Adversarial behavours on troubled projects can lead to project delays and cost overruns. This article examines how the NEC standard of contract aims to avoid disputes in major deliveries. 

What is NEC?

NEC stands for New Engineering Contract, developed in 1993, to overcome some of the chronic problems of traditional contract forms in the then construction industry. Some of these problems included adversarial client and contractor relationships, highly legal and often ambiguous contract clauses and the transfer of risks to the weakest party during negotiations.

Why NEC?

Since its inception in 1993, NEC has been instrumental in delivering some key mega projects on time, within budget and meeting the stakeholders’ objectives of value for money. NEC4 is based on the philosophy of value co-creation, which in-turn is based on mutual trust, transparency and building long lasting relationships by collaborative sharing of risk and reward.

This is contrary to adversarial, secretive and short-term approaches to managing projects.

At the heart of NEC are two fundamentals of modern management, innovation and management of uncertainty.Value co-creation only happens when all stakeholders are actively engaged in identifying and solving problems as opposed to traditional contracts where clients are, for the most part, a passive audience. NEC4 aims to avoid the “us versus them” approach to execution of project.

Along with creating value, it also benefits consultants, contractors, subcontractors and suppliers through a more reasonable allocation of risk, guaranteeing prompt and fair payment, and rewarding collaboration and innovation.The successful implementation of NEC4 (or its predecessors) does not depend on how good the project team is at interpreting each clause of the contract.

This is because the contract clauses are written in easy to understand language.

NEC has a very practical approach in bringing out this new suite of contracts (NEC4). All of the changes are a result of feedback from industry users of the previous version (NEC3) and hence supports methods and provide solutions which Clients are demanding.

Removing the Blame Game

An example of the value co-creation philosophy can be seen within the Heathrow Terminal 5 project in the UK.

The British Airport Authority (BAA) elected to retain the majority of risks which in traditional contracts may have been transferred to the contractors. The objective was to ensure that contractors were focused on identifying and creating innovative solutions and not bogged down with the fear that they may lose money if the risks eventuated.

As a result of BAA’s action the contractors came up with many innovative ideas that helped them complete the construction of the terminal on time and within budget giving the users a world class experience.

Dispute Resolution

To strengthen the collaborative approach further, NEC4 has introduced a 4-week optional process of dispute resolution where parties still have chance to resolve conflicts based on mutual trust and relationships before going into the formal process of adjudication.

In traditional contracts, once a dispute arises, the parties go in “save ourselves” mode rather than safeguarding the interest of the project in hand and as a result, the energy of all parties is consumed in finding faults in one another rather than focusing on the problem at hand to find a creative solution together.

NEC4 ensures that all parties involved are proactive in managing risks through a simple process of “early warning” of any unforeseen events that may have a potential impact on time, cost or quality for the project.

This is accomplished by maintaining an ‘Early Warning Register’ (Previously called risk register, which created confusion with “project risk” register) which leads to the proactive management of risk as many of these early warnings get translated into risks that are addressed through ongoing meetings between the parties involved.

Also, NEC is the only contract form which deals explicitly with the ‘time risk’ in the programme.

Options

The NEC4 standard comes with a suite of 14 standard contracts which are:

  • Engineering and Construction Contract (ECC)
  • Engineering and Construction Short Contract (ECSC)
  • Engineering and Construction Subcontract (ECS)
  • Engineering and Construction Short Subcontract (ECSS)
  • Term Service Contract (TSC)
  • Term Service Short Contract (TSSC)
  • Professional Service Contract (PSC)
  • Professional Service Short Contract (PSSC)
  • Supply Contract (SC)
  • Supply Short Contract (SSC)
  • Framework Contract (FC)
  • Dispute Resolution Service Contract (DRSC) (previously NEC3 Adjudicator’s Contract)
  • Design Build Operate Contract (DBO) ..New
  • Alliance Contract (ALC) …New

Price Models

Another example of the philosophy of trust and transparency at work in the NEC4 environment, are the varying forms of contract pricing models available other than the traditional fixed price model. Other options include:

  • Cost reimbursable
  • Target Costing with Gain and Pain Sharing

Both approaches require a different mindset than that of a traditional contractor (Who does not want to miss any opportunity of grabbing more from the client) and client (who does not trust what the contractor is claiming).

Both these pricing models require an open book management practice where the contractor makes its systems strong and transparent and open for audit all the time. NEC4 has a great process for ensuring the success of these types of pricing models.

NEC4’s Two New Contracts

In the revision of NEC3 to NEC4 two new contract forms were introduced:

  • Design Build and Operate: In this form of contract the contractor’s obligations go beyond construction and include operations and maintenance before handing over to the client. Consequently, the contractor must enter into this kind of contract with a very good understanding of the client’s problems and accordingly offer a solution that creates the desired outcomes.
  • Alliance Contracts: This is perhaps the ultimate of all the contracts where, not just the client and contractor, but all the other parties in the supply chain enter into a teaming relationship through a multi-party agreement to deliver a solution to the client.

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