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Out-Law Guide 8 min. read

Using the NEC4 standard form contract for construction projects in Hong Kong SAR

The new engineering contract (NEC) – a suite of standard form contracts in the construction industry – is commonly used in the Hong Kong Special Administrative Region (SAR) for public works procurement. 

Contributing to the appeal of NEC is its clarity and simplicity, its emphasis on proactive project management in the form of an early warning mechanism, its encouragement of collaborative risk management, and its provision for equitable risk allocation.

Over the course of two decades, NEC has introduced different standard forms of contract for different sectors within the construction industry, including engineering and construction contracts (ECC), term service contracts, and professional services contracts.

In the Hong Kong SAR, the NEC form has been the Development Bureau’s preferred means of public works procurement for projects over HK$1 billion (approx. US$127.6 million) since 2016. Beyond public works, organisations within Hong Kong’s utility services and public facilities sectors, such as the Hong Kong Airport Authority and MTR Corporation, a public transport operator, have also shown a preference for using NEC for major infrastructure projects.

Structure of the NEC4 ECC contract

The NEC4 ECC is made up of:

  • nine core clauses which are required to be included in every contract;
  • a main option clause concerned with the pricing of the ECC, of which there are six different options to choose from;
  • a dispute resolution option clause (in the standard NEC4 ECC, there are three options to choose from. In the Hong Kong NEC4 ECC, there is only one option to choose from);
  • standard secondary ‘X’ and ‘Y’ clauses, which are optional;
  • bespoke secondary ‘Z’ clauses, which are optional; and
  • contract data

The structure of the contract allows parties to pick and mix the appropriate options to create the contract they want, subject to their risk appetite and bargaining power.

Main options pricing clause

There are six sets of main option clauses – namely lump sum and measurement options (options A and B), target cost (C and D), cost reimbursable (E), and a management contract (F). These options are arranged in descending order in terms of certainty of price and financial risk that a contractor bears. The most popular options, A and C, feature an activity schedule, and their main difference lies in their risk-sharing structures.

Option A is a lump-sum contract under which the contractor receives a lump sum payment at each defined assessment level for each completed activity. The contractor bears the financial risks and payment is made regardless of whether the risk actually materialises. This option should be chosen if the project involves straightforward design and construction, the contractor designs a substantial value of the works in the project, and the parties wish to set out the costs of the works clearly.

Option C is a target cost contract under which the contractor is paid during works at each assessment level based on a cost reimbursable approach which shares both the losses and the gains. In this scenario, the parties would agree on their respective shares of savings made if there is any target cost underrun or overrun. This option should be chosen if the project is large-scale or relatively complex, the progress of completion is heavily dependent on unforeseen physical and weather conditions, and the parties wish to share risks.

Dispute resolution options

There are three sets of tiered dispute resolution clauses made available under the ECC, clauses W1, W2 and W3.

Clause W1 is an adjudication clause for projects under which the UK Housing Grants, Construction and Regeneration Act 1996 (UK HGCRA) does not apply, clause W2 is an adjudication clause for projects under which the UK HGCRA does apply, and clause W3 is an alternative to adjudication that applies to projects under which a dispute avoidance board has been appointed and the UK HGCRA does not apply.

The Hong Kong Government Edition of the ECC (HK NEC form) has not adopted any of the NEC4 dispute resolution clauses. Instead, the HK NEC form provides for an alternative dispute resolution clause incorporating adjudication of payment disputes – known as clause W4 – as discussed in more detail below. Currently, however, some of the private projects in Hong Kong SAR still opt for clause W1, rather than clause W4. When the proposed security of payment bill is eventually legislated in Hong Kong, we expect that private developers in Hong Kong SAR will adopt clause W4, to tie in with the availability of adjudication under the security of payment legislation.

Secondary options

Various secondary options are comprised of X, Y, and Z clauses. These secondary options may be used together with the main options, subject to certain exceptions, and are not in any way inferior to the main options.

X clauses are supplementary options to the core clauses that may be included to tailor the contract to the contractor’s risk allocation preferences. Examples include provisions on price adjustment for inflation, bonds and parent company guarantees, changes in law, delay damages, and design liability.

Y clauses are optional provisions governed by country-specific legislation. As per the NEC Contract Resources, the “Y(UK)2 clause incorporates the UK HGCRA, the Y(IR) clause incorporates the requirements of the Irish Construction Contracts Act 2013, and Y(Aus) clauses make NEC4 contracts comply with the various security of payment laws” applicable across Australian states and territories. Hong Kong SAR does not adopt Y clauses and they are not featured in the HK NEC form.

Z clauses are additional conditions of contract to be included by way of bespoke amendment. In Hong Kong SAR, the Development Bureau, which is the agency responsible for infrastructure development, has developed a range of Z clauses to suit the needs of individual projects, such as imposing a retention money mechanism and adding a new compensation event – which is an unforeseen event that could potentially impact the work being carried out – in case of a difference between the final total quantity of work done and the provisional quantity of an item stated in the activity schedule. The activity schedule is a series of activities with the price payable by the client for each completed activity outlined in options A and C.

Contract data

Contract data is where the project specific information is listed, and it is comprised of two parts.

Part 1 is supplied by the client and issued as part of the tender documentation. It identifies the selected main and secondary options, and includes details about the project manager and supervisor, as well as key dates and conditions.

Part 2 is data supplied by the contractor and returned as part of its tender submission. It identifies the relevant contacts, the contractor’s fee percentage, and the activity schedule or a ‘bill of quantities’, which is a bill that sets out the rates and prices the contractor is paid at each assessment interval of the quantity of work done in options B and D.

Dispute resolution

Although certain dispute resolution options, such as the tiered options W1, W2 and W3, are provided for under the NEC4 ECC, they are not applicable to the HK NEC form. A multi-layered dispute resolution option W4 is added to HK NEC form instead.

Option W4 provides separate dispute resolution processes for

  • a dispute between the parties arising under or in connection with the contract, which dispute may include a payment dispute, as defined in the Security of Payment provisions in Public Works Contracts under the Development Bureau Technical Circular (Works) No. 6/2021 (the Circular), that has not already been determined by an adjudicator in accordance with the Circular; and
  • a payment dispute.

Under the Circular, a “payment dispute” is broadly defined to include the situation where a payment claim is wholly disputed, the amount admitted as due is less than the claimed amount,  set-off or withholding of all or any part of the claimed amount is raised, the paying party fails to pay the admitted amount within the stipulated time; and/or the paying party fails to serve a payment response and pay the claimed amount in full within the stipulated time.

This means that for any payment dispute, as the first step, the contractor has the option to have the dispute determined by either the project manager within four weeks of the dispute arising, or an adjudicator within 55 working days from the date of the adjudicator’s appointment in accordance with security of payment provisions specified in the Circular. The contractor can raise a payment dispute under both processes, but the project manager will not determine the matter if the adjudicator has already made their decision before the project manager makes their decision known.

The adjudicator’s decision will be binding and enforceable until the parties to the adjudication settle the payment dispute by written agreement, or the payment dispute is determined by arbitration or litigation.

The project manager’s decision is also final and binding unless it is revised or replaced by an agreement in writing between the parties, or a decision by the adjudicator or the arbitrator.

The purpose of this separate mechanism for swift resolution of payment disputes is to facilitate cash flow through prompt payment to the contractor. 


The HK NEC form provides that attempting to resolve the dispute through a mediation is a pre-condition to arbitration.

For a dispute referred to the project manager, a party can refer to a mediation within four weeks, or a longer period agreed between the parties, after receipt of the project manager’s decision, or – if it is dissatisfied with the project manager’s decision or where the project manager has not given a decision on the dispute within four weeks - the date when the decision was required.

Similarly, for a payment dispute referred to the adjudicator, a party can refer to a mediation within four weeks of the date of the adjudicator’s decision if it is dissatisfied with the adjudicator’s decision. Notably, there is no express provision entitling a party to refer a dispute to mediation where the adjudicator has failed to provide its decision within 55 days. In our view this situation would rarely arise, but if it did, the adjudication will be treated as being terminated under the Circular and a party’s recourse would be to either initiate a new adjudication for that dispute or refer the same matter to the project manager for determination instead, in which case the mechanism and timing for the project manager’s determination referred above would apply.  


A party may refer a dispute to arbitration within 13 weeks from the date of the referral to mediation if there is no response from the other party; the date of the counterparty’s refusal to mediate; the date of termination of the mediation without settlement; or the expiry of the four week period for mediation in circumstances where neither party has referred the dispute to mediation. This is similar to the position under the Hong Kong SAR General Conditions of Contract for Design and Build Contracts (HK GCC) whereby either parties may refer the matter to arbitration within 90 days “if the matter cannot be resolved by mediation, or if either of the parties do not wish the matter to be referred to mediation”.

W4.1(1) of the HK NEC form provides that the provisions of Schedule 2 of the Hong Kong Arbitration Ordinance (HKAO) – which are the rules governing arbitration in Hong Kong SAR – apply to arbitration brought under that clause. The benefit of Schedule 2 is that it provides additional avenues to challenge an arbitral award. It allows a party to apply to the court for a decision on a preliminary question of law arising in the course of the arbitral proceedings, challenge the award for serious irregularity, and appeal against an arbitral award on a question of law.

Issuance of a certificate of completion is not a condition precedent that needs to be met before taking further steps in arbitration. This means parties can commence arbitration upon the date of completion for the whole of the works stated in the contract data, even in circumstances where the contract provides completion is only achieved on the date the certificate of completion is issued. This prevents the client from holding up any contractor’s reference to arbitration by delaying its issuance of the certificate of completion, in circumstances where the contractor has already completed the works, and is a welcome change for contractors.

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