Read more about: NEC 101,
28 March 2023
Our Legal Director, Juli Lau, examines the most commonly used NEC contracts and module structure.
Which are the most used NEC contracts and what are they used for?
The NEC suites cover a wide range of contractual arrangements. Our partner, Roseanne Serrelli, talked about this in the first episode of this series as being a useful feature of the NEC suite, that there is a whole family of contract documents that adopt the same philosophy and main clauses. However, construction practitioners are most likely to come across the ECC and the PSC, which appoint a contractor and a professional consultant respectively.
| ECC | PSC | |
| Purpose | Appointment of a main contractor in various procurement scenarios. | Appointment of a professional consultant e.g., project manager, supervisor, and others providing professional services, including those carrying out design. |
| Distinguishing feature | For the appointment of a contractor to carry out engineering and construction work, including any level of design responsibility. It is therefore suitable for use whether the contractor is responsible for all of the design of the works, none of the design, or the design of specific elements. | Adopts the same emphasis on proactive project and risk management and follows same core principles as rest of the NEC suite, but can also be used to appoint professional consultants on non-NEC construction projects or in its own right not linked to a construction project. |
Is it worth running a project under both ECC and PSC contracts?
It makes sense to use the PSC where the ECC is being used for the appointment of the contractor to ensure risks and liability dovetail well from a contractual perspective, and also to promote cultural consistency throughout the delivery team and a shared approach to risk identification and management. However, the client should be aware that the greater the number of NEC-based contracts, the more it must be prepared to resource its own project management capability. Therefore, using the various types of NEC contracts in tandem should simplify but may also require more investment.
What is the structure like of these NEC forms and how does it work?
NEC forms are modular contracts so they provide with great flexibility to parties as they can “mix and match”, as appropriate: core clauses, main option clauses (pricing), dispute avoidance clauses, and secondary option clauses. Also worth pointing out that Contract Data (in two parts) are effectively pro forma documents that need completing with project-specific details. This approach allows the client to tailor the contract to suit the needs of a particular project, while the key principles and risk positions are replicated across all NEC forms. I should mention that I have in mind the NEC4 suite of contracts but broadly speaking the structure follows the NEC3 suite.
Core clauses.- are nine covering such matters as the parties’ main obligations, the programme, quality management, compensation events, copyright, insurance, and termination.
Main option clauses.- are designed to adapt the contract to a particular pricing/payment mechanism: therefore one option must be adopted. Each main option (pricing option) contains clauses that supplement the core clauses and that are particular to that main option. Financial risk is allocated differently depending on the selected option:
| Contract price/payment mechanism | Financial risk allocation |
| Option A – Priced contract with activity schedule(ECC / PSC) | The contractor bears more of the risk of being able to carry out the work at the agreed prices. More akin to a fixed price contract. |
| Option B – Priced contract with bill of quantities (ECC) | |
| Option C – Target contract with activity schedule / Target contract (ECC / PSC) | The client and contractor share most of the financial risks in agreed proportions. Target price contract with ‘pain’/’gain’ sharing. |
| Option D – Target contract with bill of quantities (ECC) | |
| Option E – Cost reimbursable contract (ECC / PSC) | The client bears most of the financial risk. Contractor is paid actual costs of works plus agreed levels of overheads and profit. |
| Option F – Management contract (ECC) |
Dispute avoidance clauses.- The parties also have to select which dispute resolution option is to apply to their contract. Under all options, disputes are finally resolved by litigation or arbitration. The potential options are:
| Dispute avoidance clauses | Scope |
| Option W1 | Restricted adjudication not suitable for use where Housing Grants Construction and Regeneration Act (HGCRA)1996 applies as the right to adjudicate only arises following discussions between senior representatives. |
| Option W2 | Unrestricted adjudication suitable for use where HGCRA 1996 applies. |
| Option W3 | Dispute Avoidance Board, which gives a non-binding recommendation to the parties. This is not suitable where HGCRA 1996 applies. |
Secondary option clauses.- are truly optional clauses: they are not mandatory, but they are helpful to allocate risks and it would be advisable to at least consider whether they will be applicable to your particular contract. The three main categories of secondary options are:
| Secondary option clauses | Scope |
| X clauses | They allow a risk to be reallocated e.g., delay damages, Contractor’s design liability. |
| Y clauses | They deal with specific UK situations e.g., HGRA 1996. |
| Z clauses | This is where parties can form a schedule of amendments e.g., to include public sector clauses to comply with PCR 2015 or additional compensation events. |
Not all the secondary options can be used with all the main options and not all the secondary options are used in both ECC and PSC – please see a helpful reference chart below.
Any suggestions when negotiating or drafting these contracts?
Both the ECC and PSC are best suited for use by sophisticated parties on projects of significant complexity and value. As we discussed in the introduction to this 101 series, It is not appropriate for use where the client wishes to adopt a “hands off” approach to project and contract management or is not resourced to provide the required level of engagement.
Also, there is some healthy debate among practitioners and users of the NEC about the use of amendments to the published standard form, whether through the introduction of very detailed Z clauses that fill in some gaps that are might be missing and crucial for certain client groups, or through direct amendment of drafting in the core clauses. I think it is possible to find some sort of a balance between the purist view of avoiding amendments altogether, and one which retains the ethos of the NEC as being one which prioritises simple language over complex legal terminology, and which focuses on proactive and modern management processes.
Finally, care must particularly be taken when using amendments or clauses that are usually used with other standard form contracts to ensure that they suitable for inclusion in an NEC contract. It is important not to confuse and undermine the NEC approach and contract terms.
This article and video is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published. If you would like further advice and assistance in relation to any of the issues raised in this article, please contact us today by telephone or email enquiries@sharpepritchard.co.uk.
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| NEC conditions of contract | ECC | PSC |
| Core section | ||
| Clause 1 – General | ✓ | ✓ |
| Clause 2 – The Contractor’s / Consultant’s main responsibilities | ✓ | ✓ |
| Clause 3 – Time | ✓ | ✓ |
| Clause 4 – Quality management | ✓ | ✓ |
| Clause 5 – Payment | ✓ | ✓ |
| Clause 6 – Compensation events | ✓ | ✓ |
| Clause 7 – Title / Rights to material | ✓ | ✓ |
| Clause 8 – Liabilities and insurance | ✓ | ✓ |
| Clause 9 – Termination | ✓ | ✓ |
| Main option clauses | ||
| Option A – Price contract with activity schedule | ✓ | ✓ |
| Option B – Priced contract with bill of quantities | ✓ | X |
| Option C – Target contract with activity schedule/Target contract | ✓ | ✓ |
| Option D – Target contract with bill of quantities | ✓ | X |
| Option E – Cost reimbursable contract | ✓ | ✓ |
| Option F – Management contract | ✓ | X |
| Dispute avoidance clauses | ||
| Option W1 | ✓ | ✓ |
| Option W2 | ✓ | ✓ |
| Option W3 | ✓ | X |
| Secondary options | ||
| Option X1 – Price adjustment for inflation (used only with Options A and B / A and C) | ✓ | ✓ |
| Option X2 – Changes in the law | ✓ | ✓ |
| Option X3 – Multiple currencies (used only with Option(s) A and B / A) | ✓ | ✓ |
| Option X4 – Ultimate holding company guarantee | ✓ | ✓ |
| Option X5 – Sectional completion | ✓ | ✓ |
| Option X6 – Bonus for early completion | ✓ | ✓ |
| Option X7 – Delay damages | ✓ | ✓ |
| Option X8 – Undertakings to the client or others / Undertakings to others | ✓ | ✓ |
| Option X9 – Transfer of rights | ✓ | ✓ |
| Option X10 – Information modelling | ✓ | ✓ |
| Option X11 – Termination by the client | ✓ | ✓ |
| Option X12 – Multiparty collaboration (not used with Option X20) | ✓ | ✓ |
| Option X13 – Performance bond | ✓ | ✓ |
| Option X14 – Advanced payment to the contractor | ✓ | X |
| Option X15 – The contractor’s design | ✓ | X |
| Option X16 – Retention (not used with Option F) | ✓ | X |
| Option X17 – Low performance damages/low service damages | ✓ | X |
| Option X18 – Limitation of liability | ✓ | ✓ |
| Option X19 – Termination by either party (not used with Option X11) | X | X |
| Option X20 – Key performance indicators (not used with Option X12) | ✓ | ✓ |
| Option X21 – Whole life cost | ✓ | X |
| Option X22 – Early contractor involvement (used only with Options C and E) | ✓ | X |
| Option X23 – Extending the service period | X | X |
| Option X24 – The accounting periods | X | X |
| Option X25 – Supplier warranties | X | X |
| Option X29 – Climate change | ✓ | ✓ |
| Option Y(UK)1 – Project bank account | ✓ | ✓ |
| Option Y(UK)2 – The Housing Grants, Construction and Regeneration Act 1996 | ✓ | ✓ |
| Option Y(UK)3 – The Contracts (Rights of Third Parties) Act 1999 | ✓ | ✓ |
| Option Z – Additional conditions of contract | ✓ | ✓ |
