Introduction

In this article, Quantity Surveyor Ryan Grey considers differences between the NEC3 and NEC4 standard forms of contract.

The NEC was first introduced in 1993 as the New Engineering Contract. Since then, it has become one of the staple standard form contracts in the UK construction market.

The Third Edition of the NEC Suite of Contracts (NEC3) was released in 2005, then further redrafted in 2013. It was then superseded by NEC4 in 2017.

There has been a slow transition from NEC3 to NEC4. Many long-running projects such as long-term frameworks or those tendered some years ago continue to use NEC3. Newer contracts tend to be let using NEC4. The change has therefore been gradual rather than overnight.

I have been unable to find any statistics on uptake of the new form of contract by the sector. However, four years since its introduction, it is natural that NEC4 has begun to replace NEC3 as the preferred choice.

The NEC was designed to be a collaborative contract aiming to reduce conflict and proactively deal with risk. Whilst the NEC will always have detractors (many claim it is more difficult to administer than other forms of contract[1], and is often not properly understood), the NEC3 was widely adopted and could be considered a success.

So, if NEC3 was an established, widely adopted and industry recognised standard contract, why would there be any need to replace it?

When the very first iPhone was released the hype around it was unprecedented, with the average consumer probably thinking they had reached the pinnacle of mobile phones, replacing their outdated Nokia 3210.

However, 13 years later Apple have released one or two phones per year since, with each one bearing a slight improvement on its predecessor.

So, whilst there may be no urgent requirements to rewrite large sections of the NEC3 contract, this article will explore the natural progression from NEC3 to NEC4.

Key Differences

Wording

NEC4 is now gender neutral, replacing phrases such as “He gives an instruction” with “The Project Manager gives an instruction”, which is natural progression in delivering equality and diversity.

NEC4 has also replaced all references to the “Employer” with “Client”, to bring the NEC contract in line with standard industry terminology.

The document setting out the requirements and the constraints within the contract is now universally known across all NEC contracts as the “Scope”. Whilst this has always been the case within Professional Service Contracts (PSC), in Engineering Construction Contracts (ECC) and Term Service Contracts (TSC) the scope was previously known as the “Works Information” or “Service Information”.

Previously the NEC3 contract required any identified early warning to be entered onto the “Risk Register”. Some construction projects would also then run a second “Risk Register” to hold separate risk events not covered under early warnings. NEC4 removes any confusion by renaming the “Risk Register” to the “Early Warning Register”, to be populated with early warning items only.

Value Engineering

The NEC3 target cost options contain a value engineering mechanism, which if accepted by both the client and contractor, allows for savings made under the target cost can be shared. However, the NEC3 priced options contained no such mechanism.

This issue is addressed within NEC4 as there is now an option for price options to include an agreed value engineering percentage. This provides for the prices to be reduced by the assessed value of the resulting compensation event multiplied by the agreed value engineering percentage.

Programme Acceptance

The NEC3 failed to address non acceptance of the programme by the Project Manager. In the absence of a Project Manager’s response, the contract provided that the programme was simply ‘not accepted’.

The NEC4 improves upon this position. The contract includes a provision whereby in the absence of a Project Manager’s response, the contractor can serve notice of a further week. After this, if there is still no response then the contractor’s programme is deemed accepted.

Schedule of Cost Components

Within NEC4, there is only one way of defining the defined cost, by following the schedule of cost components (SCC). The shorter schedule of cost components (SSCC) used in cost based contracts for compensation event assessment and only by agreement is no longer used. The aim of this change is to further simplify the tender process.

However, for options A and B, there is now an option to use the new “short schedule of cost components.

Payment Applications

Under the NEC3, the contractor had the option of submitting a payment application, with no penalty if they chose not to do so.

The NEC4 places a positive obligation on the contractor to submit a payment application to the Client. Failure to submit an application leads to the contractor being penalised, through powers granted to the Project Manager in the event that no payment application is received.

Such powers include that the Project Manager may assess that money is due from the contractor to the client as a result of delay damages or defects. This means the contractor would be liable to pay the client.

Single “Fee Percentage”

One key difference between NEC3 and NEC4 is the approach to the fee percentage. The NEC3 allowed a “subcontracted fee percentage” to cover subcontractor’s overheads and profit and “direct fee percentage” to cover the subcontractor’s own direct costs.

The NEC drafters found that during tender, bidders would often provide the same number for both.

Now both percentages have now been combined and replaced with just “fee percentage” for use going forward with NEC4.

Working Area Overhead Changes

An agreed percentage ‘Working Area Overhead’ could be applied to the cost of the People under NEC3 options C, D and E,. This was intended to cover a range of cost such as sundries, security etc, relating to the working area. This often meant the contractor would have to separate these Working Area costs and claim separately.

Furthermore, the issue of what was included within the Working Area Overhead was a cause of frequent disputes between parties. Lists could often be vague and open to interpretation, with significant commercial implications depending on how a cost was treated; if something was deemed included the contractor had already been paid; if it was not, the cost would be most likely be Defined Cost to which the contractor was due additional payment.

Commercially this was often an argument worth having.

The NEC4 allows administrative costs to be payable as a defined cost. This reduces the administrative strain and removes the potential for disputes between the parties.

Preparation of Compensation Events Costs

Under  NEC3 Options A and B, the Contractor could not recover the cost of preparing quotations for CEs, which were specifically excluded from the definition of Defined cost. (Under other NEC Options this was treated as Defined Cost).

NEC4 incorporates feedback from contractors that this is unfair. This exclusion has been deleted and the cost of preparing compensation events is now recoverable under all Options.

Furthermore, NEC4 allows recovery of costs even where the PM proposes an instruction which is not accepted. This has been addressed by the introduction of new CE clause 60(1)(20) (“where the PM notifies the Contractor that a quotation for a proposed instruction is not accepted”).

Dividing date

When considering the whole process of preparing, assessing and approving a compensation event, it may be likely that a number of revisions of the accepted programme have passed. If so, from what date should the compensation event be implemented from?

NEC4 introduces a “Dividing Date” which describes the notification date of the compensation event. This removes any confusion as to which accepted programme a compensation event should be implemented against.

Dispute Resolution

There optional period for escalation and negotiation of a potential dispute is now extended to 4 weeks. This is to be conducted prior to any formal dispute resolution.

This allows for a nominated senior representative from each party to attempt to negotiate an acceptable resolution. The intent is to save time and cost that would be required in commencing a formal resolution procedure.

Of course, contracts to which the Construction Act applies, both parties have the right to refer a dispute to adjudication “at any time”[2]. However, this extra wording gives a contractual structure to a further procedure. This will be particularly useful for contracts to which the Construction Act does not apply.

Retention

A further difference between the NEC3 and NEC4 is that the NEC4 now includes the option for a retention bond instead of a percentage value retained. This allows negotiation between the parties to determine what method of retention is mutually beneficial to all parties.

Final Word

There are no doubt further differences/improvements between NEC3 and NEC4. The examples listed above just some that I have picked out for discussion.

With NEC4 now four years old it is not surprising to see that it is becoming more widely adopted. This will naturally continue in the coming years. The problems with the NEC3 were well known within the industry. Some were addressed by the adoption of bespoke Z clause amendments. Others, like Working Area Overhead continued to be an issue where contract documents had been poorly prepared or costs not properly defined.

It will be interesting to see whether any such contentious areas develop with the NEC4. The contract drafters have clearly tried to work on problem areas. In doing so, have they created any new problems? Only time will tell.

I was pleased to discover that the NEC has been proactive in responding to significant legal developments and case law. In its second set of amendments, the NEC has updated two clauses in particular as a response to recent case law:

• delay damages clause X7 now provides that delay damages cease on termination. This follows the decision in the case of Triple Point Technology –v- PTT Public Company (“Triple Point”).
• The final date for payment is now a fixed date rather than running from the receipt of an invoice. This relates to Secondary Option Y(UK)2. This follows the decision of the TCC in the case of Rochford Construction –v- Kilhan Construction, which found dates tied to an event or mechanism such as invoice would not be compliant with the Construction Act.

It remains to be seen whether the NEC drafters will be as responsive to further case law developments in future.

 

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[1] Justice Edwards-Stuart notably described the contract as a “triumph of form of substance” in Anglian Water Services v Laing O’Rourke Utilities Ltd [2010] EWHC 1529 (TCC)

[2] Housing Grants, Construction and Regeneration Act 1996, s108.