The New Engineering Contract (NEC) is being used ever more widely in our
industry, notably by health, education, water treatment and local authorities.
Sooner or later, it is inevitable that most major and medium sized electrical
subcontractors will find themselves invited to tender on the NEC forms.
If a subcontractor is suitably prepared
and his staff have received appropriate training, the NEC has many advantages over the traditional contract forms.
However, if he wanders unaware into an NEC project assuming that this is another
contract which can be signed and put
away in the safe, then he will be in for a very painful experience. Indeed, I
have known reputable subcontractors to lose vast sums precisely for this
reason. So what are the key aspects of
which to be aware?
The NEC is based on a philosophy of
“mutual trust and co-operation”. I
would caution against excessive reliance upon trust. Indeed, the NEC rules are
so detailed and precise that there is little scope for trust. Quite simply,
the subcontractor must comply with the rules to the letter. If he does not, he
will suffer financial consequences. There are three “big ideas”, as follows.
·
To be provided and updated as
works proceed. Highly detailed.
·
25% deduction from payment as financial penalty for failure to provide.
2) Compensation
events
·
The only mechanism for additional payments, “claims”, “changes”
(variations)etc.
·
Basis is actual cost and/or forecast of actual cost, plus a fee
percentage (as contract data).
·
No provisions for “top ups” or residual “end of job claims”.
·
Written notice required within one week or entitlements are lost.
·
Quotation and forecast of programme effect required within one week if event accepted.
·
Idea is to “value changes, delays and disruptions as the job proceeds”.
·
The subcontractor and contractor each
have a duty to give early warning as soon as aware of any matter which
could increase prices, delay completion or impair performance of the works.
·
Either party may instruct the other to attend an early warning meeting,
along with relevant other parties.
·
If this procedure results in a compensation event, then a separate notice
must be given.
·
If the subcontractor fails to give an early warning notice when he should
, then any compensation event is priced as though he had done so (ie in which case the contractor would have been
able to take action to avoid or reduce the problem).
It is absolutely essential that the subcontractor complies with all
the rules and time limits to the letter, or entitlements to time and money are
forfeited.
The NEC sets out a detailed procedure under the Y(UK)2 Addendum. If
dissatisfied with an action or inaction by the other party, then the aggrieved
party has only four weeks after becoming aware, in which to notify
dissatisfaction. Otherwise, he loses his rights. Within two weeks of the notice, the parties meet and attempt to
resolve the matter. No dissatisfaction can become an adjudicable dispute unless
the matter is still unresolved four weeks after the issue of the notice.
In practice, this means that if the subcontractor is dissatisfied
with the contractor’s response to his early warning or compensation event
notice, or if the contractor does not
respond at all, the subcontractor must give notice of dissatisfaction within
four weeks or risk forfeiting his
entitlements. Since one of the most
common problems is the contractor ignoring the subcontractor’s notices, it is essential that notices and response
times etc are recorded and monitored with the utmost diligence.
Procurement routes
There are several procurement options available to the end client
and contractor. The three chief options are listed below.
Option “A” – Priced subcontract with
activity schedule.
This option is based upon a detailed programme with matching priced
activity schedule. The subcontractor can claim payment only for completed
activities. Unfixed materials are not paid. Cash flow is adversely affected and
finance charges need to be allowed in the tender.
Option “B” – Priced subcontract with
bill of quantities.
This option is more like a traditional measure and value contract.
Cash flow is better, although unfixed materials are not paid.
Option “C” – Target subcontract with
activity schedule
In this option,. the tender is submitted on the same basis as
Option “A”, and this becomes the target, but the subcontractor is paid his actual
costs (subject to disallowances and audit).
At the end of the job, the total costs are compared with the target
(after adjustment for compensation events) and there is a share out of “pain or
gain” on a pre-stated basis. In practice, the percentages are likely to be set
so that the subcontractor suffers 100% pain on all overspend and perhaps 50% of
gain. Disadvantages are that the
subcontractor cannot apply for payment of his costs until he can prove he has
actually paid them out. Also, in event of
overspend, he may have to find a substantial sum in repayment of “pain” at the
end of the job. Option “C” implies
severe cash flow deficit for any subcontractor, and this needs to be reflected
in the tender price.
Conclusion
As stated at the outset, there are advantages in the NEC for all
concerned. Financial control is greatly improved. End of job disputes are
minimised. However, the subcontractor
must allow in his tender for the increased staff to comply with the rigid
rules, in particular, planning and quantity surveying resources. Above all, it is vital to comply with the requirements for early warnings
and compensation events, and to give notice of dissatisfaction within the
prescribed period. Otherwise, all entitlements may be lost for ever.
Back to Jack Russell Home page.
Back to Jack Russell column Contents page for many
more such articles.
John Russell
Construction Contracts & Training Consultants (Established
1984)
Cheshire CW4 7DP Tel : 07770 986444
Email :
swsubbie@globalnet.co.uk Website:
www.jrconsultant.co.uk
(This article is based on the “Jack Russell” contract law column in
the July 2005 “Electrical Times”).