NEC X options: Contract procedure
Andrew Wooldridge-Irving, Associate Director and Alex Tolson, Consultant Surveyor, GVE
REMINDER: Where any X options are planned to be included, they should be expressly indicated as such in contract data part one.
Furthermore, many X options also require supplementary information to be populated in either contract data or the scope, or both, to facilitate effective operation of the procedure. Where this task is not undertaken it may lead to complications in administering the contract.
In our initial article, entitled ‘NEC X options: Introduction’, we noted that the X options cover a wide variety of different topics, which makes it difficult to accurately categorise them.
For the purposes of this, and other related articles, we have organised each X option according to what we consider to be the dominant theme, which for this article is ‘contract procedure’. This theme has been associated with the following X options:
Depending upon the NEC form and main option chosen the calculated PAF amount is either paid as an amount due or added to the prices, although this latter calculation is effectively a ‘reverse PAF’ adjustment.X1 – Price adjustment for inflation – ECC, ECS, PSC, PSS, TSC, TSS, FMC, FMS, SC
X3 – Multiple currencies – ECC, ECS, PSC, PSS, TSC, TSS, FMC, FMS, SC, DBOC
X5 – Sectional completion – ECC, ECS, PSC, PSS
X14 – Advanced payment – ECC, ECS, SC, DBOC
X16 – Retention – ECC, ECS
X24 – The accounting periods – TSC, TSS, FMC, FMS
To provide definition, a ‘contract procedure’ may be defined as a task, or series of tasks, which is undertaken to administer the contract requirements. Each applicable X option is examined in detail below.
Financial procedures: X1, X3, X14 and X16
All of these X options add an additional process to the payment procedure at core clause 5. Option X1 provides for a price adjustment for inflation (PAF) calculation. This calculation is either undertaken each time an amount due is assessed, or on each inflation adjustment date, depending on which NEC form is used. The TSSC form contains a similar provision at sub-clause 52, where selected, and the DBOC form includes a price adjustment procedure at sub-clause 54. The PAF calculation relies upon information in contract data, including base date, price indices and proportions for each identified index, including a non-adjustable element. Depending upon the NEC form and main option chosen the calculated PAF amount is either paid as an amount due or added to the prices, although this latter calculation is effectively a ‘reverse PAF’ adjustment.
There is an optional requirement for an advanced payment bond to be provided by the ‘payee’ as assurance.Option X3 provides for a currency exchange calculation where items or activities are paid for in currencies other than the currency of the contract. For certain NEC forms this applies only to main options A and B, as other main options contain a currency exchange mechanism within the core payment procedure. Although the procedure is stated to be based upon that contained in World Bank forms of contract, the NEC procedure is different in that the ‘higher party’ determines what activities and items this relates to, the maximum payment amount and the publication for exchange rates. The World Bank procedure provides an option for the bidder to propose such information within a bid data sheet.
Where a specified person, project manager, service manager or supply manager, administers the payment procedure, they would need to agree a process with the ‘payer’ as to how payments in an ‘other currency’ are dealt with. Furthermore, it is not clear at what point in time this calculation is actually made, as the publication of the exchange rates may occur during the payment procedure timeline. It is also noted that, unlike option X1, the procedure does not expressly state use of the latest published information.
Option X14 provides for an advanced payment to be made. The procedure essentially operates such that an advanced payment is made at the initial stage of a project, with repayment of an amount deducted from interim amounts due, until the total advanced payment amount has been repaid. The amount of the advanced payment is stated in contract data, along with the amount of the repayments. The DBOC form differs in that it states the earliest date when the advanced payment is made.
Further consideration should also include access between sections, security arrangements and responsibility for statutory health and safety requirements.There is an optional requirement for an advanced payment bond to be provided by the ‘payee’ as assurance, with the requirement stated in contract data and the form of the bond set out in the scope. The bond value is for the amount which has not been repaid, which reflects the ‘amortised’ amount. Under NEC4 the advanced payment is now incorporated into the payment assessment procedure at core clause 5, whereas under NEC3 this matter was dealt with between the parties directly.
Option X16 provides for a retention amount to be retained from payment amounts due, as a form of security against contract default by the payee. It is noted that the contract does not provide a reason as to why retention is made and with no particular obligation as to what happens with the retained amount. A retention procedure is also included in the ECSC and ECSS forms at sub-clause 50.7. Under NEC4 a new requirement for a retention bond has been added, similar in principle to the advance payment bond under X14, with the requirement stated in contract data and in the form set out in the scope. Where a bond is given, no retention amount is deducted from the amount due.
Time critical procedure: X5
OptionX5 provides for the works, or service, to be divided into specific parts, or sections. Each section is identified by a description provided in contract data, along with a corresponding completion date. It is important that the description is comprehensive and concisely stated, so there can be no dispute as to what works, or service, relates to each section.
Where option X5 is selected then consideration should be given to the construction of a programme to appropriately include each section. This is particularly important for the assessment of the effects of any changes to the time requirements, such as the occurrence of a compensation event, especially where operations are ‘driven’ by critical resources that are common across different sections.
Further consideration should also include access between sections, security arrangements and responsibility for statutory health and safety requirements, especially as separate completion dates mean that some sections are likely to be completed, and taken over, before others. Furthermore, the provisions should be sequentially applied along the supply chain.
Accounting procedure: X24
Option X24 was introduced under NEC4 and provides for an assessment of the final amount due for the service provided during an accounting period, with the accounting periods stated in contract data.
These periods should be ‘contiguous’ and span the entire service period from the starting date to the end of the service period. Where option X23 is also selected, the accounting periods would need to align with each period for extension, up to the maximum service period.
This could mean communication difficulties between the parties as certificates are required to be copied to both parties but not notifications.This procedure applies to all main options, although where main option C is selected the share assessment dates should coincide with the accounting period end dates, although the NEC wording could be clearer in stating this. The process imitates the final assessment procedure under core clause 5, as an ‘interim’ final assessment. Such an assessment may be complicated, however, where the payment assessment periods do not exactly align with the accounting periods, including assessing the value of compensation events that are accepted but not implemented.
To avoid any possible disputes, where a part of defined cost has been finalised, under main options C and E, this can be notified, with the corresponding procedure effectively preventing any ‘opening up’ via the assessment under X24. It is also noted that X24 does not contain provisions in relation to the amendment of an assessment, where applicable, unlike the final assessment procedure. Note that under the final assessment procedure the amount due is certified, but under X24 the assessment is notified. Under the forms where a service manager operates as the specified person, this could mean communication difficulties between the parties as certificates are required to be copied to both parties but not notifications. Furthermore, the ‘consistency’ of the wording means that the contractor, under the TSS and FMS forms, can dispute their ‘own’ assessment.
In the next article we shall be reviewing X options which relate to incentivisation.
Andrew Wooldridge-Irving, Associate Director and Alex Tolson, Consultant Surveyor, GVE
awooldridge–irving@gvecs.co.uk atolson@gvecs.co.uk www.gvecs.co.uk
