Cutting carbon: the small print

Aurelia Russo looks at the main components of NEC’s new Option X29 in the context of NEC4 ECC and highlights some key points for Contractors.

Getting started 

As pressures to cut carbon increase, those working on upcoming projects should be looking to tackle climate issues at the outset, long before any works start on site. This inevitably begins with the tender documentation and the construction contract. Climate change is now the newest addition to the long list of contractual risks to be allocated between the parties. NEC has already developed its first offering for dealing with this critical issue, but does it go far enough? 

Secondary Option X29 Climate Change

The core aim of X29 is to “reduce the impact of the creation, operation, maintenance and demolition of the works on climate change”.1 How exactly this reduction is achieved on projects and what contribution the construction industry as a whole can make towards a carbon-zero world is yet to be seen. 

Broadly, the Option integrates requirements for tackling climate change into the Scope (the Climate Change Requirements, or “CCRs”) and introduces a pain-gain mechanism by way of a Performance Table, detailing financial rewards and penalties attached to net zero targets and timeframes. 

Collaboration (X29.2)

The ethos of the NEC suite is reiterated in relation to climate change. The Contractor is to collaborate with the Climate Change Partners (“CCPs”), being those parties listed in the CCRs as contributing to the sustainability of the project. 

Contractors should expect the list of CCPs to be long, particularly on large-scale projects. This obligation therefore fosters an overall spirit of teamwork and cooperation between all those working on the project, at least in relation to climate issues. As the CCPs are part of the Scope, the Project Manager may amend the list unilaterally as they see fit during the life of the project. Contractors should bear in mind that building good relationships with key CCPs could create opportunities for innovation and cost-savings. 

Early warning (X29.3)

Notice should be given as soon as either the Contractor or the Project Manager become aware of any matter affecting the CCRs. 

Dependent on how comprehensive the CCRs are, this could be a burdensome task, particularly as there will surely be some doubt over what matters may or may not affect the CCRs. Further, what level of impact is enough to warrant an early warning notice? Contractors should err on the side of caution and notify in all cases. CCRs which are objective and measurable will, of course, make any impact and necessary warning easier to ascertain. 

Climate change plan (X29.4)

The Climate Change Plan (the “Plan”) is a Contractor-led document which describes how it will fulfil the CCRs. The Project Manager has two weeks to accept or reject the Plan, however, if the Contractor is faced with silence, it is not entitled to assume that the Plan is accepted. 

Contractors should ensure that the Plan complies with the CCRs, and that it will not affect the provision of the works. The Plan sits outside of the Scope, and NEC refers to it as merely a “statement of intent”.2 The Contractor commits no breach by failing to comply with the Plan; a breach is in fact committed when the Contractor falls short of the CCRs. Contractors who do not have in-house expertise should consider appointing an external consultant to advise on how to meet the CCRs without pricing themselves out of the job. 

Disclosure (X29.5)

The CCRs should set out the parties’ respective rights to disclose, publicise and market their climate credentials. Positive statistics on net zero can assist Contractors when bidding on other projects, therefore it is preferable that the CCRs grant broad rights of disclosure. If, however, the CCRs are silent on this point, the Contractor should continue to comply with its general obligations of confidentiality under the contract in relation to such information, otherwise it risks acting in breach of contract. 

Acceleration and defects (X29.6)

If the parties have opted to use a Performance Table in addition to the CCRs, the Contractor should ensure that quotations for accepting defects or accelerating the works include any proposed changes to the Performance Table. This is important to avoid being held to targets which are no longer realistic or achievable, and incurring financial penalties as a result. 

Compensation events (X29.7 - 10)

The Contractor is able to claim for compensation events which only impact the Performance Table. If such a compensation event is given, then the Performance Table will be updated in accordance with the Contractor’s quotation. The Performance Table is a new element for the Contractor to consider when notifying a compensation event. It may wish to claim for adjustments to time, money and the Performance Table where all three are impacted by the same event. 

Contractor’s proposals (X29.11)

The Contractor is free at any time to make proposals for the achievement of the CCRs. Any such proposal may be rejected by the Project Manager for any reason. If the Project Manager wishes to accept a proposal, it cannot change the Scope until the Contractor’s quotation is agreed. The Contractor will be awarded time and money in accordance with the agreed quotation, and if applicable, the Performance Table will also be updated. This mechanism gives the Contractor the protection it needs to feel comfortable in implementing new technology and science arising during the life of the project. 

Performance measurements (X29.12)

If a Performance Table is in place, the Contractor is obliged to report on its climate performance against those benchmarks at the intervals stated in the Table. 

Where performance is in the red, the Contractor is given an opportunity to make proposals for improvement. If this process fails, the Contractor will be liable for the financial penalty set out in the Performance Table. Although NEC refer to such sums as “negative incentives”,3 it is easy to imagine how disputes over penalties may arise akin to liquidated damages for delay. The Contractor should feel encouraged to raise any issues it has with the Table as early as possible during contract negotiations. Although, the Contractor is afforded some protection by the fact that the Performance Table is not Scope, meaning that the Project Manager cannot unilaterally increase the financial penalties, nor decrease the rewards. 

Where performance is in the green, the Contractor will be entitled to the relevant financial reward. Contractors should think about how the rewards and penalties contained in the Table may be passed down to subcontractors to incentivise their contribution to the targets. 

Limitation of liability (X29.13)

The Performance Table is expressly excluded from any limitation of liability under Option X18 (Limit of Liability). Generally, the Contractor will require that its total liability under the contract is limited to either the contract price or the level of its professional indemnity insurance. Depending on how the Performance Table is drafted, the Contractor’s liability thereunder could far exceed its insurances. This exclusion exposes the Contractor to a portion of unlimited liability which should be resisted during contract negotiations. 

Stepping up

Option X29 offers a helpful solution for parties wishing to incorporate climate change obligations into their NEC4 contract. The success of the Option will vary across projects due to its reliance on the content of the CCRs, the Plan and the Performance Table – all of which are left to the parties to draft. On large-scale projects, this exercise will likely require significant input and investment from both sides if the contract is to have any chance of making a meaningful impact on the project’s carbon footprint.

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Jeremy Glover

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