The third edition of the New Engineering and Construction Contract, known as NEC3 is now in common usage throughout engineering and construction projects. Since August 2011 it has become the only form of contract to be published by the Institution of Civil Engineers. Experience has shown that use of the NEC3 form of contracts has led to fewer disputes which have reached the courts, although that said, there is also evidence to suggest that there have been a large number of adjudications, one of the main causes of these disputes is the general uncertainty experienced by contractors at tender stage. This short article attempts to identify some principles for good practice for NEC3 tendering and to bring a degree of clarity to some of the terminology.
The fee percentages are the changes which the Contractor adds to his own direct cost and subcontract cost. It forms part of the Defined Cost, the key concept for payment in options C-F and used for assessment of compensation events in options A and B. The fee percentages are to cover all those costs for which there are not cost components in the schedule of costs components; such as; profit, overheads, insurance, bonds, guarantees and corporation tax. Compared to NEC2, NEC3 has two fee percentages; the direct fee, which is applied to the defined costs of the Contractors direct resources and the subcontracted fee percentage, which is applied to the defined costs of subcontracted work.
The Key People are to be identified and then under clause 24 the Contractor is under an obligation to employ those people to work on the project or employ a suitable replacement which has been accepted by the Project Manager. The Contractor should be aware that the Employer may well wish to secure certain people to work on the project and may even award the contract on that basis. It is therefore advisable that the key people identified within the Contract Data are indeed the people who will be employed on that particular project.
The Working Areas
The working areas can be stipulated by the Contractor, but under clause 11.2(18) the working areas will be only those parts of the working areas necessary for providing the works and used only for work in the contract, that said it is critical that the Contractor defines the working areas to include not only the actual site but all of the areas where work is to be performed in connection with the contract. Defining the working areas fully is of paramount importance as, with the exception of manufacture, fabrication and design, only the costs of resources working within the working areas qualify as defined cost for payment
The Contractor should proceed with a degree of caution in relation to the risk register, as the risk register unless expressly incorporated via an additional Z clause is not a contract document, as such the listing of individual risks on the register has no bearing on either party in relation to that individual risk. Clause 80 lists all the Employers risks and makes reference to any additional Employers risks stated in the Contract Data. Clause 81.1 states “From the starting date until the Defects Certificate has been issued, the risks which are not carried by the Employer are carried by the Contractor.” So; unless there are additional Employers risks listed in the Contract Data the Contractor will carry the burden of all risks, other than those listed within clause 80 regardless of any risk allocation identified on the risk register.
The Works Information
The Works Information specifies the works and any constraints on the way it is provided, where in a project where the Contractor has an element of design responsibility he must ensure that he identifies the documents in which the works information for his design is to be found, it is important in doing so that the Contractor produces as comprehensive of works information as possible as any amendments or additions will not qualify as a compensation event.
Within the NEC contract the programme is a prominent feature. A programme should be produced and submitted along with the Contractors tender and is particularly important when options A and C are used as clause 31.4 states “The Contractor provides information which shows how each activity on the Activity Schedule relates to the operations on each programme which he submits for acceptance.” This relationship can be shown by adding a column to the activity schedule which details the corresponding reference for that activity in relation to the programme. To further emphasize the importance of having a programme clause 50.3 provides that if no programme is identified within the Contract data one quarter of the price for work done to date is retained until such time as the Contractor submits a first programme to the Project Manager for acceptance.
There are two Activity Schedule options within NEC3 which are A and C; under option A the Activity Schedule relates directly to payment whereby the Contractor is paid the lump sum price for each activity upon completion of that activity. The fact that payment is only made on completion of an activity cannot be stressed enough. A savvy Contractor should be looking at his cash flow, programme and activity schedule during the tender period to ensure they have a comprehensive list of activities, the more activities listed with a price, the more often activities will be completed and therefore paid and of course not to fall into the trap of having a single activity such as enabling works running for an extended period as such activity will not be paid until it has been fully completed. Under option C the Activity Schedule does not relate directly to payment and therefore there is no real need for the list of activities to be as comprehensive as that under option A
Percentage for Working Areas overheads
This is in relation to the schedule of cost components and is to cover the cost of items associated with employing people, the items are listed under item 44 of the schedule, this percentage is to be applied to the defined cost of people, it is worth noting that accommodation is not included as part of this percentage but is recoverable as Equipment. The way of establishing this percentage is a simple matter of calculating the cost of providing the items detailed at item 44 of the schedule, calculating the total cost of people and expressing this as a percentage, for example if the cost of providing the items detailed at item 44 is £15,000 for the project duration and the cost for people is £150,000 then the Percentage for Working Area overheads recorded in the Contract Data would be 10%
Percentage for People overheads
This has the same purpose as the Percentage for Working Area overheads but is only used when the Shorter Schedule of Cost Components is used with options A and B for assessing compensation events and by agreement only for assessing compensation events under options C, D and E. In addition to recovering these overhead costs the Contractor can also include percentages to recover overheads in relation to Manufacture and fabrication outside the working areas and design outside the working areas.
If you require further information or guidance on your NEC3 contract or indeed any form of construction contract Elemental Contract Consultants can provide accurate and tailored advice in relation to any aspect of your project.