The new NEC 4 – it is not revolting!
I attended the NEC User group’s annual event on 22 June, which had the added frisson of excitement of coinciding with the official launch of the new NEC 4 suite of contracts. There had been plenty of communication, and of course collaboration, between the group and the industry, or “users” as we are called, since NEC 3. This fed into the strapline for the day of “evolution not revolution”.
The end products within the new NEC 4 box are largely the result of a series of “lessons learned” exercises. NEC 3 arrived in 2005, had some revisions along the way, in particular in 2013, but since its arrival the use of NEC has burgeoned, becoming the UK government’s contract of choice in respect of its construction and infrastructure projects. It has now been robustly tested by some heavyweight UK projects, in particular Terminal 5, the Olympics, Crossrail, and currently by London’s new “super sewer”, Thames Tideway. It is also now becoming increasingly used abroad, most notably in Hong Kong and South Africa.
The “evolution” strapline does accurately reflect the amendments and provides some solutions which have arisen from difficulties that the drafting of NEC 3 has caused.
" But as was asked at the launch last week – what if you have a poorly performing party within the alliance? The answer: remove that member and get somebody else in. "
As an overview it does look as if some key “sticking points” have been clarified or resolved (at least partly), for example:
- An option has now been included for the Contractor to request a review and acceptance of its Defined Cost during the project and not wait until the end of the job. This helps remove the risk of a Project Manager not deducting Disallowed Costs prospectively, but rather deducting large amounts of costs towards the end of the project, potentially for commercial leverage. This new provision avoids this risk by providing for a “cost baseline” to be fixed at the Contractor’s request as the project progresses. It can be used more than once.
- A new concept of “Treated Acceptance” in relation to the Contractor’s programme has been introduced. This is a deeming provision added to the Accepted Programme process which places an obligation upon the Project Manager to notify acceptance or non-acceptance of a programme issued for acceptance within the time allowed (normally two weeks). Once notified of this failing by the Contractor, the Project Manager has one further week to notify its position, failing which the programme submitted by the Contractor will be deemed to be accepted. Such is the importance of the Accepted Programme this is a helpful provision, although in my experience the problems with the Accepted Programme process are not just time related, but also concern the commercial “game playing” (by both Contractor and Project Manager) as regards the content of the programme and/or potentially spurious reasons for it being rejected.
- The concept of the “dividing date” has been added in relation to the compensation event mechanics, which removes any doubt as to which Accepted Programme a compensation event should be implemented against. The process of identification, notification, assessment and implementation of a compensation event will take several weeks, if not months, from the date of the original event. Properly administered and managed it is likely that at least three programmes will have been “accepted” during the diary of a compensation event. This has, on projects I have advised on, begged the question: once assessed, against which programme should the compensation event be implemented? The “dividing date” resolves this. The dividing date is the date of a communication of an instruction or notification by the Project Manager or Supervisor that is a compensation event or, for all other compensation events, the date of notification of that compensation event. Any delay to the Completion Date is assessed against the Accepted Programme current at the dividing date.
As regards other changes or additions to the box, the most revolutionary evolution is the new Design, Build and Operate (“DBO”) contract. Recognising that the NEC contracts dealt principally with construction and engineering projects, but had no standard form where the Client (note the term Employer is now dead) could have the works operated by the Contractor post-completion, the DBO seeks to plug that gap. The contract is most suitable for a project where significant construction work is required (which will be designed by the Contractor) and the end deliverable will be in operational service for a period of years. As one would expect, the DBO has all the core collaborative provisions in the standard NEC form.
At this point there is both a pregnant pause, and then a dramatic drumroll.
The evolution not revolution strapline is thrown out of the window somewhat with the introduction of the Alliance contract (which is not yet a final issued document, and remains in draft/consultation form, due for publication in January 2018). Alliance contracts are not new to the industry but the approach of the NEC version injects some added thrust.
The intent is that every party involved on a particular project will sign up to one Alliance contract. The contract will be performance-based, with risk and reward for achievement of the Alliance Objectives. The members of the Alliance work together as an integrated team.
There is an Alliance Board which manages the Alliance on behalf of its members. The Alliance Board has a key role: it develops the Scope and any changes to it; it accepts quotations in relation to compensation events; and it resolves disputes. The rub here is that every decision of the Alliance Board has to be unanimous and every decision is binding on all members. Further, should a party not accept the outcome of a review of any dispute and attempt to refer that dispute to adjudication (the right to which is not referenced within the current draft), then either that member’s place in the Alliance will end or the Alliance itself will end.
So there are a number of potential carrots for members under the Alliance contract; the stick, however, has been replaced by an axe.
The Alliance contract is, in principle, a good forward-looking contract. It is clear that the NEC Users’ group views the Alliance contract as the natural evolution of parties to NEC contracts working in a collaborative manner (which it is), and is potentially the ultimate way to foster collaboration.
But as was asked at the launch last week – what if you have a poorly performing party within the alliance? The answer: remove that member and get somebody else in. The bar on formal disputes is understandable (based on the ideology) but radical, and it is difficult to foresee it being readily accepted.
The potential problems with this appear obvious, and also beg the question as to whether it is compliant with the Construction Act. I am not suggesting that the concept is wrong, but there remain people working within the construction industry who still struggle to get their heads properly around the philosophy of the NEC contracts (not ignoring of course two of the UK’s most senior construction Judges who have been critical of elements of the “style over substance” drafting).
Notwithstanding the reported increase in use of alliance-type contracts, this next stage in the NEC process appears to be only for the most experienced and enthusiastic of NEC “users”, high on its merits and convinced that its aims and provisions are sufficient to prevent disputes during the process of procuring, designing and constructing complex projects.
My view is that the Alliance contract will gradually be taken on and become mainstream over the coming years, but evolution rather than revolution dictates that this form of contract may take some time (and some soul searching) within the industry to properly gain traction.