Out-Law Guide | 01 Sep 2017 | 4:12 pm | 9 min. read
This guide was last updated in September 2017
NEC's approach with these new contracts is to build on the success of NEC3. It has reflected industry feedback to further the aims of driving collaboration, good communication and project management. The changes deal with problems that often arise on real projects, such as lack of response and slow decision-making. The result is not a radical change to the contracts, but an evolution.
NEC is famed for its use of short, plain English, and the new contracts incorporate changes in terminology. They are now gender neutral with some considered changes in emphasis. For example, the 'employer' is now the 'client', and 'works information' is now the 'scope'. This creates consistency across the suite.
The NEC guidance notes are replaced with four new user guides, dealing with:
In addition, contract data has been simplified and the schedule of cost components has been changed
The suite also incorporates four new contracts: a design build operate (DBO) contract; an alliancing contract, which is currently out for consultation; a professional services subcontract; and a team services subcontract.
DBO contracts are service-led contracts used where an employer requires a particular service but needs to have the facilities built to provide that service first - for example, a power station for power generation. The NEC DBO contract will be based on option E, with limited secondary options; and include a lump sum payment element and a defined cost element which can be used with a pain/gain mechanism.
The alliancing contract was published for consultation on 28 June, with final release anticipated in January 2018. It is NEC based on option E but multi-party contract performance based, so driven by client needs. It is a 'pure' alliance contract under which all parties to the alliance carry all risks except wilful default, and there is no dispute resolution mechanism. The idea is that, if there is a dispute, the alliance effectively comes to an end.
Clients are now being encouraged to start moving towards use of NEC4, which will have a knock-on effect on contracts used along the supply chain. There will also be transitional period where both NEC3 and NEC4 are used which, with the new terminology, may give rise to some confusion.
We will now look at the changes to the core clauses, options and dispute resolution mechanisms in NEC4 in more detail.
Core Clause 1: general
Core clause 1 incorporates defined terms, interpretation, communications and ambiguities.
The previous 10.1 is now split in two. Mutual trust and cooperation is now at 10.2 while 10.1 simply states the obvious: that the parties must comply with the contract.
At 11.2(19), there is a new definition of subcontractor which excludes labour suppliers. This had been an issue in practice.
Helpfully, 13.4 makes it clear that if the project manager (PM) rejects something in the contractor's programme, the PM must provide reasons "in sufficient detail to enable the contractor to correct the matter".
The risk register always confused people who thought it was meant to cover contractual risk. Clause 15 replaces this with a new 'early warning register', which must be issued within two weeks of the starting date. Risk reduction meetings have been replaced by early warning meetings, which should occur regularly, and can now include subcontractors. Urgent meetings can also be called for specific risks.
Clause 16 introduces a brand new value engineering provision. This allows the contractor to propose changes that reduce the cost of the works in exchange for a proportion of savings as specified in the contract.
The 'prohibition on corrupt acts' clause 18 seems minimal, and may result in a more detailed clause being used.
Finally, there is a tweak to the prevention event clause 19 to make it clear that the event must stop the whole of the works. This highlights the fact that a prevention event must be a truly exceptional event, so avoiding the argument that things like the insolvency of a subcontractor should fall within the equivalent clause in NEC3.
Core Clause 2: contractor's main responsibilities
Core Clause 2, which sets out the contractor's main responsibilities, has not had many changes. However, there are some interesting changes at clause 26, which give the client more control over subcontracting.
Firstly, subcontractors will no longer be appointed until they are accepted by the client and, if required, the subcontract documents are also accepted. NEC3 did not require approval of subcontract forms if NEC contracts were used. NEC4 adds that NEC contracts "must not [be] amended other than in accordance with the additional conditions of contract". This means the client can set limits on acceptable amendments.
Subcontractor pricing can remain confidential, but only if options A or B are used.
This core clause also contains new clauses dealing with assignment and disclosure/confidentiality. These are welcome additions, but as the clauses are fairly short clients may wish to replace them with their own bespoke 'z' clauses, as is currently the case.
Core Clause 3: time
A new clause 31.3 allows for deemed acceptance of the contractor's programme where the PM does not notify its acceptance or non-acceptance within the time allowed by the contract. The contractor must first notify the PM of its failure, but the failure will be treated as acceptance if it continues for a further week after the contractor's notification.
Lack of acceptance within the allowed time was a very common problem under NEC3, so this is a very useful change, particularly when combined with the new clause 13.4 under which the PM must give sufficiently detailed reasons for non-acceptance to allow the contractor to correct the matter. Note the last line of clause 31.2: the programme must be in the form stated in the scope.
Core Clause 4: quality management
The new Core Clause 4 replaces the 'testing and defects' clause in NEC3. It introduces a new obligation for the contractor to produce a quality management system, set out in a quality policy statement, and a quality plan. These must be submitted for acceptance by the PM and comply with the scope.
The clause also incorporates a language change: now, the contractor and supervisor "inform", rather than notify, each other of their tests and inspections. This is a significant change because of the separate rules around notices at clause 13.7.
The PM can instruct the contractor to correct a failure to comply with the quality plan without triggering a compensation event.
Core Clause 5: payment
Submission of applications for payment by contractors is now mandatory, reflecting the normal practice. In the case of a default, the assessment is the lesser of the last assessment or the amount assessed by the PM, using the form set out in the project scope.
Core Clause 5 also makes some more radical changes around defined cost for options C, D, E and F (new clause 50.9), and introduces a new final account process (clause 53).
Disputes over what is legitimately 'defined cost' have often occurred, and the new clause is designed to tackle the not infrequent problem of costs being disallowed at a late stage following an audit by the client. It requires the contractor to notify the PM when each part of defined cost has been finalised, and then make records available for the PM to review. The PM must then accept or challenge costs within 13 weeks, subject to being allowed to request more records and consider the same within four weeks of receipt. Failing this, the contractor's assessment will be treated as correct.
In practice, this should result in a rolling process of review and verification of costs. While it does not necessarily mean that disputes will be avoided, parties will at least know where they stand on an ongoing basis. It should also prompt parties to agree the records that are acceptable for cost verification at an early stage.
The new final account process is a major change, and one that NEC has accepted as necessary following stakeholder feedback. The new procedure requires the PM to assess the final amount due within four weeks of issue of the defects certificate, regardless of whether all defects are corrected. If the PM does not do so, the contractor can issue its own assessment. In either case, the assessment becomes conclusive unless dispute procedures are started within four weeks.
Core Clause 6: compensation events
These are largely unchanged but for a few interesting tweaks.
A new compensation event is introduced where the PM notifies that a proposed instruction is not accepted. This is intended to deal with ensuring that contractors are paid for the time they spent working on the quotation. However, it seems to be quite a blunt tool which ignores the reason behind the PM requesting the proposed instruction in the first place.
The new 'dividing date' concept at 63.1 is interesting. It tries to clarify the confusion which currently exists about when you shift to using forecast, rather than actual, costs; and will also be used for identifying the relevant accepted programme. Clause 65 introduces a new process for proposed instructions aimed at allowing more flexibility; while the well-known clause 65.2, which prevents revisions to a compensation event if the forecast is wrong, has been amended to allow for changes if the contract explicitly says so.
Core Clause 7: title
A new clause 74 gives the contractor the right to use client materials, but only to "provide the works". That right can also be made available to a subcontractor.
Core Clause 8: liabilities and insurance
At the request of the insurance market, "risks" has been changed to "liabilities" throughout which will help to avoid confusion.
Clause 81 has been amended to make the contractor's liabilities more clear, in contrast to the previous wording which assigned "all risk that the employer [now client] does not have" to the contractor. However, this raises the question about whether the client or the contractor will be deemed to carry anything not listed as either a client or contractor liability.
The repair and indemnity provisions at clauses 82 and 82 have been replaced with a new recovery of costs clause 82. The waiver of subrogation has now been extended to cover both parties, following on from the SSE v Hochtief decision where it was held that insurers had the right to pursue a joint insured.
Core Clause 9: termination
Client termination for any reason now has its own secondary option clause, at X11. Clause 91.8 creates an additional right for client to terminate due to corruption.
Option W: resolving and avoiding disputes
The dispute resolution procedures at Option W have been renamed "resolving and avoiding disputes".
NEC4 introduces a new dispute resolution procedure involving discussions between parties' senior representatives over a three-week period, based on submissions and producing a list of issues. This process is compulsory if option W1 is selected, or can be used by agreement if option W2 is selected. Note that the form states that submissions can be up to 10 sides of A4 with supporting documents, but hopefully parties will use these provisions sensibly.
There is also a new option W3, allowing for the use of dispute avoidance boards (DABs). This is aimed at the international market where DABs are common, but could potentially be used on UK 'mega-projects' where parties would find the input of a DAB useful. A DAB appointed under option W3 will visit the site regularly to speak to all parties and discuss all issues with a view to negotiating a settlement and, if it cannot help settle, will provide a recommendation. If used, the DAB process must be completed before a dispute can be taken to tribunal.
Changes to main options
NEC4 incorporates a number of changes to the main options A to F, which relate to contract structure and pricing. The most significant are:
For options A and B
For option C
Changes to secondary option clauses
These cover a range of topics such as ultimate holding company guarantees; collateral warranties; transfer of IP rights; building information modelling (BIM, referred to as 'information modelling' in NEC4); multi-party collaboration; professional indemnity insurance; whole life cost; and early contractor involvement.