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#WiseUpWednesday: The NEC3 is dangerous…

The NEC/3 Engineering and Construction Subcontract is becoming increasingly popular throughout both the public and private sector. But, it can be extremely dangerous for Specialist Contractors.

Why do I say this?

The Nec/3 is 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 identified as part of the contract, and proactively managed at the time, rather than battled out afterwards.

Does that sound like any of the Main Contractors you know?

“Risks proactively managed” – “at the time” – forgive me for being blunt, but most Main Contractors couldn’t manage the proverbial p*** -up in a brewery…

Although the ethos of the NEC3 makes a lot of sense, the fact of the matter is that life is never that simple.

Risks and Challenges

It’s not just me that’s saying it. Various experts have warned of the dangers of the NEC3.

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.

What are “Compensation Events”? In broad terms they’re variations to you and me, but the NEC3’s valuation and agreement processes are substantially different from the valuation process in say a JCT contract.

Time is another big problem under the NEC3, because the contract makes it clear how very important the contract programme is as both a management and a commercial tool. The programme has to reflect everything we know about the works as it happens, and you have to submit your programme for “acceptance” before you start and every time anything changes.

What happens if you’re doing that?

Then you are at risk, plain and simple. Don’t say you haven’t been warned…

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.

We are regularly called in to help resolve problems with NEC3 contracts after the event, and of course we can help you with that. But, training and education can help you to avoid the problems before they happen and we can help you with that too.

Together we can make a real difference.


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