NEC disputes
Steve Goodwin FCInstCES, Managing Director, GVE Commercial Solutions
THE NEC ethos has always been one of a collaborative approach, with the contracts designed to provide the parties with a set of processes, procedures and requirements that aim to achieve the intended outcomes.
The relational basis of NEC contracts encourages this collaborative approach throughout the supply chain.
The NEC ethos has always been one of a collaborative approach, with the contracts designed to provide the parties with a set of processes, procedures and requirements that aim to achieve the intended outcomes.
Despite this intention, the reality is that differences of opinion do arise on projects let under NEC forms of contract.
Often these escalate to a dispute, with some of the more common reasons giving rise to this situation listed below:
- Poorly drafted contracts, particularly where ‘z-clause ’ amendments to the contract wording leads to ambiguities and inconsistencies.
- Users unfamiliar with the structure, content and detailed requirements of NEC contracts.
- Unsatisfactorily drafted scope documentation (also known as works information under certain NEC3 forms), for example, not expressly stating what ‘constraints’ apply.
- Contractor/subcontractor interface issues, especially where contract requirements are not suitably aligned through the supply chain contracts.
A starting point to resolve some of the issues encountered by users is the contract itself. It is all too common to find proposed contracts (one week on LinkedIn and you will find numerous references to poor NEC tender information and amended contracts) where the recipient has received an extremely large volume of paperwork as an example.
This would typically include multiple pages of amendments to the standard NEC contract terms and on many occasions the volume of clause amendments and additions is greater than the length of the standard NEC form of contract.
A starting point to resolve some of the issues encountered by users is the contract itself.
Although each project has particular features that require some amendments to the contract, the NEC ‘ethos’ and approach should always be adopted when drafting such clauses, with consideration to the risk allocation embedded within the standard form(s) of contract.
Discounting this ‘ethos’ commonly causes contractual and legal difficulties for the users, changing the NEC contract into something completely different and further introducing ambiguities and inconsistencies.
Lack of knowledge, experience and understanding regarding NEC practice and procedure is another major factor that often leads to a dispute. In recent years this factor has increased where the NEC contract has been used within sectors other than civil engineering.
This includes the building sector which has, until recently, predominantly used the JCT suite of contracts.
Whilst the NEC and JCT contract suites, for the most part, contain the same basic principles, such as payments, defects, change management, risk allocation, liabilities and termination, there are differences in the way that both contracts approach these.
Although each project has particular features that require some amendments to the contract, the NEC ‘ethos’ and approach should always be adopted when drafting such clauses, with consideration to the risk allocation embedded within the standard form(s) of contract. An example is the manner by which the contracts deal with ‘change management’.
JCT users cannot simply apply their knowledge and understanding of JCT contracts, as expansive as that may be, when administering an NEC form of contract.
The basis of change management under JCT is either ‘changes’ or ‘variations’, depending upon the form of JCT contract, with the corresponding valuation made using the contract pricing document as the starting point. In addition, JCT contracts provide for claims for both ‘time’ and ‘loss and expense’ as separate contract mechanisms.
Change management under NEC contracts, however, is predominantly determined by the ‘compensation event’ procedure, which addresses the cost of any change, associated disruption and any corresponding programme impact within a single procedure.
The impact of future risks that materialise may form part of a JCT ‘loss and expense’ claim, however when using NEC these factors should be considered as part of assessing a compensation event quotation. In summary, the misapplication of these basic contract principles due to a lack of understanding by either party can have significant consequences on both cash flow and profitability, resulting in a difference of opinion, leading to a potential dispute.
Unless stated otherwise in NEC contracts, the party wanting the infrastructure/building to be constructed produces the description of the works, which NEC4 defines as the ‘scope’ (in NEC3 it is called ‘works information’ under certain NEC forms). One often overlooked and misunderstood aspect of the scope is that it has two elements.
The first is what is actually required to be constructed (i.e. a road, water treatment plant, school building (the works under the ECC form)) and a detailed description of each section thereof. The second is ‘constraints’ which the scope should state as to how the works are to be provided.
For example, and to note the difference between these, for a school project the scope may state:
- i) a brick wall is to be constructed, 20m long and 3m high, in brisk colour ‘x’; and
- ii) works can only occur between the hours of 8am and 9am.
The first point above details ‘what’ is required and the second states a constraint on ‘how’ the requirement is to be undertaken. Disputes often arise not from the ‘what’ but the constraints on ‘how’ the description of the works are to be delivered.
Construction projects often require numerous subcontractors to assist with the successful delivery of the project and it is the contractor’s responsibility to effectively manage the interface between the various subcontractors.Construction projects often require numerous subcontractors to assist with the successful delivery of the project and it is the contractor’s responsibility to effectively manage the interface between the various subcontractors.
On the face of it this sounds straightforward, with the contractor managing, requesting and advising, both when and where each of its subcontractors can undertake their subcontracted requirements. The absence of particular ‘constraints’, however, may result in the subcontractor programming their works how they wish to do so, without considering any constraints.
Each subcontractor submits a programme for acceptance to the contractor, demonstrating the sequence of how it delivers its subcontract works.
Disputes may arise due to an interface ‘failure’ between the parties, however the contractor cannot ‘reject’ a submitted programme because it either does not tie-in with the contractor’s sequencing or it overlaps or interferes with other subcontractors’ programmes. For clarity, when using NEC4 ECS form of contract, the reasons the contractor may ‘reject’ a submitted programme for acceptance are:
i) ‘The subcontractor’s plans are not practicable;
ii) It does not show the information required by the subcontract;
iii) It does not represent the subcontractor’s plans realistically; or
iv) It does not comply with the subcontract scope.’
To mitigate the circumstances that lead to a dispute, it is essential to ensure that contracts are drafted using best practice and with consideration applied to any required contract amendments to avoid introducing ambiguity or inconsistency.This avenue for dispute overlaps with the other reasons. Firstly, programming difficulties may be encountered due to the contractor introducing additional clauses within the contract, to place an unrealistic interface responsibility on the subcontractor.
A typical contract amendment may state something such as ‘the subcontractor shall be deemed to have included in its pricing ‘all’ interface issues with other subcontractors and no compensation event shall arise due to any such interface issues’.
Secondly, it is often encountered that the contractor informally instructs the subcontractors ‘to do this’ or ‘to not do that’, primarily on email or verbal communications.
This may occur by the contractor’s personnel due to a lack of knowledge and understanding of the NEC risk profile and ‘constraint’ mechanisms. This informal means of communication is often perceived as an instruction to alter or change the stated ‘constraints’ imposed upon the subcontractor, giving potential escalation to a dispute.
In conclusion, to mitigate the circumstances that lead to a dispute, it is essential to ensure that contracts are drafted using best practice and with consideration applied to any required contract amendments to avoid introducing ambiguity or inconsistency.
Knowledge and understanding of the mechanisms of the contract should be adopted when using different forms of contract, to ensure that the contracts are administered in the way they are intended. A clear and accurate identification of the ‘description of works’ and associated ‘constraints’ should be provided to facilitate accurate price for and provide their works, enabling a collaborative integration of multiple subcontractors and the contractor to effectively manage the different aspects of a construction project.
Steve Goodwin, FCInstCES, Managing Director, GVE Commercial Solutions