James Nisbet puts NEC 3 under the microscope, exploring the language used as well as the contract’s relationship with the government’s procurement strategy. And a construction lawyer offers a guide to using the document in practice

In the New Engineering Contract (NEC) the guidance notes claim the conditions have been drafted in a simple, clear style. If only this were so.

Words in common use that could easily explain the contract such as ‘fair’, ‘reasonable’ and ‘opinion’ have been used as little as possible.

On the pretext of achieving uniformity some common construction expressions have been redefined. For example, ‘temporary works’, an expression long used in civil engineering to denote works essential for the construction of a project but which would not be incorporated in the finished project, is to be ‘equipment’. Commonly ‘equipment’ had been regarded as furnishing a building and was frequently dealt within a separate contract from construction.

NEC to ECC and back

The text in the latest versions of the NEC refers to the ECC (Engineering and Construction Contract). But the conditions of the ECC did not start out to represent a basis for a building contract.

The New Engineering Contract was first published in 1993. It was intended to improve civil engineering design and construction. Engineers devised the conditions and the conventional representatives of building construction were not involved. Nor was there an intention to draft a document suitable for both civil engineering and building. Civil engineering contracts historically have been considered to be different from building contracts because of the perceived greater risks in converting natural resources.

In July 1994 the Latham report was published. It found that nearly all its principles for a modern contract were incorporated in the NEC. The report recommended its use for building works. So, the NEC was republished in November 1995 as the ECC.

Price and cost

It is the meaning to be attached to the words price and cost that can cause most confusion. While price can mean a purchaser’s cost the words have usually meant different things. Cost is what you buy something for. Price is what you sell it for.

When considering price and cost it is important to remember that NEC represents six different types of procurement methods with 25 secondary options and the opportunity to add others. There is a core set of conditions that are amplified or amended to suit each method. Four of them represent cost reimbursement contracts and two purport to be a type of lump sum contract. So there is ample opportunity for a wide range of procurement methods to be described as an NEC contract.

Confusion

This wide range of procurement methods has created the confusion about the meanings of price and cost.

The 1995 issue of the conditions (NEC 2) defined:

  • ‘Price’ with three separate meanings depending upon the choice of option.
It could mean cost plus a fee, prices for activities and prices for quantities.

  • ‘Price for work done to date’ with four separate meanings.
  • 'Cost’ with three separate meanings.
It could mean payments due (but not necessarily paid) to subcontractors only for work which the contractor is required to subcontract, payments due to subcontractors plus the cost of cost components or the cost of cost components alone whether the work is subcontracted or not.

‘Cost’ is also described as actual. So there is ‘actual cost’ and ‘forecast actual cost’. If actual means existing in fact and forecast means a prediction of a future event (like the weather tomorrow), it is a puzzle to know how a cost can be both a reality and a future event at the same time.

There is no reference to tender prices in any of the options.

NEC 3 attempts to deal with the confusion by inserting ‘defined’ between ‘actual’ and ‘cost’ but the confusion remains.

Compensation events

The method of adjusting ‘prices’ for the effect of a compensation event is described in the core conditions. It adds together:

  • The actual defined cost of the work already done.
  • The forecast of defined cost of the work not yet done and
  • The resulting fee.
If the total reduces the ‘total defined cost’ the prices are not reduced. However, the conditions do not describe how the total defined cost is established.

The guidance notes imply that the method of assessment of prices is unworkable and that any adjustment to ‘prices’ would depend upon individual circumstances. There is no provision in the conditions for the use of a predetermined method of assessment.

Records

The records to be kept by a contractor are listed in the conditions. Unless amplified by requirements in the Works Information the records deal only with records of payments and of assessments of compensation events for subcontractors. On their own they are insufficient to verify costs incurred for cost reimbursement contracts.

Achieving excellence?

The Office of Government Commerce (OGC) has endorsed the use of NEC 3 for government construction works. It has claimed that the contract conditions comply with the principles of the OGC’s Achieving Excellence in Construction strategy.

In 1999 the Treasury in Achieving Excellence set targets to improve the administration of government departments. Building on Success published by OGC in February 2003 described the extent to which the targets were achieved. Improvements in the administration of government departments is important for those departments responsible for purchasing construction but its relevance to conditions of construction contracts is not easy to appreciate. The principles of Achieving Excellence in Construction with which NEC 3 is said to comply have yet to be revealed.

James Nisbet is founder of Nisbet

Source

QS News