Improving collaboration in construction when working under NEC
Andy Inchmore, Managing Surveyor and George Taliana, Managing Surveyor, GVE Commercial Solutions
THE NEC suite of contracts are noticeably different to many other standard forms of contract available within the construction industry. NEC4 is the fourth edition of the NEC suite of contracts, originally launched in the UK in 1993. It is the leading standard form of contract centred around proven best practice in project management and a collaborative approach to risk management.
Whether client, contractor or subcontractor (and many other participants), getting the basics right when administering a NEC4 contract will help to ensure a project reaches a successful conclusion. This article considers five key areas that are central to achieving the desired outcomes:
- Communications
- Early warnings
- Compensation events
- Programming
- Defects
Communications
Having an effective flow of communication between the parties is vital during the life cycle of a project. NEC4 contracts provide clear and concise guidance on the communications required between the parties. Regular users of NEC contracts will be aware that some communications are time sensitive and must be communicated within certain timeframes to ensure compliance. There are other formalities that must also be observed to ensure a communication is correctly issued. These are predominantly set out in clause 13, however, it will be necessary to identify if any amendments (z-clause ) have been made to the clause to alter the standard requirements.
The key formalities include:
- The form of communication: NEC4 requires each communication to be in a form that can be read, copied and recorded and written in the language of the contract.
- Where communications are to be sent: A communication has effect when it is issued to the correct address as identified in the contract. This could be an electronic or a physical address or even both.
- Who issues communications: Throughout the contract it is clear who is required to issue certain communications. Predominantly under the NEC4 Engineering and Construction Contract (ECC), this is the project manager, supervisor, or the contractor.
Disputes on projects can occur when the parties fail to communicate in the manner required by the contract. A common example of this occurs when verbal instructions are given to site operatives by the project manager or supervisor, yet nothing is subsequently put into writing. This can potentially lead to payment for these works being assessed as not due as the management team may profess the works were never instructed. Even worse, the work can be classed as defective if the contractor has built something not in accordance with the ‘scope’.
Understanding who can issue notifications and communications under the contract is also significant.
Understanding who can issue notifications and communications under the contract is also significant.Under the ECC, the project manager and supervisor are named individuals and are required to carry out their actions unless they have delegated such actions in accordance with the contract. Notifications and communications from the contractor can be given by anybody with its apparent authority as the contractor is a corporate body and is required to act through its employees and others who represent it.
A common misconception is that the people who have the authority to issue notifications and communications for the contractor are those identified as ‘key people’ in the contract, but the contract does not say this. A useful example of this can be found in clause 15.1 whereby an early warning is required to be notified as soon as the ‘contractor’ is aware of a matter. It makes sense that the person who first becomes aware of such a matter can notify, which in most circumstances would be someone working on the site.
Follow up on any verbal communications to ensure they are confirmed and captured in writing by the person who gave it or a delegated authority.A good management tool would be to identify at the outset the main people who would normally be involved in the issuing and receiving of the various communications required by the contract. This should assist to ensure any following actions are addressed in a timely fashion. It should be noted, however, that such a list would not preclude others from issuing communications, nor make them invalid.
Top tips: Follow up on any verbal communications to ensure they are confirmed and captured in writing by the person who gave it or a delegated authority. Do not act on the instruction until it is given correctly.
Early warnings
Early warning notifications (EWN) and compensation events are sometimes confused as being one and the same or of a similar nature. This is fundamentally not the case though as they both serve a different purpose, follow different processes and produce different outcomes. The early warning process is a risk management tool designed to identify and deal with potential risks to the project before they happen.
Clause 15.1 states:
“The contractor and the project manager give an early warning by notifying the other as soon as either becomes aware of any matter which could:
- Increase the total of the prices.
- Delay completion.
- Delay meeting a key date; or
- Impair the performance of the works in use.
The project manager or the contractor may give an early warning by notifying the other of any other matter which could increase the contractor’s total cost. The project manager enters early warning matters in the early warning register. Early warning of a matter for which a compensation event has previously been notified is not required.”
A common mistake is the assumption that, if an EWN is given, then a notice of compensation event (NCE) does not need to be given in relation to the same matter. This is not the case as the EWN process will not provide the compensation that the contractor seeks.
When EWNs and NCEs are issued, or more importantly if they are not issued, can impact on what the contractor may be entitled to recover.This does not, however, preclude the requirement to issue an EWN for a matter that then becomes a compensation event.
Compensation events
The contract is clear that EWNs are to be notified as soon as they are identified. Compensation events do not need to be notified within the same timescales.
Clause 61.3 states:
“The contractor notifies the project manager of an event which has happened or which is expected to happen as a compensation event if:
- The contractor believes that the event is a compensation event; and
- The project manager has not notified the event to the contractor.
If the contractor does not notify a compensation event within eight weeks of becoming aware that the event has happened, the prices, the completion date or a key date are not changed unless the event arises from the project manager or the supervisor giving an instruction or notification, issuing a certificate or changing an earlier decision.”
The significance of when EWNs and NCEs are issued, or more importantly if they are not issued, can impact on what the contractor may be entitled to recover for certain events under the compensation event mechanism.
Clause 61.5 states:
“If the project manager decides that the contractor did not give an early warning of the event which an experienced contractor could have given, the project manager states this in the instruction to the contractor to submit quotations.”
The importance of this becomes more evident when dealing with the submission of quotations for compensation events.
Clause 63.7 states:
“If the project manager has stated in the instruction to submit quotations that the contractor did not give an early warning of the event which an experienced contractor could have given, the compensation event is assessed as if the contractor had given the early warning.”
What is the significance of this? Considering an example whereby a contractor has encountered an unforeseen physical condition during excavation works, i.e. an underground structure, which satisfies the prerequisites of clauses 60.1(12) and 60.2. Once it has satisfied these requirements, the contractor must notify a compensation event within 8 weeks. However, as soon as they became aware of the matter which could increase the total of the prices, delay completion etc, they should have notified an EWN.
Let’s assume the contractor did not issue an EWN and continued with their excavation works in and around the structure which consequently took longer to complete. The contractor subsequently issued a compensation event notice to the project manager after five weeks to try and recover the additional time and defined cost incurred due to the event.
If the contractor had issued an EWN, the project manager would have been afforded the opportunity to instruct what was to be done with the structure.In this situation, the contractor failed to identify the importance of giving an EWN and subject to clauses 61.5 and 63.7, this must be considered by the project manager when assessing the compensation event. If the contractor had issued an EWN, the project manager would have been afforded the opportunity to instruct what was to be done with the structure. The project manager may have just instructed the works to continue as the contractor chose to do. Should that happen, the contractor would be entitled to recover its associated defined costs.
Alternatively, the project manager may have concluded, after discussion with the client and others, that the excavation works should have stopped in that area as the planned works in that location could be carried out in an alternative location.
Consequently, the project manager may have instructed no further works or reinstatement works only. This would mean that the additional works carried out by the contractor were unnecessary.
Should this be the case, the project manager will assess the compensation event as if the contractor had given the EWN at which point, they could have advised their alternative plans. By failing to give the EWN, the costs incurred by the contractor in continuing the excavation works could be either assessed at zero (or some other sum) or considered disallowed cost depending on which contract main option is chosen.
This scenario identifies how failure to issue an EWN can result in a significant amount of cost not being recovered by the contractor for works undertaken. Furthermore, the contractor in this scenario may need to recover five weeks of their programme spent doing these works. This could result in further costs being incurred which would also not be recoverable as a compensation event.
Top tips: Do not wait to issue an EWN if you become aware of any matter listed in clause 15.1. The EWN process is a good management tool to be used collaboratively by the parties to identify and deal with any risk to the project as soon as practicable. Sending an EWN after any matter can be dealt with is not what the EWN process is for.
Programming
The contract terms in the programming section of the ECC (core clause 3) are a comprehensive list of the exact requirements to be included within each programme issued for acceptance. In comparison to other standard forms of contract, the exacting ECC programming requirements are designed to promote active project management as well as detailed information on logic, sequencing, resourcing, and risk.
This identifies how failure to issue an EWN can result in a significant amount of cost not being recovered by the contractor for works undertaken.This approach encourages positive and collaborative behaviours both to identify and manage risks and opportunities as they arise and the contemporaneous assessment of the effect of compensation events.
The ECC clearly identifies what is required to be submitted in each programme issued for acceptance. These requirements include access dates, key dates, planned completion, the completion date, allowances for float, time risk allowance and stated procedures in the scope. The details of these requirements are found in clause 31.2.
ECC3 did not address the scenario where the project manager failed to respond to the contractor, either accepting or rejecting the programme issued for acceptance. This lack of response has many negative effects, one of which was the assessment of compensation events using the last accepted programme. Assessment on an out-of-date programme may be flawed as the programme may no longer include the same methodology and/ or sequencing of the works, nor the same logic, and thus not reflective of actual progress and/or actual logic of the work still to do.
NEC4 provides an obligation upon the project manager to respond to the contractor within the prescribed period. If the project manager fails to either notify acceptance or non-acceptance (including reasons for not accepting it) within the prescribed period, following a notice, failure for a further one week provides that the contractor’s programme is treated as being accepted by the project manager, known as ‘deemed acceptance’.
This clause encourages collaboration, although provides a default position in the event of a failure by the project manager.
Top tips: Invest the time and effort to produce a detailed and accurate programme. Not only will it be used as the basis for assessing compensation events, it also highlights both risks and opportunities to be explored between the parties.
Always remind the project manager if they fail to accept the submitted programme for acceptance. ‘Deemed acceptance’ of the programme is better than having an outdated programme.
Defects
The ECC is clear in specifying what a defect is.
Clause 11.2(6) states:
“A defect is:
- A part of the works which is not in accordance with the scope; or
- A part of the works designed by the contractor which is not in accordance with the applicable law or the contractor’s design which the project manager has accepted.”
With reference to communications, and similar to the EWN procedure, to ensure a proactive collaboration between the parties, clause 43.2 states:
“Until the defects date the supervisor and the contractor notifies the other as soon as they become aware of a defect.”
This obligation remains until the ‘defects date’ which is identified in the contract data and is typically 52 weeks after completion of the whole of the works. Where the supervisor has not notified a defect prior to the defects date, the contractor still has the obligation to correct the defect if they are aware of it.
This is an important obligation that should not be ignored. Not only should all defects be notified, but all known defects (notified or not) must be corrected by the contractor by the end of the ‘defect correction period’, otherwise the contractor will be in breach of contract.
Typically, the defect correction period is two or three weeks. It is important to remember the defect correction period is not just tied to completion.
Clause 44.2 sets out that whilst the defect correction period begins at completion for defects notified before completion, the defect correction period also begins when a defect is notified after completion, meaning that there may be numerous defect correction periods running at any one time.
However, whilst clause 44.2 sets out the prescribed period for correcting a notified defect, the contractor must correct all notified defects before completion that may delay completion, as defined in clause 11.2 (2).
Contractors should be wary of not correcting defects within the defect correction period. If the contractor has been given access to correct the notified defect and it is not corrected within the prescribed period, the project manager is entitled to assess the cost of correcting it, which is then paid for by the contractor.
Top tips: Remember to notify a defect as soon as you become aware of it and correct them within the prescribed period. Additionally, remember to keep clear records of each defect, as there is often a debate (or worse, dispute) between the parties as to whether the defect is a design or workmanship issue.
Andy Inchmore, Managing Surveyor and George Taliana, Managing Surveyor, GVE Commercial Solutions