Out-Law / Your Daily Need-To-Know

The New Engineering Contract (NEC), of which the Engineering and Construction Contract (ECC) forms a part, is a suite of standard form construction contracts created by the Institution of Civil Engineers. There have been three editions: the first in 1993, the second in 1995 and the most recent – NEC3 – in June 2005.

The use of NEC in construction projects is becoming more common, and it is the contract of choice for the 2012 Olympics.

This guide summarises some key points for an employer or contractor to be aware of when contemplating using NEC3.

Brief history

In the early 1990s, the Government commissioned the Latham Report to review procurement and contractual arrangements in the UK construction industry. The report concluded that strategies should be adopted to:

  • bring an end to the adversarial approach that had become so prevalent in the construction industry;
  • produce a single contract with a wide application;
  • stimulate productive management

NEC3 is now used for many major construction and engineering projects in the UK and overseas. It is endorsed by the Institute of Civil Engineers, the Olympic Delivery Authority and the Office of Government Commerce which recommends NEC3 for use on all public sector construction projects.

Underlying principles of NEC3

NEC3 adopts a fundamentally different philosophy and practice to most other standard form construction or engineering contracts. Its three core underlying principles are:

  • clarity and simplicity: the contract is well-supported with additional materials, including detailed flow-charts and guidance notes. NEC3 is intended to be clear, simple and easy to use, and is written in the present tense in plain English. However this can lead to problems as its brevity can, in some cases, create ambiguity and much of its terminology is untested in the courts;
  • stimulus to good management: overall, NEC3 focuses on 'real time' management of the project rather than looking back on what the parties should have done. However it is very heavy on administration, and requires good understanding of its procedures and sufficient resources from both the employer and the contractor to make it a success;
  • flexibility: NEC3 can be constructed from nine sections of core clauses, six main options, two dispute resolution options and seventeen secondary options. This flexible approach is intended to avoid the need for lots of bespoke amendments, reduce the need for lengthy negotiation and also reduce the potential for disputes. However, in practice most of NEC3 contracts include considerable bespoke amendments – known as the 'Z' clauses as they form part of Option Z under the contract.

The structure

NEC3 contracts are constructed as follows:

  • core clauses: these nine sections are the same in every form, and cover the basics which are applicable in every contract:
  • 1 - general - includes defined terms, interpretation, communications, ambiguities;
  • 2 – contractor's main responsibilities – provision of works, design, people, subcontracting;
  • 3 – time – starting, completion dates, key dates, programme, access, takeover, acceleration;
  • 4 – testing and defects – tests and inspections, notifying defects, correcting defects, accepting defects, uncorrected defects;
  • 5 – payment – assessing amounts due, payment provisions, pain share/gain share where appropriate;
  • 6 – compensation events – events which will give rise to time and money and procedures for dealing with these;
  • 7 – title – for example, to plant and materials;
  • 8 – risks and insurance – contractor and employer risks, insurance requirements;
  • 9 – termination – grounds, procedures and payments on/for termination.
  • main options: these relate to contract structure and pricing. One option, from A to F, must be selected:
  • A: Priced Contract with Activity Schedule;
  • B: Priced Contract with Bill of Quantities;
  • C: Target Contract with Activity Schedule;
  • D: Target Contract with Bill of Quantities;
  • E: Cost Reimbursable Contract;
  • F: Management Contract
  • dispute resolution: two options – W1 and W2 - one of which must be selected;
  • secondary options: seventeen further clauses for certain matters such as changes in law, alteration of pricing for inflation and provision of performance bonds can be selected as appropriate;
  • contract data: this section is critical as it contains all the contract-specific essential information, and there are no default options. Part One should be provided by the employer, and Part Two by the contractor. It includes the Works Information and Site Information – the works and site-specific information, such as scope of work and design responsibility;
  • Z clauses, or bespoke amendments, can also be added if necessary.

Some key differences between NEC3 and other standard form contracts

At a more detailed level, NEC3's approach to some of the common features and practices adopted in construction and engineering projects is quite different, including:

  • interim payments are ascertained and paid on a forecast basis, rather than by reference to actual costs;
  • there are some potentially surprising approaches taken to recoverable costs, and these need to be worked through in detail - particularly if the same mechanism is stepped down to subcontracts;
  • there is a preliminary assessment of pain/gain share made at completion, and payment/allowance is made at that stage. The final assessment is made once the final actual cost is known and the final target cost is known;
  • NEC operates what is in effect a maintenance period after the project is completed, instead of the traditional defects liability period;
  • the events which can give rise to an extension of time or additional payment are comparatively extensive.
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