Changes to NEC4 construction contracts focus on compensation and cost

Out-Law News | 25 Mar 2019 | 2:32 pm | 1 min. read

The Institution of Civil Engineers (ICE) has published a set of amendments to its standard form New Engineering Contracts (NEC), making changes to the way compensation and defined cost are assessed.

The ‘January Amendments’ to NEC4 (37 page / 497KB PDF) were published earlier this month. Construction expert Mark Collingwood of Pinsent Masons, the law firm behind Out-Law.com, said that the changes were not major, but that users of the contracts should be aware of them.

“Much of the new material is useful correction of minor drafting issues but there are one or two points of significance, in particular in relation to assessment of compensation events where the accepted programme is out of date,” Collingwood said.

On the issue of compensation, clause 63.5 of NEC4 clarifies that the assessment of a compensation event should take into account events which have happened between the date completion of a project was supposed to have happened and the ‘dividing date’ – when the project manager makes a notification of the compensation event.

The amendment confirms the previously-held assumption that in order to assess delay caused by a compensation event when the ‘accepted programme’ of the project was out of date, parties should nominally update the accepted programme.

The amendments also update the way project managers and contractors deal with ‘defined cost’ for part of the works being carried out. The previous NEC4 provision allowed assessments of tranches of defined cost to be made final and not capable of after-the-event audit or review by the project manager or client.

The amendment resolves this, requiring contractors to notify project managers “when the defined cost for a part of the works has been finalised”. However it does not clarify what is meant by “a part”, which Collingwood said would be troublesome as it appeared that operation of the provision by the contractor was mandatory.

Other amendments concern issues such as termination following no-fault events and clarification of the difference between work undertaken on a time charge basis and work undertaken on a lump sum or rates basis.

NEC4 was introduced in June 2017, the latest version of the standard form contracts created by ICE in 1993.

The first version of NEC was followed by updated versions in 1995 and 2005. NEC is the contract of choice for many of the UK government's procurement projects, including 2012 Olympics-related projects and Crossrail. It is also increasingly being used in IT procurement, as well as infrastructure; and being used internationally.