NEC4 in Australia

Introduction

This white paper examines the NEC4 suite of construction contracts, explains key concepts, and discusses their use in Australia. It is authored by Steven Evans, who has 35 years of experience in the construction and engineering industry and has used the NEC contract since NEC2 (working for a contractor) and later NEC3 and NEC4 as a consultant and trainer. At the time of writing this paper, Steven is the only accredited NEC tutor in Australia. 

He has delivered hundreds of training courses and consulted with many organisations, both under the NEC banner and for his own company, in countries as diverse as the UK, Ireland, Netherlands, South Africa, Peru, and New Zealand. Since moving to Australia almost ten years ago, Steven has been involved, to some degree, in every NEC project in the country, from building a contracting strategy and advising on amendments to providing detailed consulting, coaching and training.

Basically, he knows what he’s talking about…….

What is NEC4?

Let’s start with what it’s not by addressing some comments I’ve received over the last ten years.

• It’s a ‘pommie’ contract. I’m Welsh, so I’m unsure if this is an insult to English people or a compliment. Whatever it is, yes, the contract was drafted by a UK-based organisation, but it was designed to be international and used in many countries worldwide.
• It’s an Alliancing contract. No, it’s not. There is an Alliance Contract in the NEC4 suite, but the ECC (the head contract) has traditional contracting arrangements. It is a collaborative contract, not an alliancing contract.
• It has a high administration load. Only as much as any other construction contract does if they were appropriately resourced and we did everything we should be doing.
• It’s ‘contractor-friendly’. No, it’s a fair balance between both parties. It only seems contractor-friendly as we’re used to contracts being amended to be ‘client-friendly’, and any move back to the middle ground presents as bias.

With that out of the way, what is it?

NEC4 is the fourth generation of a suite of contracts for procuring works, goods, and services for construction and engineering projects. The suite contains a contract for every agreement needed in a typical project’s supply chain, along with different types of contracts for different types of projects and procurement methods. 

The complete list of NEC4 contracts currently available is:

Full Contract

• Professional Service Contract and Subcontract
• Engineering and Construction Contract and Subcontract
• Supply Contract
• Term Service Contract and Subcontract
• Design Build and Operate Contract
• Facilities Management Contract
• Alliance Contract

Short Contract 

• Professional Service Short Contract
• Engineering and Construction Short Contract and Short Subcontract
• Supply Short Contract
• Term Service Short Contract

Other Contracts

• Framework Contract
• Dispute Resolution Service Contract

This paper will focus on the NEC4 Engineering and Construction Contract (ECC), which is the head contract between the Client (the person who wants the work to be done) and the Contractor (the person who is doing the work).

One of the characteristics of NEC4 is that the suite of contracts is consistently drafted; that means if you understand one of them, you’ll be well on your way to understanding the others.

The drafting of NEC4

NEC contracts were conceived by Dr Martin Barnes CBE (https://en.wikipedia.org/wiki/Martin_Barnes_(engineer)), a respected civil engineer and project manager noted for many achievements in professional project management. He wanted a contract that assisted project management rather than interfering in it, as so many other contracts seemed to do.

In an interview on YouTube (https://www.youtube.com/watch?v=L7RUXQ8DJRY), Dr Barnes explains his philosophy and tells the story of NEC. I urge you to watch it.

One of the features of NEC, as explained by Dr Barnes, is that it is drafted by engineers, project managers (and lawyers, of course) to ensure the effective management of a project. Every clause in the contract is crafted to add to effective project management rather than detract from it.

If I had to explain the difference between NEC and other contracts in one sentence, I would say, ‘It deals with risk and change by focusing on management rather than blame’.

That is not to say ‘blame’ is not important (it is probably better to say ‘liability’). In that regard, an NEC4 contract is quite traditional insofar as it has clear allocations of liability and clear obligations that are not entirely dissimilar to what we are used to with the likes of GC21 or AS4000.

So, if you were to use an NEC contract but not collaborate, you’d still get an outcome that might be similar to the one you would get using GC21 or AS4000.

But NEC allows and stimulates those involved in the project to collaborate, aligning the best interests of the parties with the best interests of the project. If we recognise that and actively collaborate, managing risks and change without putting liability front and centre, we will get a better outcome than if we continue to blame each other.

That is easier said than done, and how we collaborate is a subject for a separate paper. But as Peter Drucker once said, ‘Culture eats Strategy for Breakfast’; culture and behaviour are much more important to a project’s success than the terms and conditions we choose to use.

NEC is the only contract that will support collaborative behaviour.

Before we go into more detail, there is one more thing I want to say. One of the ways that NEC helps us collaborate is by promoting clarity, and one of the ways it does that is a regime that requires the Project Manager (Superintendent in AS terms) to ‘accept’ submissions from the Contractor.

For example, the Project Manager is required to accept:

• The programme (so everyone is working on the same common document)
• The design (so everyone knows what needs to be built)
• Subcontractors (to ensure the project can be provided effectively)

and so on.

None of those ‘acceptances’ change the liability between the Parties. The Contract remains liable for performance even if the Project Manager accepts the programme, the Contractor remains liable for the design even when accepted by the Project Manager, and the Contractor remains liable for the performance of Subcontractors, even after acceptance.

Acceptance only ensures clarity and establishes common ground.

With that out of the way, let’s move on.

Amendments for Australia

NEC4 contracts do not need to be amended to work in Australia*.

There, I said it (albeit with an *).

The ‘*’

One of the features of the NEC suite is its flexibility. Most contracts contain ‘Secondary Options’, bolt-on clauses that allow a specific contract to be customised with additional clauses. These clauses are called X, Y, and Z clauses, and the Y clauses contain country-specific amendments that make an NEC contract compliant with various legislation in that country. 

Usually, this is limited to amendments to comply with the security of payment legislation, but some go beyond that and deal with things like project bank accounts and third-party rights.

Currently, Y clauses are available for:

• UK
• Ireland
• Northern Ireland
• Singapore

and, of course, Australia. Hong Kong could be on the list, but they are lucky enough to have their own version of the contract.

The Y clauses in Australia deal only with the Security of Payment legislation and are generally not considered adequate. 

We like our contracts to have detailed payment processes that ensure we are completely compliant with legislation and, to the extent allowed by the legislation, make it as difficult as possible for the Contractor to get paid and as easy as possible for the Client to avoid payment.

This is not ideal, but it seems unavoidable.

On the subject of amendments, we are also uncomfortable with the sparse words used by NEC in other parts of the contract. In my experience, lawyers also like to amend:

• The definitions – adding many more
• How to interpret the contract
• Communications
• Design liability and design submission
• Intellectual Property Rights
• Assignment
• Change in Control
• Confidentiality
• Deemed acceptance

We often claim we want to use NEC to collaborate with a delivery partner and then present them with an amended contract that only just falls short of deleting clause 10.2 (the collaboration clause). 

It’s collaboration in name only.

Let’s take a look at how the NEC4 ECC is structured.

NEC4 ECC

This is the head contract between the Client and the Contractor and is has six different types: A, B, C, D, E, and F. 

The choice of these ‘main Options’ dictates the parties’ pricing method, payment and financial risk. 

• Option A is a lump sum comprising an ‘activity schedule’. 
• Option B is remeasurable based on ‘bills of quantities’. 
• Options C and D are the ‘target’ cost versions of the above. 
• Option E is a cost-plus contract. 
• Option F is a management contract. 

There is no ‘design and construct’ version, but it can be made so by including the obligation to design within the Scope document. Often, secondary option X15 is used when the Contractor designs as it deals with design liability and insurance.

The ECC (as with any contract in the suite) can be further customised by using: 

• Dispute resolution options (W clauses) 
• Country-specific options (Y clauses) 
• Secondary option clauses (X clauses) 
• Additional conditions of contract (Z clauses) 

The options to select will depend on a variety of factors, including: 

• The type of project 
• The level of detailed design information 
• The appetite for risk 
• The size and complexity. 

What else makes up the contract?

Many other documents make up the Contract; let’s look at some of them: 

Contract Data 

The Contract Data contains information about the specific requirements of a contract for a particular project. They comprise two parts: Part One and Part Two. 

Part One is the Client’s data, which is generally completed for inclusion in the request for tender. 

Part Two is generally the Contractor’s data, which the Contractor completes as part of its tender submission. 

Scope 

Scope is the specification on steroids. This document describes the works and states any constraints on how they will be done. The contract also contains over 70 direct references to further information in the Scope. 

Many amendments that are made to an NEC contract should instead be included in the Scope. As a general principle, if an amendment is needed and concerns how the Contractor carries out the work, then it should be in the Scope, not the contract. 

Site Information 

This document contains information about the Site before the works commence. It generally describes what the Contractor is obliged to allow in its price and programme. 

If ground conditions are found to be worse than those described in the Site Information, then it could be a compensation event if, among other things, they were unforeseeable. 

Therefore, a more detailed and accurate Site Information document will reduce the Client’s liability.

Other Documents 

Other documents include: 

• Pricing documents 
• Performance bonds 
• Guarantees
• Programmes and so on. 

Some of these exist when the contract is made; others come into existence afterwards. 

Let’s now look at some of the key provisions:

Key Provisions of NEC4 ECC

We can break down the key provisions of this contract into five categories:

• Social Management – Collaboration
• Project Management – Accepted Programme
• Risk Management – Early Warning
• Commercial Management – Defined Cost
• Change Management – Compensation Events,

Let’s take a look at each:

Social Management – Collaboration

‘The Parties, the Project Manager and the Superintendent act in a spirit of mutual trust and cooperation’ (clause 10.2)

This underpins all NEC4 contracts. However, NEC4 is more than just this bare statement of intent. 

Trust and cooperation are essential in construction and project management, where many tasks and challenges might, and usually do, arise. 

Trust can only be built by acting consistently, and in the way we promised to act (i.e. in accordance with the contract). 

The Parties and the Project Manager must consistently do what the contract says so that the other party can anticipate their behaviour. 

We cannot put the contract in the bottom drawer and forget about it, this is not how we collaborate.

How do we collaborate?

NEC4 supports the practical aspects of collaboration through the various provisions in the contract, such as: 

• Early warning notices 
• Early warning Register 
• Compensation event notices 
• Accepted programme 
• Contractor’s share 
• Adjudication
• Sanctions

In short, if you are doing everything the contract requires you to do, you will be collaborating. 

But more than that, your best interests are aligned with those of the project. So, suppose a contractor wishes to maximise their profit on a project. They achieve that by managing risk by issuing early warning notices at the appropriate time, dealing with change efficiently by complying with the compensation event process, and efficiently managing everyone involved in the project through a common, Accepted Programme.

In other words, do all the things the contract requires a Contractor to do to be collaborative.

The NEC4 contracts use a carrot-and-stick approach, motivating the parties to collaborate and sanctioning them if they do not. 

A closer look at the sanctions, however, reveals that many impact both parties. For instance, a failure by the Contractor to submit an updated programme means that it loses its right to claim some compensation events and its right to quote for compensation events. 

That sounds like a sanction against the Contractor, but on the flip side, the Project Manager must now assess the cost and time impact of every compensation event based on their own information. 

The Project Manager might want to avoid that extra work, and the best way to do that is to work with the Contractor to update the programme. 

Both parties are, therefore, motivated to have an Accepted Programme in place. 

You could say ‘collaborate or else’, or maybe it’s better to say ‘collaborate, because it is in your best interest to do so’.

Project Management – Accepted Programme

The programme, the plan, the schedule, whatever you want to call it, is one of the most important management tools, the ‘beating heart’, of a construction project.

The NEC4 ECC contract calls it a ‘programme’ and considers it to be of such importance that it requires the Contractor and the Project Manager to work together to produce a single, agreed, extensive baseline programme and to update that programme throughout the project regularly. 

In addition, NEC4 ECC states in detail what must be included in a programme, when it must be submitted, what the Project Manager must do with it once it is submitted, and the consequence of failing to comply. 

Use of the programme 

The detailed programme requirements set out in the contract allow it to be used: 

• To assess the Contractor’s ability to carry out the project with the intended resources and within the contractual time frame, 
• To demonstrate that all the contract needs and requirements have been considered, 
• To assess the Contractor’s actual progress against that planned, 
• To assess the effect of compensation events upon Completion and Price, 
• and last but not least, as an essential management tool. 

The Accepted Programme 

The concept of ‘Accepted Programme’ means that we have a single, common programme that both parties (and all other stakeholders) are working on. 

Its goal is to promote good project management by ensuring that all project participants agree and understand what they need to accomplish and by when, and by supporting the timely and prospective assessment of compensation events as they occur. 

To achieve these aims, numerous prescriptive procedures governing Accepted Programmes are included in the contract. 

The starting point is the submission of regular programme updates to the Project Manager.

The Project Manager then has two weeks to respond, either rejecting or accepting a programme.

The reasons for rejecting are:

• The plans are not practicable
• It does not show the information needed by the contract
• It does not represent the Contractor’s plans realistically
• It does not comply with the Scope

The Project Manager and the Contractor should already be working closely together, so nothing in an updated programme should be a surprise; accordingly, whilst the contract stipulates up to two weeks for a response, the aim should be a much shorter period.

The Accepted Programme is designed to promote collaborative working and conflict resolution. It specifically provides a mechanism for assessing delay (through compensation events) in real-time without the requirement for a lengthy and costly forensic delay analysis. 

Risk Management (Early Warning)

The Early Warning process is a risk management tool. 

It is common sense that managing risk (whoever’s liability it might be) as soon as it arises is less costly and more efficient than dealing with the consequences later. 

It is also common sense that both parties managing the risk together would produce a better outcome than one party in isolation. 

Clause 15 of NEC ECC clearly specifies the circumstances under which the parties are required to notify an early warning of a risk. An early warning notice must be sent as soon as the sender learns of ‘any matter’ that could impact the total of the prices, delay completion, or impair the performance of the works. 

In addition, the Contractor may notify early warning of a risk in connection with any matter that may increase its final cost. 

The Early Warning Register 

Notified early warning matters are documented by the Project Manager in the Early Warning Register. This serves as the central repository for all notified risks that still require mitigation and management. 

Early warning notices should not be issued to assign responsibility or liability. When dealing with issues raised by an early warning notice, the emphasis should be on agreeing on the steps needed to remedy the issue rather than assigning blame. 

The obligation to warn does not apply only to matters that may result in compensation events but to all matters, including mistakes made by either party if those mistakes affect the time, cost or quality. 

After the matter is notified and added to the Register, either party may instruct the other to attend an Early Warning Meeting. In any event, the meetings are held regularly as set out in the Contract Data. 

The meeting is not a blame game. 

Instead, the individuals attending are required to collaborate to propose and consider recommendations to minimise or decrease risk, explore solutions, and determine how to proceed with the project. 

Following the meeting, the Project Manager revises the Register to record the decisions and instructs any changes to the Scope that may be required. 

Commercial Management – Defined Cost

Defined Costs are costs incurred (or forecast to be incurred) by the Contractor which the contract says can be used to: 

• Assess the PWDD (main Options C, D, E and F) 
• Assess the value of compensation events (all main Options) 

providing they are not ‘Disallowed’. 

The contract contains a process to check whether a cost is a Defined Cost. You may consider that the contract acts as a ‘filter’ allowing costs through which are Defined Costs and stopping those that are not. 

Costs that are not Defined Costs are deemed to be included in the Fee percentage. 

The first part of the filter states that for a cost to be a Defined Cost, it must be incurred (or forecast to be incurred) by the Contractor in Providing the Works. Any cost incurred by the Contractor doing things unrelated to or not Providing the Works is not a Defined Cost. 

The second part of the filter is that a cost must not be excluded by a clause in the contract. For instance, the cost of retesting works that have previously failed a test is excluded and, accordingly, is not Defined Cost. 

The third and most important part of the filter is the Schedules of Cost Components (Short or full, depending on the main Option).

The Schedule is a set of clauses defining which costs are Defined. You can imagine it as a series of pigeon holes which a cost must fit into. If a cost fits the definition, then it is a Defined Cost; if it doesn’t, then it’s deemed to be included in the Fee. 

Disallowed Costs 

These are costs that would pass the above tests and are found to be Defined Costs but are disallowed for one of the reasons stated in the contract.

Disallowed Costs cover a variety of circumstances, from a cost claimed by the Contractor not being evidenced by its records to costs incurred because the Contractor did not follow a procurement process in the Scope or did not give early warning. 

Change Management – Compensation Events

NEC4 ECC takes a very different approach to the management of change than many other traditional contracts. 

‘Compensation events’ are the primary method by which the Prices, the Key Dates and the Completion Date are changed. Each event comprises the entire cost and time effect in a single assessment. We no longer have separate claims for variations, extension of time and damages; they are all wrapped up in one assessment. 

Moreover, the event is notified, priced, assessed and implemented (finalised) within a defined and short timescale, ensuring that changes are dealt with quickly and effectively whilst it is fresh in everyone’s mind. 

Gone are the days of sweeping up variations at the end of the project. 

Compensation events also set the risk profile for the project. If an event is listed in the contract as a compensation event, then it is the Client’s risk; if it is not listed, then it is the Contractor’s risk. 

In addition, compensation events work with the early warning and programme provisions to ensure the Contractor complies with its obligations, for example:

• If the Contractor fails to give early warning of a matter that later becomes a compensation event, then the value of the compensation event may be reduced. 
• If the Contractor fails to update the programme, then the Project Manager assesses the compensation event based on its own information. 

The process comprises: 

• Notification
• Contractor’s assessment and quotation 
• Project Manager’s acceptance or assessment 
• Implementation

Notification 

For compensation events arising from an action of the Project Manager, the Project Manager is obliged to notify and instruct the Contractor to provide a quotation. For example, if the Project Manager issues an instruction to change the Scope, they also notify it as a compensation event, if they believe it to be one. 

For all other compensation events, the Contractor is obliged to notify. For these other events, the Contractor must notify within 8 weeks of becoming aware of the event, otherwise there will be no change to the Prices, the Key Dates or the Completion Dates. This is often known as the ‘time bar’. 

The Contractor can also notify events that the Project Manager should have notified but didn’t. 

If the Contractor notifies, the Project Manager must respond within 1 week (extendable by agreement). That response is ‘yes, it is a compensation event, please provide a quotation’, unless: 

• The event is the fault of the Contractor 
• The event has not happened or is not expected to happen 
• The event has not been notified within the time in the contract 
• The event has no effect on Direct Cost or time, or 
• The event is not a listed compensation event 

Contractor’s Assessment and Quotation 

The Contractor provides a quotation within 3 weeks of being instructed to do so, extendable by agreement. 

When instructing a quotation, the Project Manager must state assumptions on which to base the quote if the effects of the event are unclear and may instruct alternative quotations after discussion with the Contractor. 

If the actual conditions are different from those assumed by the Project Manager, then it is another compensation event. Otherwise, the assessment is not changed if the Contractor’s assumptions are wrong. 

The Contractor may submit alternative quotations even if not instructed by the Project Manager to do so. 

At the time of instruction of the quotation, the Project Manager may also state that the Contractor failed to give an early warning. If the Project Manager states this, then the event is assessed as if the Contractor had given early warning. 

The quotation comprises the changes to the Prices, Key Dates and the Completion Date and contains sufficient details to enable the Project Manager to decide whether it is correct or not. 

If the compensation event has an impact on time, the quotation includes details of the impact upon the current Accepted Programme. This could be by submission of a new programme, but does not have to be. 

The change to the Prices is assessed as the impact of the event on Defined Cost, i.e.: 

• The actual Defined Cost of work already done 
• The forecast Direct Cost of work not yet done 
• Plus the Fee
  

The dividing date between forecast and actual is the date of the instruction (if there is one) or the date of notification (if there isn’t) 

The dividing date also helps us in assessing the time impact. The delay to the Completion Date: 

• Is assessed as the length of time that, due to the compensation event, planned Completion is later than planned Completion shown on the Accepted Programme current at the dividing date 
• The relevant programme on which the delay is assessed is brought up to date before making the assessment. 

The assessment includes allowance for risk which has a significant chance of occurring and are not other compensation events. 

Assessments are based upon the assumptions that 

• the Contractor reacts competently and promptly to the compensation event and takes all reasonable steps to limit, reduce and otherwise mitigate the effects of the compensation event, 
• any Defined Cost and time due to the event are reasonably incurred. 

Project Manager’s assessment 

The Project Manager cannot unilaterally decide to assess a compensation event; Project Managers can only make their own assessment when: 

• The Contractor has not submitted its quote within time 
• The Project Manager decides the Contractor has not assessed compensation event correctly and decides to do it itself 
• The Contractor has not submitted an update to the programme within timescales required by the contract 
• The Project Manager has not accepted Contractor’s latest programme 

The Project Manager is obliged to make their own assessment within the time allowed for the Contractor to provide a quotation for the same event. 

If there is no Accepted Programme or no update, then the Project Manager uses their own assessment of the programme to determine the impact on the Completion Date. 

Implementation 

Implementation means the compensation event assessment is finalised and cannot be undone except through the dispute resolution process. 

A compensation event is implemented when: 

• The Project Manager accepts the Contractor’s quotation 
• The Project Manager notifies the Contractor of its own assessment or 
• The Contractor’s quotation is treated as having been accepted 

Failure of the Project Manager 

If the Project Manager fails to: 

• Respond to a notice of a compensation event 
• Respond to a quotation 
• Make their own assessment 

the Contractor notifies the Project Manager of that failure, and if the Project Manager continues to fail for a further 2 weeks, then the submission by the Contractor is deemed to be accepted. 

Other provisions in the contact

The NEC4 ECC is much more than the above, there are also provisions for:

• Dispute resolution/escalation
• Communication protocols
• Design management
• Acceleration
• Defect and quality management
• Payment
• Ownership of materials
• Insurance
• Termination,
• Clear liability allocation.
• Price escalation
• Parent company guarantee
• Separable portions
• Early completion bonus
• Liquidated damages
• Information modelling
• Performance Bond
• Retention
• KPI
• Early Contractor Involvement

In fact, if your question is: ‘I can do [insert thing here] under GC21/AS4000/[some other contract], can I do it under NEC4 ECC?’

The answer is almost certainly yes.

If you need more information, please contact me.