Blog: NEC4 – will the ‘Next Generation’ of standard contracts be a step forward?

Euan Pirie
Euan Pirie

Euan Pirie from Harper Macleod highlights the imminent launch of NEC4

The NEC has published a “white paper” entitled “nec4: The next generation: An explanation of changes and benefits”.

NEC is, of course, the organisation behind a suite of standard form contracts used for civil engineering and constructions projects in the UK and several other international jurisdictions. The contract was originally called the ‘new engineering contract’ (nec).

The white paper provides a number of useful insights regarding the changes that we can expect to see when the next generation of nec contracts is launched at the NEC Users’ Group Annual Seminar 2017, to be held at the County Hall in London on 22 June.

The early indications are that NEC has actively engaged and appears to be genuinely attempting to make changes to cut down on the number of “legal led” Z clauses which amend the standard form contracts and that have to be sought in individual projects.

Whether the need for detailed Z clauses can be avoided following the introduction of nec4, however, remains to be seen, as the temptation to “tinker” will remain strong, as can be seen from generations of practice involving the JCT standard forms.

Here, we take a look at some of the main changes proposed by nec4, and analyse how they might play out in practice.

New contracts - two entirely new form of nec precedents are to be introduced:

  • the NEC 4 Design Build Operate Contract (DBO); and
  • the Alliance Contract (ALC) in a consultation form.

  • The objective of the DBO contract is to allow procurement of design, construction, operation and/or maintenance services from a single supplier. The “white paper” confirms that there will be flexibility regarding the level and nature of services that can be procured following completion of the works, ranging from sophisticated performance levels to more basic FM services.

    Comment: The paper makes it clear that the contract will not provide the additional provisions required where the supplier is also to provide finance to the client – i.e. this is not intended to be a DBFO contract, which has been the main use for combined construction and maintenance services in the UK previously. It remains to be seen, therefore, whether the DBO contract will be widely adopted as:

    1. only a limited number of entities provide both construction/engineering and operational/maintenance services through a single corporate entity (meaning that construction and operational joint ventures (COJVs) may have to be formed in order to respond to tender opportunities using the DBO); and
    2. procurers may not be willing to pay the premium that is likely to be entailed in purchasing combined construction and maintenance services of this nature.
    3. The benefits of a DBO contract are potentially significant, however, and we look forward to seeing how key issues are addressed in nec4, including whether the client will be entitled to make deductions against operational or maintenance payments where problems are experienced at the completed facilities that are attributable to defects in the original construction or engineering works. If that option applies, that would be a major step forward for clients and provide them with a highly effective means of encouraging prompt remediation of construction defects.

      The ALC is set to be a multi-party contract, intended to deliver deeper collaboration driven by common interests, risk sharing and an integrated risk and reward model. Alliance contracts have been used in the UK previously (principally in the oil industry) and internationally. They are intended for use primarily in high technical complexity/high risk contracts, for which the adoption of a traditional risk transfer based approach to contracting might not be effective due to the large price contingencies that would likely be applied.

      Comment: The challenge for the ALC is likely to be persuading procurers of construction services that the potential savings offered by the contractor not applying significant risk contingency pricing is not outweighed by the lack of certainty created due to the (relative) absence of risk transfer provisions.

      nec4Significant amendments/new provisions

      These are proposed to be included within the existing suite of nec3 contracts. We’ve selected some “highlights”, along with some analysis of how they might work out:

      • New “design and build” and collateral warranties options that are set to bring nec3 drafting more closely into line with market precedents such as: contractor obligation to maintain PII; contractor enhanced design duty of care; copyright licences; and obligations to enter into collateral warranties.
      • The acid test for this option will be the extent to which it cuts down on the need for lawyers to draft detailed Z clauses, which amend the standard form contracts, so that the requirements of project funders and sponsors on these key elements can be met. The white paper does not, however, confirm whether nec4 will include a “standard form” collateral warranty, which might be a useful and time-saving initiative.

        • Enhanced alternative dispute resolution/dispute avoidance mechanisms.
        • These provisions will only have “teeth”/be likely to apply to those works to which the provisions of the Housing, Grants, Construction and Regeneration Act 1996 do not apply.

          • Provisions to better and more fully encourage assessment of Defined Cost (for Options C, D, E and F) on a regular and ongoing basis, in the hope that “final account” type disputes can be reduced.
          • Payment process to be instigated by the submission of an application for interim payment by the Contractor.
          • This is a “common sense” change and the frequent object of Z clauses introduced by solicitors acting for the client in any event.

            • New secondary option drafting to support the use of building information modelling.
            • New provisions relating to production of a quality management system and plan by the Contractor.
            • New provisions prohibiting corrupt acts and allowing for contract termination where these arise.
            • New confidentiality and publicity undertakings.
            • New compensation event allowing the Contractor to recover costs of quotations in respect of proposed instructions that are not accepted.

              • Euan Pirie is head of the Infrastructure and Projects Practice team at Harper Macleod and specialises in complicated and high value construction and engineering contracts and revenue funded (PPP) projects.
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