The New NEC4

NEC have announced a new set of contracts - NEC4 - to be launched on 22 June 2017.

The NEC contracts introduced an original approach for project delivery by promoting collaboration, fair dealing, good project management, early identification of risks, and the allocation of risks to the parties best able to manage it.

The NEC3 has gained popularity since its launch 12 years ago, and has been used in numerous high-profile projects such as the London 2012 Olympics, Crossrail, and Christchurch International Airport.

The new NEC4 is the outcome of 12 years of feedback, user demand and best practice. The result is expected to be an updated and streamlined contract suite that supports innovation and project management, encourages collaboration, and has improved flexibility and clarity to make a contract that is easier to use.

We understand that some of the changes include:

1. New Contracts

  • Design and Build Contract which combines design, construction, operation and/or maintenance via a single supplier.
  • Alliance Contract (which will be published in consultation form) is a collaborative multi-party contract based upon an integrated risk and reward model, and its intended use is for large complex projects.

2. New Terminology

  • The “Employer” will be the “Client” in all forms except for the Supply Contract;
  • the “Risk Register” will be renamed the “Early Warning Register”;
  • the “Scope” will be the document describing the works in all forms, and will replace “Works Information” in the Engineering and Construction Contract, “Service Information” in the Term Service Contract, and “Goods Information” in the Supply Contract.
  • Section 8 “Risk” has been renamed “Liability and Insurance”;
  • Secondary Option X4 “Parent company guarantee” has been retitled “Ultimate holding guarantee”, and includes provisions for more complex corporate structures; and
  • Secondary Option X12 “Partnering” has been retitled “Multi-party collaboration”.

3. Assignment

  • The NEC4 introduces a new core clause that permits the parties to assign their rights under the contract to another party. Previously parties would have needed to use a Z-clause amendment.  

4. BIM

  • Options to support the use of BIM have been incorporated.

5. Bribery and Corruption

  • The introduction of core clauses to prohibit corrupt acts. This is to bring the NEC4 up to date with the Bribery Act 2010, and therefore observes the greater safeguards required by Clients which will avoid the need for Z-clause amendments.

6. Compensation Events

  • A Client can add additional compensation events in the Contract Data Part One, allowing parties to change the risk profile of the contract without the need for a Z-clause.
  • The Contractor will be able to claim its costs of preparing quotations for a proposed instruction which are not accepted by the Project Manager.

7. Confidentiality

  • Additional core clauses have been added to restrict the disclosure of confidential Project Information. This is to keep up with Client demands, and avoid the need for Z-clauses that were required in NEC3.

8. Contractor’s Proposals

  • The NEC4 will contain new processes that allow the Contractor to identify opportunities that can improve the outcome of a project.
  • The Contractor can propose changes to the Scope which can reduce cost. The Project Manager can then accept and instruct on this proposal, unlike NEC3 they can no longer request a quotation prior to the acceptance.
  • The Contractor can propose an acceleration to achieve an earlier completion. The NEC3 process will remain the same and the Project Manager can then request a quotation before they decide whether to accept.
  • A new secondary option has been introduced which allows the Contractor to identify changes to the scope which would reduce the cost of an asset over its whole life.

9. Collateral Warranties  

  • The type and form of collateral warranty can now be specified, which reduces the need for additional Z-clauses. 
  • There is a new secondary option for the provision of collateral warranties to other parties with an interest in the project.

10. Design and Build Option

  • The NEC has added a new secondary option specifically for design and build contracting. This deals with:
    • - the requirement that professional indemnity insurance be maintained;
    • - design responsibility by aligning the Contractor’s standard of skill and care for design to professional designing similar works (this is preferred by insurers);
    • - Intellectual property;  
    • - licences to use materials provided by the parties to each other; and
    • - retention of documents in relation to design information.

These provisions were frequently required by insurers, and the parties would have otherwise had to introduce them through the use of Z-clauses.

11. Dispute Resolution

  • Prior to any formal proceedings, there will be a four-week negotiation period between the senior representatives of each party for negotiation of a dispute.  This will be mandatory where option W1 applies, but consensual where dispute resolution W2 applies. This is to increase the chance of a solution being reached and collaboration between parties being promoted.
  • Where the UK Housing, Grants, Construction and Regeneration Act does not apply, the NEC4 will include option W3. This gives parties the option to refer a dispute to any dispute resolution board nominated at the time the contract is formed.

12. Early Contractor Involvement (ECI)

  • ECI is now directly incorporated as a new secondary option; previously it was a stand-alone provision.  The Client is permitted to appoint the Contractor at an early stage to provide their input into the design process, allowing for innovations, risk elimination, cost savings and time certainty.

13. Final Assessments

  • In the Cost Based Contracts in main options C, D, E and F, the Contractor is to notify the Project Manager when the Defined Cost is ready for review, and then the Project Manager will review it within 13 weeks and either accept it or advise on any issues.  If the Project Manager does not comply, the Defined Costs are accepted without review, which encourages the parties to assess such costs regularly rather than just at the end of the project. 
  • There is also a new requirement for the Project Manager to issue its final assessment of the payment due to the Contractor within four weeks of the Defects Certificate.  If the Project Manager does not do this, the Contractor can issue its own final assessment.  The final assessment submitted by either party becomes conclusive if not challenged and referred to dispute resolution within four weeks of it being issued. This is similar to JCT contracts.

14. Schedules of Cost Components and Fee

  • The Shorter Schedule of Cost Components (SSCC) has been deleted leaving only the Schedule of Cost Components (SCC) to assess Defined Cost in the NEC4 contracts main options C, D and E. This has been introduced for simplicity. 
  • Subcontractor costs have been moved across to the SCC and provision for payment has been made consistent across the options. 
  • The rules for people have also been changed; the NEC4 now allows for working in different locations and not exclusively in Working Areas. This means that if people’s normal place of work is within the Working Areas, their time spent working ‘on this contract’ will be included within Defined Cost as opposed to just their time spent within the Working Areas.  This recognises the change towards flexible working patterns in society.
  • Further, there is no longer a separate fee percentage for subcontracted works.

15. Quality Management

  • The Contractor must prepare and issue a quality management system and plan.

Conclusion

There has been a clear move by NEC to take on board industry feedback and remove obvious gaps in legal risks; thereby reducing the need for generic Z-clauses (parties will still have to have some Z-clauses specific to project requirements).

By streamlining terminology and Cost Components across the entire series it has also created clarity and is easier to use, which is particularly beneficial for international projects where English may not be the first language of the user.

The amends also provide for a solid framework of collaboration between parties from the early stages to completion; this allows for better project management and avoids disputes.