Campaigning for good project management and flexibility, the NEC4 suite of documents were released in June 2017. Updates made in NEC4 have emerged out of direct feedback from the construction industry and how the contracts are used in practice. In particular NEC4 aims to reduce the number of Z clauses used to modify the standard form a contract.
New Contracts
NEC4 introduced 2 new forms of contract: the Design, Build, Operate (DBO) and the Alliance Contract (ALC).
The DBO provides an “integrated whole-life delivery solution” for the increasing proportion of complex infrastructure projects designed, constructed, operated and maintained by one contractor. Catering for all these operations, it’s drafted on the basis that the same contractor will be carrying them out from pre-construction through to facility management.
The ALC is a “true” alliance arrangement in which the client and all key members of the supply chain are engaged under a single contract. Each member must equally contribute to the performance of the alliance as a whole.
Contract Update
As well as incorporating gender-neutral terminology and making definitions consistent across the suite, NEC4 has made a number of substantive changes you should be aware of:
1. Communications
With the rise of digital communication, users now have the flexibility to agree a system that reflects how communications operate in practice.
2. Assignment
A new clause enables either the contractor or the client to assign freely. This is unlikely to be popular where funders are involved, since clients do not need to consent to an assignment by the contractor.
This clause is slightly unusual as if the client assigns the new client must “act in a spirit of mutual trust and co-operation”. This reflects the core ideas of NEC, which encourages collaborative working throughout the supply chain. It’s unclear what impact this will have on a new client in practice, other than discouraging the assignment of claims.
3. Programmes
The form of programme to be used can now be stipulated under the scope, providing welcome clarity for contract administration purposes.
The timescales for submitting and accepting a programme have changed. If a project manager does not expressly accept or reject a programme within two weeks of submission by a contractor, the contractor can notify the project manager of that failure. If that failure continues for a further week the programme is deemed accepted.
4. Payment
The contractor is now obliged to submit an application for payment before the assessment date. There is also a new final account mechanism which provides for the issue of a final certificate when the contractor has performed their obligations under the contract or on termination. The need for prompt assessment of costs and compensation events has meant that this mechanism has historically not been included. It’s been introduced as users were often making a Z clause amendment to this effect, to give finality and avoid later challenges.
5. Compensation Events
There are two new compensation events in NEC4: one which allows the contractor to recover the costs of preparing a quote for a proposed instruction and a second which allows agreed compensation events to be inserted into the contract data.
NEC4 has clarified the dividing date for the purposes of a compensation event. If the compensation event arises out of a communication from the project manager or supervisor (such as an instruction), the dividing date is the date of that communication. For all other compensation events, the dividing date is the date the compensation event is notified.
6. Title to Objects and Materials within the Site
NEC4 reverses the position of NEC3 on the ownership of materials from excavation and demolition from the site. All such materials automatically belong to the contractor (unless the scope states otherwise) other than any objects of value or historical or other interest, which belong to the client. In NEC3, all title vested with the client, and users should be wary of the risk of a dispute over materials or objects being of “value or historical or other interest”.
7. Liabilities and Insurance
One of the key changes between the NEC3 and NEC4 is the allocation of risk. Under the NEC3 there were risks stipulated as client risks and all other risks lay with the contractor. NEC4 has now issued definitive lists of risks that lie with the contractor and those that lie with the client. Users should be wary of risks that do not fall within either of these sets, where there will be significant scope for dispute.
Under NEC4 any claims, proceedings, compensation, and costs are now dealt with by way of a recovery of costs clause - unlike under NEC3, where this was dealt with by an indemnity.
8. Dispute Avoidance Board
A dispute avoidance board (DAB) has been introduced. The DAB is appointed consensually by both parties. It familiarises itself with the project before any dispute arises and makes regular site visits on request to attempt to encourage an amicable solution between the parties. If no solution is found, the DAB will make a recommendation and only when this is rejected can the formal dispute resolution process be commenced.
9. Undertakings
The provision of collateral warranties has been replaced by undertakings. This includes both from the contractor to third parties and sub-contractors to the client and third parties. These undertakings are in the form of a separate document prepared by the client, so in practice there is no significant legal distinction.
10. BIM
The BIM clause in NEC4 specifies who is to contribute to, who owns, and who is liable for what risks in BIM models. The clause does not specify a standard form BIM model and allows clients the freedom to use their own practises and incorporate them into the contract.
11. Termination at Will
The client is now able to terminate the contract at will.
12. Contractor’s Designs
Under the NEC4 it is the client’s responsibility to show that the contractor did not carry out the design with the requisite standard of skill and care - a complete reversal of NEC3, where it is the contractor’s responsibility to show it did carry out the design with requisite skill and care. Clients should be aware of this change.
13. Whole of Life Costings
The contractor is entitled to suggest changes to the scope which will reduce the cost of operating and maintaining an asset. This is in line with NEC’s collaborative approach and recognises that the cost to run an asset is a significant part of the investment in an asset.
14. Early Contractor Involvement
Under this provision of NEC4 a contractor is appointed in the early stages to contribute to the development of the design and tender. The contractor can propose amendments which could bring about improvements or innovations the client would otherwise not identify.
A contractor can raise any discrepancies early on when it is easier and cheaper to rectify problems. Early involvement of the contractor provides a good foundation for collaboration and could save the client significant costs.
