Formation of Construction Contracts

Table of Contents 1. Outline of the NEC Contract a) Summary of the ethos & key aims of the Contract i. Stimulus to good management ii. Variations iii. Clear and simple language b) Strengths c) Weaknesses 2. Main Option Clauses a) List of main Option Clauses b) Summary and Comparison of Option Clauses c) Recommendation 3. Secondary Option Clauses a) 15 ‘X’ Secondary Options b) Two ‘Y’ Clauses c) Discussion of ‘Z’ Clauses d) Recommendation 4. Conclusion 5. References

1. Outline of the NEC Contract‘The NEC Engineering and Construction Contract (ECC) (previously the New Engineering Contract) has been developed to meet the current and future needs for a form of contract to be used in the engineering, building and construction industries. It is an improvement on existing standard contracts in a number of ways.’ (NEC, 2005).

a) Summary of the ethos & key aims of the contract i. Stimulus to good management The use of the NEC ECC should stimulate good management between the employers, designers, contractors and the project managers, and also make them work collaboratively to enable them to achieve their own objectives more consistently. It should also allocate the risks associated with the project between all parties clearly and simply to reduce the possibility of those risks occurring. The ECC focuses on ‘real time’ management of the project rather than looking back at what the parties should have done. This means the programme of works should always be up to date regardless of any changes.

ii.Variations

A variation is a change to the contract/programme of works after the contract has been agreed. An example of a variation could be a modification to the original design of works. In this case, the designers of the works would have to issue an early warning notification to all other parties involved toensure they all know of any extra costs or delays in works that could happen as a result of the change. After this, ‘the parties are then required to meet, to seek mutually beneficial solutions to overcome these problems, and to operate a formal Risk Register of notified events.’ (NEC, 2005). This change also results in a compensation event and a sum of money is usually paid to the effected parties.

iii. Clear and simple language

The NEC ECC is written in ordinary language which is clear and simple and only uses words which are in common use. This makes it easy for everyone to understand, especially those whose first language is not English or those who are not used to using formal contracts. This also makes it easier to translate into other languages. The NEC ECC also has fewer clauses than in many standard forms, uses short sentences and the use of subjective words is kept to a minimum. Also, there is no cross-referencing between clauses.

b) Strengths   It can be used in a wide variety of commercial situations, for any type of work and in any location. Clear and simple document which is easy to understand and follow. Nothing is getting tested in the courts so no case law is being built.

c) Weaknesses

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2. Main Option Clauses a) List of main Option Clauses      ‘A) Priced contract with activity schedule; B )Priced contract with bill of quantities; C) Target contract with activity schedule; D) Target contract with bill of quantities; E) Cost reimbursable contract; F) Management contract.’

(NEC, NEC3 Engineering and Construction Contract, 2005)

b) Summary and Comparison of Option Clauses Option A: ‘Provides a priced contract where the total of the price tendered by the contractor against each activity represents the amount he will be paid for that work.’ (Rowlinson, 2011). Option B: ‘Provides a priced a priced contract but this time with a bill of quantities. Under this option, the contractor is paid the actual quantity of work carried out at the rates in the bill of quantities.’ (Rowlinson, 2011).

Option C: ‘The contractor tenders the prices (the target) backed by an activity schedule together with relevant percentages and rates. The percentages and rates are used in calculating the defined cost and price of work to date.’ (Rowlinson, 2011).

Option D: ‘Main option D follows the same approach as main option C, except that a bill of quantities is used against which the final total of the prices is re-measured.’ (Rowlinson, 2011). Option E: ‘The employer pays for all the resources utilised by the contractor to carry out the works, following a formula employing various tendered rated and percentages, subject only to the disallowing of costs resulting from the contractor’s inefficient use of resources.’ (Rowlinson, 2011). Option F: ‘Provides a management contract option under which the contractor is paid a fee for carrying out prescribed duties.’ (Rowlinson, 2011).

The main difference between each option clause is the risk associated with each one however; the risk for the contractor and client will differ for each option clause. The contractor faces high risk if option A is useddecreasing to low risk if option F is used. The client is the opposite where they face low risk if option A is used and high risk if option F is used.

c) RecommendationThe use of main option clause A should be adopted in the contract document for this project. This option minimises the risks associated with the project for the client and all responsibility is then placed on the contractors to complete the project on time and for the agreed price.

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3. Secondary Option Clauses a) 15 ‘X’ Secondary Options               ‘X1: Price adjustment for inflation; X2: Changes in the law; X3: Multiple currencies; X4: Parent company guarantee; X5: Sectional Completion; X6: Bonus for early Completion; X7: Delay damages; X12: Partnering; X13: Performance bond; X14: Advanced payment to the Contractor; X15: Limitation of the Contractor’s liability for his design to reasonable skill and care; X16: Retention; X17: Low performance damages; X18: Limitation of liability; X20: Key Performance Indicators.’

(NEC, NEC3 Engineering and Construction Contract Option A: Priced contract with activity schedule, 2005)

b) Two ‘Y’ Clauses  ‘Y (UK) 2: The Housing Grants, Construction and Regeneration Act 1996; Y (UK) 3: The Contracts (Rights of Third Parties) Act 1999.’

(NEC, NEC3 Engineering and Construction Contract Option A: Priced contract with activity schedule, 2005)

c) Discussion of ‘Z’ ClausesZ clauses are intended for UK Government clients when using the NEC3 forms of contract. These clauses are additional conditions to the main NEC3 contract and are not intended for independent use.

d) RecommendationAn example would be for the contractors to request that the secondary option clause ‘X6: Bonus for early Completion’ to be included in the contract to reward them for possible early completion of the project. However, the client might request to include the secondary option clause ‘X17: Low performance damages’ to make sure that the contractors do not rush the job in order to attain their bonus.

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4. Conclusion   The use of the NEC3 Contract is an overwhelming form of contract favourite and is highly regarded within industry. The use of the NEC3 Contract should be used as a governing document for the tender and subsequent project. The use of the main option clause A should be adopted in the contract document for this project.

5. References    NEC. (2005). NEC3 Engineering and Construction Contract. NEC. (2005). NEC3 Engineering and Construction Contract Guidance Notes ECC . NEC. ( 2005). NEC3 Engineering and Construction Contract Option A: Priced contract with activity schedule. Rowlinson, M. (2011). Practical Guide to the NEC3 Engineering and Construction Contract. Hoboken, NJ, USA: Wiley-Blackwell.