How NEC4 can drive collaborative project delivery in Australia

Infrastructure Australia, in its ‘infrastructure market capacity 2025 report’, noted the importance of “moving beyond transactional contracting to models that foster collaboration, transparency, and shared accountability”. At its simplest, collaboration means to work jointly with others, with the objective of achieving a shared goal.

To enable the delivery of the major public infrastructure pipeline, which has reached a total of A$242 billion (approx. US$173bn) in value, a move towards promoting collective interests over individual ones is required. NEC4 contracts don’t just allocate risk, but also embed provisions designed to shape more collaborative behaviours. There are several ways NEC4 achieves this objective. 

Mutual trust and co-operation 

Clause 10.2 requires the parties to act in the spirit of mutual trust and cooperation. Parallels have been drawn between this clause and with obligations of good faith, which are recognised by the Australian courts as “a form of contractual duty which requires the obliger to have regard to the interests of the obligee, while also being entitled to have regard to its own self-interest when acting”.

Although Australian courts are yet to consider the meaning of clause 10.2, it is likely that it does not prevent parties from relying on and applying their contractual rights or acting in self-interest. It does, however, provide an additional benchmark by which the behaviours of the parties will be judged including by not improperly exploiting the other party.

To deliver on the intent of NEC, it is a philosophy that the parties should use to guide them when administering the contract in all respects. Parties could introduce an express reference to fairness and reasonableness into this clause to further define the standards they will be expected to adhere to.

These obligations also extend to the role of the project manager and supervisor, with additional considerations required when performing an assessment or certification role under the contract. UK courts have previously found that the project manager and supervisor must act impartially and independently of the client’s interests in matters of assessment and certification.

Incentive target cost options

NEC users can select from six pricing options. Options C and D provide a ‘target cost’ mechanism in which the contractor is paid its defined cost plus the fee. The final price is compared against the target price and any difference, known as ‘pain’ or ‘gain’, is shared between the parties.

This sits between a traditional lump sum arrangement and a reimbursable contract, encouraging collaborative behaviours through providing an incentive for realising cost savings, combined with provisions relating to cost transparency.

Early warning and risk reduction regime

NEC contracts have an intentionally prescriptive early warning and risk reduction regime, aimed at encouraging early identification and resolution of issues and which is not focussed on claims.

Importantly, both parties, not just the contractor, are required to identify and notify the other side of issues with the potential to impact program, price or performance at an early stage.

Early warning meetings are scheduled at regular intervals, which can involve subcontractors, at which issues that have been notified are discussed, parties make proposals for addressing those issues, seek solutions and agree actions.

An early warning register is maintained by the project manager throughout the project to keep track of issues raised in notices and discussed at meetings, any actions agreed and issues resolved.

This process places an administrative burden on the parties, although it does so with the intention of driving a mindset shift towards early engagement, open communication and mitigation of risk. The consistent application of this process aims to reduce the pot of issues that might escalate and result in significant impacts to the project or formal claims.

Program

Under NEC, the program is a live and shared document that is addressed by a series of detailed contractual requirements. There is a prescriptive list of the information that needs to go into the program, going beyond what contracts traditionally seen in Australia require.

All submitted programs need to be accepted by the project manager, who only has limited scope to reject submitted programs for prescribed reasons – such  as that it does not show the information the contract requires. The program also needs to be updated at regular intervals to reflect actual progress and any measures planned to be taken to overcome delay.

Importantly, the program should also drive compensation events (CEs). Delay is measured by reference to any delay to planned completion of the project as shown on the accepted program.  Therefore, it is critical that parties keep the program up to date to measure entitlements for CEs. 

This incentivises parties to work together to ensure programs are up to date and realistic with the goal of avoiding disputes. 

Dispute resolution mechanisms 

In addition to the usual processes of adjudication and arbitration or litigation, NEC secondary option W3 gives parties the option to appoint a dispute avoidance board (DAB).

A DAB is a standing impartial advisory board appointed at project commencement, comprising of experienced construction professionals with a range of expertise. They take a proactive approach, visit the site at regular intervals to identify issues before they arise and retain open communication channels with the parties.

Where issues arise, the DAB will correspond with all parties with a view to negotiating a settlement and avoiding disputes. If settlement is not reached, the DAB will provide non-binding recommendations. Going through the DAB process is a precondition before escalating to arbitration or litigation, although it does not interfere with the parties’ right to adjudicate.

The use of DABs in the context of NEC contracts is not new, with one success story being the London 2012 Olympic Games. DABs are also increasingly used for large publicly procured infrastructure projects in New South Wales and may be considered as part of the procurement for the 2032 Brisbane Olympic Games. 

Secondary option clauses

In addition to the core clauses, secondary option clauses are also available to parties, with many of these encouraging more collaborative practices. 

Multiparty collaboration

X12 establishes multiparty collaboration and allows the parties to set out criteria by which parties can work together in a structured way including collaboration objectives, agreeing on shared performance targets with the ability to set key performance indicators as an incentive for achieving them, and defining information-sharing protocols.  

Early contractor involvement

X22 can be used with option C, target cost, and E, cost reimbursable, and provides the option for an early contractor involvement regime (ECI) in which contractors, and crucially their supply chain, are involved from an earlier stage as part of a two-stage procurement process.

ECI means that contractors can shape the design early, allowing for more accurate pricing and programming and less scope for undefined risk contingencies. The benefits include better value, cost certainty, improved risk identification and mitigation, and enhanced collaboration and transparency.

Any ECI process must, however, be managed appropriately and is not risk free. Complaints typically arise where the process is delayed, resulting in increased costs, or ultimately fails to result in an agreed scope and price for the next stage of the works. 

Bonus for early completion

X6 introduces an early completion bonus, which can be used to provide contractors with an incentive to finish early and therefore work more efficiently during the project. 

Alliance contract

At the most collaborative end of the spectrum is the alliance contract, which marks a move away from transactional relationships to long-term collaboration. The approach is different to traditional contracting and requires a significant organisational and behavioural shift towards a ‘one team’ approach.

An alliance contract is a multi-party contract, under which the alliance delivery team all sign up to a single set of terms. The idea is that all parties in the alliance share the risk of the success or failure of the project.

The alliance has a stated set of objectives, with the main responsibilities of members including the delivery of the contract on a ‘best for project’ basis. There is limited scope for pursuing formal claims and the contract includes various mechanisms to discourage disputes and claims including ‘no blame no claim’ provisions and an active role by the alliance board in resolving disputes.