Trust nobody

It was 13 years ago that Sir Michael Latham published a report identifying the 13 attributes that all construction contracts should have. What really could turn out unlucky for some, however, is that the New Engineering form of Contract (NEC) 3 is far from ‘Latham compliant’. Trust fund provisions, which formed an integral part of the ‘Trust and Money’ recommendations, have been omitted.

Back when the report was delivered, the NEC complied in eight respects. NEC 2 was introduced soon after, with the claim that it met all 13 conditions. In July 2005, the NEC 3 was launched to replace the GC works contract family on government projects and to be the contract of choice for the Olympic Delivery Authority 2012 games.

But employers, project managers, designers and contractors unfamiliar with the management changes made necessary by working under this contract’s regime could have a costly time ahead of them.

The contract imposes a management discipline against a tight and demanding timescale. Failure to accord with the requirements is penalised by financial recovery provisions ceasing to be available. And to ensure that all parties work in a spirit of mutual trust and collaboration they “shall act as stated in this contract.”

To achieve this, risk management meetings are convened, at either party’s request. Early warning notices are to be issued and, if changes are required, the ‘compensation events’ allowing additional time and money are administered to a strict procedure.

This collaborative working does not make the engineering and construction contract a ‘partnering’ contract. The NEC has five differing ways in which contracts may be formed. These are termed ‘options’. They are designated by an alphabetic letter and range from a priced contract with a bill to a cost reimbursable arrangement.

The project manager has to ensure that changes are costed and managed to give the employer certainty of price. Consequently, the staff resources required will increase during the project’s duration. However, this is countered by the fact that the final account is settled on a rolling basis. Estimating total event costs becomes an important skill, but the parties must appreciate that this contract favours certainty over finite accuracy. Legal commentators deride this as a weakness, but they are missing the point. The contract attempts to provide an adequate mechanism giving certainty to what is paid and when.

New key terms include:

Accepted programme

The requirements are exacting, needing constant review and updating to show planned access, durations, ‘float’ (which is contractor owned), key dates (by which activities must be completed or penalties incurred), time/risk allowances, h&s requirements etc;

The risk register

This part of process is employer initiated and expanded as the project is realised. It forms part of any tender submission appraisal, especially under Options C and D;

Defined cost

The various procurement options define allowable cost in different ways. Where the site set-up is located in a different geographic location to the site, where payment is required for materials off-site, or where work is to be further sub-contracted, the definition for the option that is being tendered must be clearly understood;

Early warning procedures

The requirement to alert employers to overspends, delays or impaired performance sets this contract apart from the others. It requires that a better degree of foresight is brought to the management of the construction process. The consequences of an early warning meeting are fed into the risk register for later deliberation or subsequent project improvements.

Detractors deem the stiff requirements bureaucratic. But if all parties are properly resourced, the employer should benefit from better communications, increased risk awareness and certainty of cost.