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THE NEW ENGINEERING CONTRACT: THE SUITE OF CONTRACTS

1. The need for a new form of contract

In 1985 the Institution of Civil Engineers in the UK reviewed contract strategies in use
in the engineering and construction industry. The main recommendation which
emerged was to develop a new form of contract.

Two key reasons for this were that:

most existing forms had their origins in days when modern principles of
project management were almost unknown

clients wanted a greater certainty that their projects would be delivered to their
objectives of cost, time and fitness for purpose.

Other reasons included the unhelpful proliferation of contract forms across the
industry, the fact that few projects were now single-discipline (yet most contract
forms were developed by professional institutions representing a single branch of the
industry) and the high level of the incidence of disputes together with the associated
waste of resources.

It was agreed to develop a new form of contract with the three main objectives:

stimulus to good management

flexibility of use (for different contract strategies, multi-disciplinary projects
and for work in both the UK and internationally)

clarity and simplicity.

2 The Development of NEC

The initial step was the preparation of a 'specification' for the new contract. This
included the principles upon which the new form was to be based and a list of the
main functions which the clauses were to perform.

Wide consultations on the specification were held during 1988, leading to the
production of a 'consultative version' of NEC. This was published in January 1991.
Further wide consultations (including the trial use of the form by five clients, three of
which were outside the UK) led to two further years of refinement of the document.

The New Engineering Contract was launched in March 1993. Feedback from users
and the publication of the Latham report combined to produce pressure for a Second
Edition of the NEC with a change of title for the main contract to broaden its appeal.
This was published in November 1995 with the title of:




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The Engineering and Construction Contract (ECC)

There is now extensive and successful experience of its use, especially in the UK and
South Africa, and also in other countries such as Hong Kong, Belize and Thailand.
Further development of NEC is being managed through the NEC panel. The NEC
Users Group acts as a forum for users of the contract to exchange ideas and
experiences. Although both of these groups are established by ICE their membership
represents all sections of engineering and construction.

The ECC is now one of many contracts in the NEC family of contracts. Other
contracts include:

NEC Engineering and Construction Subcontract

NEC Engineering and Construction Short Contract

NEC Short Subcontract

NEC Professional Services Contract

NEC Adjudicator's Contract

NEC Term Service Contract

NEC Framework Contract

All these contracts were published as part of NEC3 in June 2005. They all follow the
same basic principles and can be used individually or together to cover all contractual
relationships in the engineering, construction and building industries.

3 The ECC Documents

The ECC is published in ten volumes. The essential core documents are:

the ECC complete text including all six major options the Black Book

the ECC sub-contract

the Guidance Notes

the Flow Charts (which are used to develop and validate the logic of the
clauses).

The other six volumes which provide an integrated version of the text which is
specific to each of the six major options:

Option A a priced contract using Activity Schedules

Option B a priced contract using Bills of Quantities

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Option C a target cost contract using Activity Schedules

Option D a target cost contract using Bills of Quantities

Option E a cost-reimbursable contract

Option F a management contract

These six main options can all be used with or without design by the Contractor.

4. The Structure of the ECC

The ECC is divided into five main parts. These are:

(a) Core Clauses

These causes apply whichever of the six main options is chosen. They
comprise over 90% of the text for each main option and are sub-divided into 9
sections covering the issues which are common to all engineering and
construction contracts.

(b) Main Options

These are listed in section 3 of these notes. One of them must be chosen by the
Employer or his advisors - there is no default mechanism in the ECC to fall
back to a particular payment strategy. The strategy for choosing the precise
form of the contract starts with this decision.

A significant part of the decision on which main option to choose is about the
broad allocation of risk between Employer and Contractor.

(c) Secondary Options

These options (X1 to X20) cover matters which are not required in every
contract. It is not necessary to use any of them, although this would be an
unlikely outcome. They include options which are predominantly used in
specific circumstances or for particular types of work. For example multiple
currencies on international contracts or low performance damages on process
plants.

The Trust Fund Option has been deleted from the 3
rd
Edition as it has never
been used.

Many of these options provide a choice of specific risk allocation.

(d) Schedules of Cost Components (SCC)

These schedules define which costs are allowable as 'Defined Cost' under the
ECC. In Options C, D and E they apply only to the Contractor and not his
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subcontractors. In these Options the definition of Defined Cost includes a
component for payments due to subcontractors.

Any components of cost not listed in the schedules should be allowed for by
the Contractor when setting his 'Fee'.

In Options C, D and E Defined Cost plus Fee is the main or sole basis for
payment and is also used in the assessment of compensation events.

In Options A and B the forecast of Defined Cost plus Fee is only used in the
assessment of compensation events.

Option F is the only main option to which the schedules do not apply.
The full SCC is part of the contract only when Option C, D or E is used. The
Shorter SCC will always be used for the assessment of compensation events
under Options A and B. It may be used (see clause 63.15) for the assessment of
compensation events under Options C, D or E.

(e) Contract Data

This is in two parts. Part one is completed by the Employer and Part two by the
Contractor. All contract specific information is entered here. This avoids the
need to change text in any of the clauses of the ECC.

In the conditions of contract terms identified in the Contract Data are given in
italics (Clause 11.1).

5 ECC Design Features

A summary of how the main aims of NEC have been achieved is given below:

(a) Good management

This is perhaps the most important characteristic of NEC. Every procedure has
been designed so that its implementation should contribute to the effectiveness
of management of the work. Use of the NEC is intended to lead to a much
reduced risk of cost and time overruns and of poor performance of the
completed projects to the Employer and to a much increased likelihood of
achieving a profit for the contractor, subcontractors and suppliers.

The NEC is based on three principles:

foresight applied collaboratively mitigates problems and shrinks risk

clear division of function and responsibility helps accountability and
motivates people to play their part (new roles for Project Manager, who
represents the Employer, Supervisor and Adjudicator)

people will be motivated to play their part in collaborative management
if it is in their commercial and professional interest to do so.
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Some examples of how these principles have influenced the drafting of
contract terms are given below.

Programme

Many of the detailed procedures rely on the fact that an up-to-date and realistic
programme maintained by the Contractor is used in joint decision-making
between him and the Project Manager (who has considerable authority on
behalf of the Employer). The use of the programme is defined in some detail
and in such a way that the Contractor is motivated to keep it up to date and
realistic.

Compensation Events

These are events which can lead to extra payment or a delay to the Completion
Date. The Project Manager may ask to be presented with options for dealing
with the problem, for example a minimum cost solution or a minimum time
solution. Their valuation is based on a forecast of the effect of the problem on
the actual cost to the Contractor and is provided in the form of an advance
quotation by the Contractor whenever possible. This quotation includes a Fee
for profit and overheads.

The effects are that the Employer can make decisions with reasonable
certainty, the Contractor's eventual payment is secure, the risk he carries is
tolerable and he is motivated to manage the situation efficiently. An important
by-product is that few issues of valuation or extensions of time are left to be
settled after the event.

Sub-contracts

The ECC sub-contract uses the same text as the main contract and provides
almost back to back protection for main contractors. Sub-contractors cannot be
nominated which eliminates the clouding of responsibilities which nomination
causes.

Early Warning (Clause 16)

Both Project Manager and Contractor are required to give early warning to the
other of any matter which could affect the price, the completion date or the
performance of the works. The procedure is designed to motivate the parties to
ensure, as far as possible, collaborative problem solving, which leads to
prompt decisions and actions and mitigates the adverse effects of the problem.

In the 3
rd
Edition Clause 16 has been extended to include a risk reduction
meeting and a process for revising the Risk Register.




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Schedule of Cost Components

The clear division between Defined Cost and Fee removes uncertainty and
virtually eliminates the need for argument over what costs are allowable when
a variation or other compensation event occurs.


(b) Flexibility

The ECC is intended to be used for engineering or construction work
containing any of the traditional disciplines such as civil, electrical, mechanical
and building work. It can be used for a range of types of contract. It is intended
for use in the UK and can easily be adapted for use in other countries.

In order to achieve uniformity across different sectors of construction some
changes of terminology from traditional civil engineering contracts have been
necessary. For example the phrase 'temporary works' has disappeared and the
word 'plant' is given the use which is customary in other engineering sectors.

Some examples of flexibility in ECC are:

Main options for priced contracts, cost-reimbursable contracts, target
cost contracts and management contracts.

The financial control document can be either a bill of quantities or an
activity schedule permitting 'milestone' payment or an openbook
account.

It can be used where the Contractor has no design responsibility, some
design responsibility or full design responsibility, without any change
to the ECC clauses.

A selection of secondary options which include price fluctuations,
multiple currencies, retention, low performance damages and parent
company guarantees, among others.

(c) Clarity and simplicity

The ECC is written in ordinary English and long sentences have been avoided
where possible. It has been necessary to retain a few legalistic phrases, mainly
in the insurance area. It is arranged and organised in a structure which helps
users to gain familiarity with its contents and has avoided cross-referencing
within the text. The main benefits are intended to be:

ease of understanding

less likelihood of misunderstanding or doubt about interpretation
easier transfer into use by those whose first language is not English
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easier and more effective training in its use
Some particular features are:
actions by the parties are defined precisely
time periods are set for all important actions and they are deliberately
set tightly to motivate speedy responses

the bases of decisions by the Project Manager are set down resulting in
the minimum use of words like 'fair', 'reasonable' and 'opinion'.

a single procedure for assessing compensation events which includes
an assessment of both cost and time for all events

almost all circumstances which may give rise to additional payment to
the Contractor are identified in one list of compensation events

the amount of text needed to give effect to the options is small

a separate section for all Contract Data which is specific to the
particular contract.

6 Dispute Resolution

The contract has been designed to minimise the incidence and severity of disputes.
The ECC provides clear procedures for resolving problems and achieving fair and
speedy evaluation of compensation events with benefits to both parties. Where
agreement is not possible the ECC aims to avoid lengthy and costly procedures.

An Adjudicator, selected at the outset of the contract and named in it, is used for
dispute resolution. He has a relatively short period in which to make his decision. His
costs are shared equally between the parties which should motivate fewer references to
the Adjudicator and demotivates against the temptation to submit spurious issues to
him.

The ECC has two forms of dispute resolution. The standard ECC Option is W1.
Option W2 has been specifically introduced to be used only when the contract is
carried out in the UK and is a construction contract within the definitions of the
Housing Grants, Construction and Regeneration Act 1996.

7 Other Forms in the NEC Suite

(a) The Professional Services Contract

This is based very closely on the ECC. It has been drafted in the same manner,
uses very similar language and, where the same provisions apply, identical
clauses have been used.

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The core clauses for the PSC are the same as the ECC except that Section 2
becomes 'The Parties main responsibilities' and Section 4 becomes 'Quality'.

The PSC is used for consultants providing professional services such as a
project manager, supervisor or designer. Its use is not limited to projects where
other NEC contracts are being used.

The PSC requires important information to be provided separately. The most
critical document is the 'Scope' (equivalent to Works Information in the ECC).
The Scope is information which specifies and describes the services and states
any constraints on how the consultant provides the services.

Four types of payment mechanism are available through the main options:

Option A: Priced contract with activity schedule (a Lump sum for each
activity)

Option C: Target contract

Option E: Time based contract (cost-reimbursement)

Option G: Term contract (a priced task schedule for an agreed period of
time)

One of these must be chosen. The Employer may choose any of the 15
secondary options. The Contract Data is in two parts, as with the ECC.

There is no separate schedule of Cost Components as costs are defined in
terms of staff rates and expenses.
A percentage fee type of contract was carefully considered but rejected mainly
because of the lack of incentive and the fact that the cost of construction is not
related to the cost of professional services (see P2 of the PSC Guidance Notes
for elaboration).

(b) ECC Subcontract

This is back to back with the ECC, but with some minor amendments.

The Employer, P.M. and Supervisor are combined into one (the Contractor).
All the ECC main options are retained except Option F. Time periods for
sending information to the Contractor are less than those in the ECC to allow
time for the Contractor to incorporate or process the information.

(c) The Short Contract

This is designed for use with contracts which:

do not require sophisticated management techniques

comprise straightforward work and
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impose only low risks on both the Employer and Contractor.

The Short Contract package includes the conditions of contract and also forms
which, when filled in, make up a complete contract.

(d) The Short Subcontract

This is a subcontract version of the Short Contract. Relevant guidance is
included on pages 20 to22 of the Short Contract Guidance Notes. It can be
used as a subcontract to the ECC and to the Short Contract.

(e) The Adjudicator's Contract

This is for the appointment of an adjudicator for any contract in the NEC suite.
The NEC contracts require an adjudicator to be named in the contract.

(f) The Term Service Contract

This should be used for the appointment of a supplier for a period of time.to
manage and provide a service. The service may or may not be related to
construction. It is not designed for managing a project.

(g) The Framework Contract

This should be used for the appointment of one or more suppliers to carry out
construction work or to provide design or advisory services on an as
instructed basis over a set term.







Professor J G Perry
School of Engineering
University of Birmingham

2012