Read more about: NEC 101,
3 May 2023
Our partner, Jane Crees, examines the NEC time and pricing provisions under the NEC4 Engineering and Construction Contract (“ECC”).
Why time is important and how is it regulated in the ECC?
The ECC shares common features with many other building contracts but introduces specific elements to promote the NEC priorities about which others have spoken e.g., pro-active project management and dealing with issues as the contract progresses rather than storing them up until the end or until they become fully blown disputes. It is rare to find a building project where how long the works will take is not considered important. In fact, completing the project quickly is often one – if not the – most pressing priority for any Client. It is also crucial for the Contractor who will have to provide for resources on site whilst the works continue and may also have to forego the chance to make profit elsewhere. It is often said that time is money, and nowhere is this more true than in construction. The ECC provides for this in several ways. First, it identifies a Completion Date and makes it a specific contractual obligation for the Contractor to Provide the Works so that they are completed no later than the Completion Date. There may also be Sectional Completion Dates if the works are divided into sections. Failure to meet this deadline exposes the Contractor to a potential damages claim, and as in other forms of contract, the ECC provides for such damages to be liquidated (essentially fixed and identified) at the beginning of the contract. This is done by incorporating Optional Clause X7 to provide for such delay damages. Similarly, the contract also allows the Client to identify Key Dates, by which time particular conditions must be satisfied. Failure to do this exposes the Contractor to the Client recovering the resulting additional costs. It may be that such late completion or failure is not the Contractor’s fault, and where this is the case (i.e., where a compensation event has occurred) the Completion Date or Key Date (as the case may be) may be changed to reflect this. Specific to NEC however is its emphasis on the Accepted Programme. This is a programme for the project, which is produced by the Contractor and must contain a number of items as specified in clause 31. In all but the simplest build, this will be a very detailed document. As the name suggests, the draft programme must be accepted by the Project Manager and there are strict and fairly limited timeframes for these activities. The Project Manager is entitled not to accept a draft programme if it does not meet certain requirements (see clause 31) upon which the Contractor will need to rectify these issues and resubmit. The Accepted Programme is then:
For these reasons, it is essential that there is an Accepted Programme in place at all times, and both the Contractor and the Project Manager must be careful to discharge their responsibilities to ensure this is the case. Honing the Accepted Programme is not a one-off activity either – it may (and should) be revised along the way in certain circumstances and this is reflective of its status as a key tool in NEC project management and implementation.
How is the price for the works calculated and how is the risk of increased costs allocated between the parties?
One of the main features of the ECC is that it allows the Parties to choose between several different pricing options when agreeing the contract terms. Our partner, Juli Lau, talked about this in the second episode of this series. There are six fully drafted options in total (A to F), and one must be selected in every contract. Although we do advise on the others, I am going to focus on Options A, C and E, as these are most relevant to my everyday work, and have obvious contrasts. I am going to summarise how each works, and then go through some of the main things to think about when selecting which pricing option to include. So, first Option A. This is described as a Priced Contract with Activity Schedule. This name flags two important points in itself:
When therefore it comes to the regular/interim payments, the Contractor is paid (among other amounts) what is referred to as the Price for Works Done to Date (“PWDD”). In the case of Option A, the PWDD comprises the total of the Prices (i.e., the lump sum prices in the Activity Schedule) for those activities (or group of activities) that have been completed by the relevant assessment date (i.e., the date on which the PWDD is calculated). This does mean that work that has been done but which is not a completed activity in itself does not get paid for in that payment cycle (but will form part of the PWDD in a future payment cycle once completed). There may therefore be a tension between the Contractor wishing to split the works into more activities to be paid sooner and improve cashflow, and the Client who may have an interest in “larger” or more composite activities.
Is there a role for the fee in all this?
That is a good question as the Fee does appear in the core terms, but its use is not as in other Options. In Option A, the items appearing in the Fee need to be taken into account in the pricing of the activities as there is no separate addition of the Fee in calculating the PWDD. In Option A, the Fee is only used in some calculations of the impact of compensation events, and in certain calculations following termination.
Shall we move on to Option C and how things may be different?
Option C also relies on an Activity Schedule, initially priced along the same lines. But then things become rather different as the description “Target Contract” suggests. Instead of being paid the Activity Schedule prices for completed activity, the Contractor is paid a PWDD which comprises the “actual” cost of the works plus a fee element. So, this is calculated as follows:
Defined Cost is a version of the Contractor’s actual costs in Providing the Works, but it is not all the Contractor’s costs. The Schedule of Cost Components identifies for what costs the Contractor is entitled to be paid (and the Contractor will have to provide suitable evidence of such costs). In addition, the contract specifies certain “Disallowed Costs” that are not included in Defined Cost and must be borne instead by the Contractor. The Contractor therefore has to provide in the calculation of its fee percentage for any costs not caught by Defined Cost that they wish to recover. Pain/gain Following Completion, an Option C ECC provides for the Project Manger to compare the Contractor’s tendered total of the Prices (so the sum of the Prices in the Activity Schedule) with the total PWDD. This assessment is finalised for the final amount due. This results in the identification of “pain” if the PWDD is greater or “gain” if the PWDD falls under the tendered total of the Prices. Option C then provides for how that gain or pain is allocated between the Parties based on percentage shares (and ranges) set out in the Contract Data. This should form some incentive for the Contractor to keep within its original tendered Prices, although how effective this is depends on (among other things) how carefully the share ranges and percentages are initially worked out. It is worth noting that under the base form of ECC, the pain/gain mechanism is only applied following Completion i.e., Option C does not provide for interim adjustments to reflect the parties pain/gain share, something considered in the case of Doosan Enpure Ltd v Interserve Construction Ltd [2019] EWHC 2497 (TCC).
And finally, Option E?
Option E is different again. It is described as a cost reimbursable contract, which broadly means that the Client pays the actual cost of the works. Sometimes this is referred to as “cost plus” but NEC does not use this term. This may in part be due to the fact that Option E does go some way to prescribe what those actual costs may be. Unlike Option C however, there is no pain/gain mechanism, which removes a significant pressure on the Contractor to rein in those costs.
That might be a good point to consider the allocation of risk between the parties across these different options. Could you say a little about this?
Yes, it is a really important consideration and mainly relates to who bears the risk of paying extra in the event that completing the works turns out to be more expensive than originally estimated. Sometimes people think of the different pricing options falling on a spectrum running from the Client bearing this risk in full at one end, to the Contractor bearing the lion share of this risk at the other end. Option A falls at the latter end – the Contractor has to price those activities accurately and if they do not, then the Contractor will not be able to recover any further costs of doing the work (for example if more labour was required than provided for, or a greater quantity of a material was required). At the other end falls Option E, where the Contractor will generally be able to recover its actual costs even if greater than those the Parties originally envisaged. Somewhere in between (depending probably on how successful the incentivisation mechanism proves to be) is Option C. This is helpful but is not the full story and in reality, things are a bit more complicated (which makes choosing the pricing option a potentially difficult but important choice). Whilst it is tempting as a Client to think that Option A may be preferable as it provides the greatest cost certainty, this may in itself come at a cost, as the Contractor may build extra contingency into their prices to guard against its risk exposure. In some cases, this may mean that Option A is not a practicable option, particularly if the works are not straightforward, are particularly risky, or have other characteristics that mean pricing an Option A contract is problematic. In such circumstances, it may be more probable that the Parties opt for Option C or Option E (although in the case of Option C, these issues do not go away completely, as the target price has to be identified through pricing an Activity Schedule). In conclusion, this choice is something the Client will need to consider very carefully and take advice if needed.
Are there other provisions in the ECC that mean that the Client might end up paying more?
Yes, two main provisions:
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.
