Managing certification of payment and final assessment using NEC ECC4 contracts in Hong Kong SAR

Contractors, however, must be cautious of bespoke amendments that can significantly alter the balance of risks and responsibilities under the contract. 

Proactively managing documentation and compliance and giving due consideration to amended terms – particularly around risk strategy and pricing – are essential to minimise any disputes.

Below we identify practical considerations and pitfalls to avoid and note some commonly seen amendments in infrastructure projects in the Hong Kong Special Administrative Region (SAR).

Certification of payment during the project

Under NEC4 ECC Clause 50.3, the amount certified by the project manager (PM) for payment generally includes three distinct elements.

First, it covers the “Price for Work Done to Date” (PWDD), the definition of which varies depending on the selected contractual option.

Under Option A, priced contract with activity schedule, the PWDD is defined to include the total prices for completed activities. Under Option B, priced contract with bill of quantities, it involves the quantity of completed work multiplied by the applicable rate from the bill of quantities. Under Options C, D, E and F, target cost contracts, the PWDD also includes the defined cost, which are the costs forecasted or actually incurred by the contractor, plus the applicable fee.

Second, the certified sum includes “other amounts payable to the Contractor” that are not part of the PWDD. These typically involve sums due to the contractor for assessed compensation events (CEs) – events that alter the project's scope, cost or timeline, such as additional works or delays attributable to the employer. The valuation of these events is defined under Clause 63.

For target cost contracts, the PWDD includes defined cost, which are the costs forecasted, or actually incurred by, the contractor plus the applicable fee. These can include costs arising from changes requested by the employer, reimbursable items, incentives for achieving milestones or early completion and costs incurred for implementing agreed accelerations.

Finally, the certified sum takes into account any deductions or retentions due from the contractor, such as deductions or retentions for: 

• delay damages under Option X7;
• the contractor's failure to correct defects under Clause 46;
• the contractor’s failure to meet collaborative objectives if Option X12 is used; 
• recovery of advanced payments if milestones are not met under Option X14; and
• failure to achieve key performance indicators (KPIs) if Option X20 is applied.

Additionally, under Clause 50.5, 25% of payment can be withheld as a result of the contractor’s failure to submit the first programme to the PM for acceptance. Amendments to this clause may further extend the right to deduction to all instances where the contractor fails to provide a revised programme.

Common amendments 

Some NEC contracts incorporate bespoke additional or modified clauses designed to cater for specific commercial and operational requirements, such as to enhance control over cash flow or to secure greater protection against the contractor’s default. 
Amendments that permit the PM to correct certified amounts in previous certifications that are incorrect, while expressly excluding the contractor’s right to claim interest on any under-certified amounts, are common.

Interest entitlement on overdue payments may be restricted to simple interest compounded annually, instead of the default daily interest. Additionally, bespoke amendments may empower the employer to deduct amounts owed by the same contractor across multiple contracts. Such clauses typically specify that the PM’s estimated deductions are binding, with a view to streamlining the deduction mechanism.

Timing considerations

NEC4 ECC Clause 50.2 requires contractors to submit payment applications before each assessment date or, in the case of the HK ECC, two weeks before each assessment date. Failure to do so results in payment amounts being capped at the lesser of either the current assessment or the previous assessment under Clause 50.4.

This provision serves to highlight the importance of timely submission of all payment applications, as failure to do so may have significant ramifications on contractor cash flow. If payments decrease due to factors such as delay damages, the project manager can certify these reduced amounts. This would in turn require the contractor to take proactive steps to promptly demonstrate to the PM that the reduction should not have been made, and seek a correction in subsequent assessments under Clause 50.6.

Notably, some NEC contract amendments may adjust standard NEC timelines, extending the periods within which the PM must certify payments, and the employer must subsequently pay. For example, it is not uncommon to see amendments giving the PM three weeks, rather than NEC’s standard one week, from the assessment date to certify payments, and may extend payment periods from three weeks to six weeks from the assessment date, unless otherwise specified in the contract data.

These extended timelines, when considered together, effectively push out the date a contractor receives payment from four to six weeks from the assessment date. In this scenario, contractors may need to account for these extended timelines in their pricing strategy to mitigate the impact of delayed payments and to combat liquidity pressures.

Lastly, the importance of accurately calculating periods of time must not be overlooked, as a small misstep may give rise to significant consequences, such as the failure to observe Clause 50.4.

Recent UK cases have provided guidance on the interpretation of certain time periods. In 2023, in Elements (Europe) Ltd v FK Building Ltd, the High Court clarified that a "day" for completing a contractual obligation means the entire 24-hour period up to 23:59:59, meaning that if a contract specifies that an act must be completed by a given date, the party involved has until this time to carry out the action. However, if a contract specifically states that the act must be completed by a particular time within that day, then that specific time must be adhered to.

The definition of a "month" was addressed in another recent High Court case, Contracts Limited v 74 Hamilton Terrace Freehold Limited. Here, the court reinforced the ‘corresponding date rule’ in common law: if a contract allows a period stated in full months for an act to be completed, the deadline will fall on the same calendar day in the final month. If that corresponding day does not exist, for example 30 February, the deadline defaults to the final day of that month, in this example 28 February.

Any contractual provisions governing time period computations should be meticulously reviewed so as to avoid any unintended adverse consequences. 

Finalising defined costs

Clause 50.9, introduced in NEC4 for Options C, D, E, and F, provides a process to finalise assessments of defined cost. This clause removes the risk of the PM’s passive acceptance of costs by requiring active engagement from both the contractor and PM.

Periodic confirmations of defined cost are encouraged, to promote clarity and fairness and minimise room for disputes. Contractors should seek to align their payment applications to the schedule of cost components categories to ensure ease of verification, and give sensible consideration to potential disallowed costs under NEC Clause 11.2(26), or 11.2(30) in HK ECC, for Options C, D, and E; and Clause 11.2(27), or 11.2(31) in HK ECC, for Option F.

It is common to see PMs strictly applying this provision to disallow otherwise valid costs where the claim is raised with insufficient supporting accounts and records.

Final assessment of payments

Clause 53 of NEC4 ECC provides a structured final account procedure, in which the PM must assess and certify the final amount due no later than four weeks after the supervisor issues the defects certificate or 13 weeks following the termination certificate is issued.

If the PM fails to issue the assessment within these timelines, Clause 53.2 empowers the contractor to submit its own final assessment directly to the employer. If the employer accepts this contractor-generated assessment, payment must be made within three weeks or within an alternative period expressly stated in the contract data. If no alternative period is explicitly provided, the default NEC standard of three weeks will apply.

There is no explicit penalty for delayed PM assessments, however, and the employer retains the right to dispute the contractor's assessment under the dispute resolution clause detailed in Option W. While the clause aims to expedite final settlements, it realistically relies on proactive contractor submissions to incentivise timely assessment from the PM.

Contractors can consider other ways to incentivise the PM to comply with their obligations. If the PM fails to carry out an assessment, such as evaluating a claim or certifying payment, the contractor could argue that this failure amounts to a breach by the employer. This is because the PM acts as the employer’s agent. If a breach is established, the contractor may be entitled to claim compensation as a compensation event under the contract. 

Conclusive nature of final assessment 

Clause 53.3 establishes that the final assessment becomes conclusive evidence of the final amount due, unless disputed under the contract's dispute resolution provisions under Option W. Crucially, this clause applies equally whether the assessment originates from the PM or the contractor, with the only proviso being that the assessment is submitted within the specified four week period. This results in contractors having a strategic incentive to submit their assessments to the employer promptly if the PM does not make the assessment within the time allowed under Clause 53.1, as this may motivate the PM to respond quickly to avoid the contractor’s assessment being final.

Revisions and disputes 

While Clause 53.3 grants conclusive status to final assessments, Clause 53.4 provides flexibility to subsequently alter this assessment through a formal settlement agreement or adjudication decision, how these clauses interact is unclear. Clause 53.4 does not clarify explicitly whether such revised assessments also attain conclusive status, although this may be implied. In any event, NEC anticipates that any adjudication decisions become final and binding after a four-week period, ensuring clarity and finality in dispute resolution.

Final assessment provisions under the HK ECC

The final assessment provisions under the HK ECC, Clauses 53.1 and 53.2, differ from NEC4 ECC Clause 53 in several aspects. 
Instead of mandating the PM to issue an assessment within the prescribed periods by reference to the date of defects certificate or termination certificate, Clause 53.1 of the HK ECC requires the contractor to initiate the final assessment process by submitting a final application for payment to the PM within four weeks of the supervisor issuing the defects certificate, or 13 weeks of the PM issuing a termination certificate, or a longer period to which the PM has agreed.

The PM is then required to make an assessment of final amount due within four weeks after the contractor’s application for payment or, if no application has been made, within four weeks of when it should have been submitted. Under the HK ECC, the PM is subject to a more relaxed final assessment timeframe as compared to under NEC4 ECC.

Notably, the HK ECC does not contain equivalent clauses or provisions to Clauses 53.2, 53.3 or 53.4 of NEC4 ECC, meaning that the strategic route of submitting a contractor-generated assessment directly to the employer is not available under the HK ECC, and the final assessment is not expressly regarded as conclusive evidence of the final amount due.