that, so they still want to push the risk in your direction!

Interpretation Of Key Fundamentals

It’s essential that you understand such issues as the “Early Warnings” mechanism and how Compensation events are intended to work.

And how about the interpretation of the simple matter of how to calculate costs – a fundamental issue in many NEC3 disputes.

Clause 63.1 deals with assessing Compensation Events and reads as follows:

“The changes to the prices are assessed as the effect of the Compensation Event upon

  • the Actual Defined Cost of the work already done
  • the forecast Defined Cost the work not yet done and
  • the resulting fee.”

It’s not hard to see how different people can interpret that in different ways. And that’s before the contract gets amended!

Onerous Amendments

Specialist contractors are at risk whenever a standard Form Contract is amended, but NEC3 is particularly troublesome in this regard. Here are just some of the reasons why;

First, most Contractors are familiar with JCT forms of contract, and attempt to add JCT type clauses, or even directly take JCT clauses and add them to the NEC. Conflicting language will lead to unpredictable results, and pose real problems should a dispute arise.

Secondly, the contract defines precise time limits for communication and responses by both parties. Ordinarily this means Contractors have to reply promptly to notifications and quotations in respect of Compensation Events and get things agreed.

Thirdly, failure to reply within the allocated time carries express sanctions within the NEC. Such provisions are drafted so that both parties agree the cost and time effect of Compensation Events in a prompt manner.

That’s all unfamiliar territory for most Contractors!

 

Finally, understanding risk apportionment under NEC3 is crucial. It’s important to understand this in order to avoid being caught out by risks being unfairly “re-arranged” by the Contractor.

Success Or Catastrophic Failure!

It would appear, then, that the key aspects for successfully working with NEC are understanding, pro-active project management and communication.

When coupled with good advice, working with NEC3 can be successful. But please be warned that the key is understanding. Without that you may be risking catastrophic failure.

Training and education can help and we have a full day Masterclass planned at the NEC in Birmingham on 22 April 2016, so please take advantage of this to ensure you have the latest knowledge and tools to stay ahead of the competition.

And because our StreetwiseSubbie Buddies have been given priority, as of today there are only 11 places left, so you will have to be quick.

Single delegate rate is £250 plus VAT or £200 plus VAT for two or more delegates

Please email info@streetwisesubbie.com to book or request more details.

Together we can make a real difference!

I hope you enjoyed my Wise Up Wednesday and that it gave you some food for thought, and I sincerely hope to speak with you soon.

In the meantime if you need any help with any of your business issues, including problems with NEC3 contracts please don’t hesitate to pick up the phone and give us a call on 01773 712116.


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