NEC X options: Incentivisation
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 1. Furthermore, many X options also require supplementary information to be populated in either contract data or the scope, or both, to facilitate the effective operation of the procedure. Where this task is not undertaken, it may lead to complications in administering the contract.
In our initial article, ‘NEC X options: Introduction’ (CES May 22 pp30-32), 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 ‘incentivisation’. This theme has been associated with the following X options:
X6 – Bonus for early completion – ECC, ECS, PSC, PSS
X7 – Delay damages – ECC, ECS, PSC, PSS, SC
X17 – Low performance damages – ECC, ECS, TSC, TSS, SC
X20 – Key performance indicators – ECC, ECS, PSC, PSS, TSC, TSS, SC
X21 – Whole life cost – ECC, ECS, TSC, TSS, FMC, FMS, SC
X29 – Climate change – ECC, ESC, PSC, PSS, TSC, TSS, FMC, FMS, SC, DBOC, ALC
To provide definition, ‘incentivisation’ may be defined as ‘a process which incorporates incentives into either a system or a procedure’. An incentive may be either positive, associated with a reward, or negative, associated with a penalty, whereby the intention is to stimulate a level of performance that benefits both parties. Each applicable X option is examined in detail below.
Positive incentives – X6, X20, X21 and X29
All of these X options provide for a positive incentive to achieve an improved level of baseline performance. Option X6 provides for a stated bonus amount to be paid to the contractor/subcontractor/consultant for achieving completion earlier than the completion date. The amount to be paid is stated in contract data and applies to each day that completion is earlier than the completion date.
Option X6 provides for a stated bonus amount to be paid to the contractor/subcontractor/consultant for achieving completion earlier than the completion date. For the ‘engineering’ forms there are provisions which allow option X6 to operate in conjunction with option X5 sectional completion. These forms also include a procedure to allow the client/contractor to ‘take over’ part of the works before (subcontract) completion, although there is no provision within X6 for the apportionment of the bonus payment, unless a section taken over specifically relates to a section under option X5.
Where option X6 is used be aware of the associated implications of an acceleration quotation and, furthermore, where a compensation event assessment results in planned completion moving backwards.
Option X20 allows for the introduction of key performance indicators (KPIs) which are stated to be an aspect of performance. These are accompanied by an incentive schedule which states both a target against each KPI and an associated payment. Where the target stated for a KPI is achieved then the associated payment becomes due, with the wording of the option suggesting that this is a positive incentive. The criteria for measuring a target should be clear and unambiguous to avoid any possible dispute. A KPI may be added to the incentive schedule although existing KPIs and payments may not be changed.
Option X21 provides for a proposal to reduce the cost of operating and maintaining the asset (or affected property), which is directly connected to a change in the scope.The contractor/subcontractor/consultant/supplier is required to report performance against each of the KPIs along with proposals for improving performance where the targets stated are not forecast to be achieved. It is not clear, however, whether reporting is required to continue once a KPI target has been achieved or where it is not realistically possible to achieve the target for a KPI.
Although it is stated that option X20 is not used with option X12, multiparty collaboration, the KPIs under X12 within the schedule of partners apply at a ‘collective’ level, so it may be appropriate to add KPIs which apply at a specific contract level. Care should be taken, however, not to introduce a conflict of interest.
Option X21 provides for a proposal to reduce the cost of operating and maintaining the asset (or affected property), which is directly connected to a change in the scope. The procedure is similar in principle to subclause 16 within the ‘engineering’ forms of contract, although option X21 does not contain reasonable procedural requirements, including specific actions both before and after a proposal is submitted.
The process commences with a proposal from the contractor/subcontractor/serviceprovider/supplier. The NEC user guides suggest that this may be followed by an instruction to submit a quotation, although the wording under option X21 does not correspond with this formal action. There are detailed requirements as to what a quotation comprises, although there are no stated rules as to how the quotation is prepared, as is the case for a compensation event. Any positive incentive for the supplier relates to the quotation assessment and the considered effect on both cost and time. It is recommended to provide detailed criteria within the scope to determine how the assessment of a whole life cost reduction is undertaken.
This would allow an assessment to be made on a consistent basis, especially as the procedure only provides for either accepting or not accepting a submitted quotation, following consultation. When a quotation is accepted the user guides state that the acceptance itself changes the scope, with the option specifically stating that this is not a compensation event. This is not consistent, however, with the procedure under the core conditions whereby the scope is changed by an instruction given at subclause 14.3, with the compensation event issue addressed under subclause 60.1 (1) as a bullet point, as appropriate.
The name of the option changed from ‘reducing the impact of the works on climate change’ to ‘climate change’, with corresponding versions published for other NEC forms in addition to the ECC contract.
Option X29 provides for reducing the impact of the works on climate change. Following the issue of a consultative version earlier this year, a formal version of X29 was published on 26 July 2022. The name of the option changed from ‘reducing the impact of the works on climate change’ to ‘climate change’, with corresponding versions published for other NEC forms in addition to the ECC contract. Much of X29 is similar to other NEC content, especially options X10, X20 and X21, which provides consistency of drafting, although the issue relating to scope change under X21 also applies.
Similar to option X20, this option provides specified targets against which performance is measured. If performance meets or exceeds a target then a corresponding amount is paid. Instead of an incentive schedule, X29 uses a performance table, which is already a feature of the FMC, FMS, DBOC and ALC forms. There are also corresponding reporting requirements that are similar to those within option X20. This is supplemented with a procedure for a proposal to reduce the effect on climate change, similar to that under option X21, which provides the basis for a further positive incentive. It is recommended that the scope contains detailed criteria as to how an assessment of the effect on climate change is undertaken.
Negative incentives – X7, X17 and X29
All of these X options provide for a negative incentive to promote meeting the baseline level of performance. Option X7 provides for a pre-determined amount of ‘liquidated’ damages to be paid where (subcontract) completion (delivery) is not achieved by the (subcontract) completion (delivery) date. A similar procedure is also found at subclause 50.6 of the ECSC, ECSS, PSSC, TSSC and SSC ‘short’ NEC contracts. For the ‘engineering’ forms there are provisions which allow option X7 to operate in conjunction with option X5 sectional completion.
To overcome these ‘constraints’ it is suggested to use a range of appropriate measures within an incentivisation framework, with provision to allow the process to operate on a collaborative basis.
These forms also include a procedure to allow the client/contractor to ‘take over’ part of the works before completion, with a corresponding provision for delay damages to be proportionately reduced. It is further noted that NEC contract amendments published in October 2020 included an addition to option X7, whereby delay damages cease at the date upon which termination is certified, to align with common law clarification.
Option X17 provides for ‘liquidated’ damages but in respect of delivered performance. The ECC, ECS and SC forms link performance with a defect and a performance level stated in contract data. The TSC and TSS forms are similar but are based on the delivered service level compared with that stated in a service level table. Where the performance level does not meet the stated level then low performance damages are paid. Any associated testing procedures should be comprehensively set out in the scope to definitively determine whether low performance has actually occurred.
Option X29, as seen above, includes a performance table with specified targets that may be associated with an array of incentives, which could be positive and/or negative. Consequently, this option may be categorised as both a positive and negative incentive. A key theme with these X options is that the incentive is predominantly financial. Such an approach, however, limits the potential benefit due to the associated constraints of a purely financial incentivisation system. Furthermore, the options are largely based on a unidirectional interaction. To overcome these ‘constraints’ it is suggested to use a range of appropriate measures within an incentivisation framework, with provision to allow the process to operate on a collaborative basis.
In the next article, we shall be reviewing X options which relate to contract assurance.
Andrew Wooldridge-Irving, Associate Director and Alex Tolson, Consultant Surveyor, GVE
awooldridge–irving@gvecs.co.uk
