NEC4: Engineering and Construction Contract Option C: Target Contract with Activity Schedule

Product Information

Clause 81 has been amended to make the contractor's liabilities more clear, in contrast to the previous wording which assigned "all risk that the employer [now client] does not have" to the contractor. However, this raises the question about whether the client or the contractor will be deemed to carry anything not listed as either a client or contractor liability. Defined cost is as stated for options A and B in the short(er) schedule of cost components (SSCC) while in options C, D and E it is as stated in the schedule of cost components (SCC). At 11.2(19), there is a new definition of subcontractor which excludes labour suppliers. This had been an issue in practice. Compensation Events– these are events which, if not arising due to the Contractor’s fault, allow the Contractor to be compensated for any consequent change to the Prices, Completion and/or Key Dates. This section of the contract provides the main list of compensation events, and details NEC’s requirements in respect of notification, quotations, assessment, proposed instructions, and implementation of compensation events. Further provisions are included under the Main Option clauses (detailed below), and other compensation events may be found elsewhere in the NEC Contract, such as in the Contract Data. Caution: many NEC contracts are amended to remove compensation events (such as Clause 60.1(19), that relates to prevention) and so it is imperative that the Contractor fully review any contract amendments (typically in the ‘Z clauses’– see below). Secondary Options Y(UK)1 – project bank account, Y(UK)2 – ref. the ‘Construction Act’, and Y(UK)3 – The Contract (Rights of Third Parties) Act 1999.

NEC, Additional public sector Z clauses required to comply with the requirements of The Public Contracts Regulations 2015, accessed 10 January 2023 The NEC disallowed costs provisions have been drafted carefully as part of the overall allocation of risk and to achieve a commercial balance which motivates both parties and aligns their interests. If not used correctly or if amended, that commercial balance is disrupted and the incentives for better performance under ECC Options C, D and E contracts will be less effective. The previous 10.1 is now split in two. Mutual trust and cooperation is now at 10.2 while 10.1 simply states the obvious: that the parties must comply with the contract. This arrangement forces both parties to work more collaboratively as the financial success is shared by both client and contractor. Similarly, the financial failure of a project is shared. This collaborative working can reduce disputes and accelerate innovation.

The option C contract allows the financial risks to be shared between the parties (employer and the Contractor) which motivates the contractor to deliver the works in the most cost efficient way. The contract data part two enables the client to allow the tenderer to state different overhead percentages for different locations. The preamble to the SCC makes it clear that an amount is included ‘only in one cost component’. Hence ‘support people’ are covered by the overhead, and so not directly paid under SCC 1. This will include accounting staff and other staff normally considered an overhead. To avoid potential disputes over the intended coverage of this charge, clients may want to make clearer in the contract the staff intended to be covered by the overhead percentage and so not directly billable under SCC 1.

This option includes a target contract linked to an activity schedule. The target contract contains a price commonly referred to as a target cost. The NEC4 Engineering and Construction Contract (ECC) Option C is the target cost main works contract with an activity schedule. It can include any level of design, and is ideal for more complex or larger projects where the client and contractor are willing to share project financial risk in a fully collaborative way. Client termination for any reason now has its own secondary option clause, at X11. Clause 91.8 creates an additional right for client to terminate due to corruption. Option W: resolving and avoiding disputes The NEC4 Alliance Contract (ALC), published initially in a consultative format, was created to support clients who wish to take a step forward by fully integrating the delivery team for large complex projects. This core clause also contains new clauses dealing with assignment and disclosure/confidentiality. These are welcome additions, but as the clauses are fairly short clients may wish to replace them with their own bespoke 'z' clauses, as is currently the case. Core Clause 3: timeDisallowed cost is new to NEC4 PSC and defined in a way similar to that in the ECC. The definition needs close attention, but two key elements are costs, ‘not justified by the Consultant’s accounts and records’, and those, ‘incurred only because the Consultant did not … give an early warning which the contract required it to give’. These are two simple drivers for the consultant to keep good records and do what it says in the contract. The new Core Clause 4 replaces the 'testing and defects' clause in NEC3. It introduces a new obligation for the contractor to produce a quality management system, set out in a quality policy statement, and a quality plan. These must be submitted for acceptance by the PM and comply with the scope. So the warning note under Option C is that while cost management is important to interim valuations and cash flow during the project the proper and accurate management of value, in terms of identifying, pricing and agreeing change is also vital to a successful project outcome. GMH Planning Ltd., NEC4 Term Service Contract – review of changes from NEC3, and NEC4 Engineering and Construction Subcontract – review of changes from NEC3, both accessed 28 November 2022 The NEC4 FMC suite includes the Facilities Management contract (FMC), subcontract (FMS), short contract (FMSC) and short subcontract (FMSS). [15]

The risk register always confused people who thought it was meant to cover contractual risk. Clause 15 replaces this with a new 'early warning register', which must be issued within two weeks of the starting date. Risk reduction meetings have been replaced by early warning meetings, which should occur regularly, and can now include subcontractors. Urgent meetings can also be called for specific risks. That sharing of risks under ECC Option C is based on the assumption that both parties are incentivised to work together for the benefit of the project and assist each other to increase any gains and avoid overspend. Disallowed costs sit outside this mechanism and are borne in full by the contractor, so the extent of disallowed costs will have a substantial impact on the underlying commercial bargain. Amendments to disallowed costs The NEC4 Design, Build and Operate Contract (DBO) allows the procurement of a more integrated whole-life delivery solution. It combines responsibility for design, construction, operation and/or maintenance, procured from a single supplier.

The Schedule of Cost Components (and Short Schedule of Cost Components, which is only used in NEC4 for Option A & B compensation events) to be used in respect of Defined Cost and the assessment of compensation events, and Disallowed Cost” is defined by Clause 11.2(25) and are costs that the Project Manager has decided are either: Defined Costs (actual costs) are assessed by the Project Manager during the course of the works by auditing the Contractor’s accounts. If the final PWDD is less than the target cost the Contractor will receive a pre-agreed share of the saving depending on the ratio. If the PWDD, it is greater than the target cost, the Contractor will pay a share of the difference (again at the agreed ratio).

Today we highlight the practical differences in estimating and cost management under the most commonly used options of the NEC3 contract family, namely the fixed price ‘option A : Priced contract with activity schedules’ and ‘option C : target contract with activity schedules.’ Throughout the works the target cost is adjusted to reflect any compensation events which may arise.Originally contracts in the civil engineering and construction industries were bespoke and drafted by Chancery pleaders using their knowledge of leases rather than building processes. In 1879, Royal Institute of British Architects for construction projects created RIBA forms which lead to the Joint Contracts Tribunal, JCT forms. For civil engineering the need for a formalized approach to contracts led the Institution of Civil Engineers (ICE) to produce a formalised set of conditions of contract. In 1986, the ICE commissioned the development of a new form of contract as it was felt that there was a need for a form that had clearer language, clearer allocation of responsibilities and reduced opportunities for contractual “gamesmanship”. In 1991, this resulted in a consultative form of the New Engineering Contract form of contract. The first edition was published in 1993. [8] Wider use of the NEC was recommended by the Latham Report in 1994. [ citation needed] In addition, contract data has been simplified and the schedule of cost components has been changed