The new NEC4: What are the changes?
The new NEC4 suite of contracts was released on 22 June 2017 at the NEC Users' Group Annual Seminar. We set out below a summary of the key changes in the NEC4 and a brief summary of the two new contract forms.
The new DBO form
This is a new contract form under which the Contractor can take responsibility for design, construction, operation and/or maintenance of the works.
It is intended to be a flexible contract in which the operational services can be provided before, during and after the works are completed. These operational services can range from basic FM services to obligations to operate the works to achieve specified performance levels.
It generally follows the NEC approach and structure and it is based on the Term Service Contract as the core contract with ECC elements added.
The new alliance contract
This is to be published initially as a consultative form.
It is a multi-party contract that is intended to provide a fully integrated delivery team for complex projects. It generally follows NEC principles but has a number of changes to address its multi-party nature. Its key features include:
- Partners (i.e. members of the delivery team) can be added or removed.
- All liabilities are shared between the Client and the Partners, save for those caused by the wilful default of the Partners and (if the Client chooses) third party claims. This is intended to align the incentives and risks for all parties.
- An Alliance Board manages the Alliance on behalf of its members. The decisions of the Alliance Board have to be unanimous but then they bind all members of the Alliance.
- An Alliance Manager is to be appointed who is responsible for the majority of roles reserved to the Project Manager and the Contractor under the NEC4 ECC. There are relatively limited matters reserved to the Client.
- It is a cost reimbursable contract with limited grounds for disallowing costs but with risk and reward depending on whether the Alliance Objectives are met.
Secondary option X15 has been expanded with more extensive provisions specifically related to design and build contracting:
- The Contractor’s design duty has been amended so that it refers to the skill and care normally used by professionals designing similar works, rather than the Contractor using reasonable skill and care to ensure the design complies with the Works Information.
- A requirement for PI insurance to be held by the Contractor has been included. The relevant level of PI insurance and the period it has to be held for are to be specified in the Contract Data.
- There is a requirement to retain documents in relation to design information in the form set out in the Scope for the period for retention specified in the Contract Data.
- A new secondary option X9 provides that ownership of the material prepared for the design of the works transfers to the Client, except as stated in the Scope.
Clause 16 includes a new right for the Contractor to propose a change to the Scope which reduces cost. The Project Manager has four weeks to respond and has the option to accept and instruct, reject or request a quotation prior to making a decision.
Clause 36 allows the Contractor, as well as the Project Manager, to propose an acceleration to achieve Completion before the Completion Date.
There is a new secondary option (X21) that allows the Contractor to propose a change to the Scope which would reduce the cost of operating and maintaining an asset over its whole life.
The Contractor is now required to make an interim assessment (Clause 50.2). If it does not, the Contractor is not entitled to any further payment but the Project Manager can certify a payment back to the Client (Clause 50.4). In NEC3, the Project Manager had to make an assessment and had to consider any application made by the Contractor.
Finality of assessments
In the cost based contracts (i.e. Options C to F), the Contractor can instigate a review and acceptance of its Defined Cost by the Project Manager. If the Project Manager does not respond within 13 weeks (or within four weeks of the provision of any further records requested by the Project Manager), the Contractor’s Defined Costs and Disallowed Costs are treated as accepted (Clause 50.9).
The Project Manager is obliged to issue a final assessment of the payment due within four weeks of the issue of the Defects Certificate (Clause 53.1). If the Project Manager fails to do this, the Contractor may issue its own assessment. The final assessment becomes conclusive if not challenged by either party referring it to dispute resolution within four weeks of it being issued.
Schedule of Cost Components
The Schedule of Cost Components has been simplified. For example:
- Subcontractor costs have been moved to the Schedule of Cost Components and payment of them has been made consistent across all Options. The Defined Cost is the cost paid to the Subcontractor.
- The Working Areas overhead has been removed from the Schedule of Cost Components. The relevant items are paid as actual Defined Cost instead.
- The design overhead and manufacturing and fabrication overhead have been removed as an addition to the relevant rates for design and manufacturing and fabrication.
There is now only one Fee percentage, with no separate Fee percentage for subcontracted works. This is linked to subcontractor costs now being paid under the Schedule of Cost Components, rather than as a separate element of Defined Cost.
Additional compensation events can now be included in the Contract Data Part One (Clause 60.1(21)).
There is now “treated acceptance” of the Contractor’s programme in situations where the Project Manager does not respond to a programme issued by the Contractor for acceptance within the required time limit (Clause 31.3).
Liabilities and insurance
The Contractor’s liabilities are set out specifically (not by exception to the Employer’s liabilities).
An important clarification has been made to Clause 84.2 to make clear that waiver of subrogation rights extends to the Parties, not just their directors and employees.
There is no longer an automatic right for the Client to terminate at will. Instead, a right to terminate at will is a Secondary Option (Clause X11).
Undertakings to others
There is a new Secondary Option (Clause X8) that allows the Client to call for “undertakings to Others”. This is the NEC’s terminology for collateral warranties.
Clients can require the Contractor to provide “undertakings to Others” from the Contractor to third parties and from Subcontractors to the Client and third parties. The form of collateral warranty is to be included in the Scope but no form has been produced by the NEC. The relevant details of the “undertakings to Others” to be provided are to be set out in the Contract Data.
Dispute resolution procedure
The is a new four week period for a submission of a statement of case and meetings between Senior Representatives of the parties that applies before formal dispute resolution proceedings can be commenced (Clause W1.1). However, because of the absolute right to adjudicate at any time in contracts to which the Construction Act 1996 applies, this four weeks period is consensual for such contracts (Clause W2.1).
There is also a new dispute resolution option (Clause W3) that applies if the parties wish to use a Dispute Avoidance Board. This option cannot be used if the Contraction Act 1996 applies because it does not include an absolute right to adjudicate at any time. The Dispute Avoidance Board makes recommendations in respect of any disputes that arise if they are not resolved by discussion. The dispute can only be referred to the tribunal if this recommendation is not accepted by the parties.
Early contractor involvement
This is a new Secondary Option (Clause X22) that can be used only for Options C and E. It allows the Contractor to be appointed at an early stage to participate in the development of designs and proposals (similar to a PCSA).
There is a new Secondary Option (Clause Z10) that addresses BIM, although this is referred to by the NEC as “Information Modelling”. This clause requires the Contractor to provide an Information Execution Plan, which must satisfy the BIM Requirements provided by the Client.
Bribery and corruption
A new Clause 18 prohibits corrupt acts. There is also a new termination event (Clause 91.8) that allows a party to terminate in the event that a corrupt act is carried out by the other party.
Confidentiality and publicity
A new Clause 29 restricts the disclosure of project information and prohibits the Contractor publicising its involvement in the works without the Client’s agreement.
A new Clause 28 allows either party to transfer the benefit of any rights under the contract to another party, save that the Client can only assign if the assignee intends to act in a spirit of mutual trust and co-operation.
Changes to terminology
The NEC4 has incorporated a number of changes to terminology, including:
- “Employer” is now “Client”.
- “Scope” is used as the name of the document that describes the work being provided. It replaces “Works Information”, “Service Information” and “Goods Information”.
- NEC4 is gender neutral. Therefore, “he” is now “it”, etc.
- Clause 10.1 has been split into Clauses 10.1 and 10.2 to reflect the two obligations in this clause, i.e. to act as stated in the contract, and to act in a spirit of mutual trust and co-operation.
- The Risk Register is now the “Early Warning Register”.
- Secondary Option X12 “Partnering” has been re-titled “Multi party collaboration”.
The new NEC4 is definitely a case of evolution, not revolution. The NEC4 would be clearly recognisable to any users of the NEC3; the structure and drafting style has remained the same.
The improvements are welcome and should improve the contract. However, it is likely that a number of clients will still insert numerous Z clauses to strengthen their position and add clarity to the parties’ potential liabilities under the contract.
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Real Estate and Construction Newsletter – December 2017
Welcome to our December newsletter, bringing you legal insight into issues facing the property industry.