NEC contracts –best practice procurement?

Good for Australia?20 April 2016

Richard Patterson

NEC and Procurement Specialist

Mott MacDonald

Richard Patterson

2

• Dams engineer ….…to procurement specialist

• Chartered Engineer, CEng, MICE

• 26 Years with global consultant, Mott MacDonald

• International procurement

– World Bank, EU, Asian Development Bank, Caribbean Development Bank etc

• Water project finance

• Target cost contracts, collaborative working

• NEC (New Engineering Contract) specialist

A plan

• The NEC family

• Flexibility, clarity, stimulus to good management

• Relationships and collaboration

• Global contracts

• Case studies and benefits

Peter Higgins

.

NEC is a family of contracts that facilitates the

implementation of sound project management principles and

practices as well as defining legal relationships

NEC is a family of contracts that facilitates the

implementation of sound project management principles and

practices as well as defining legal relationships

www.neccontract.com

What do you want from a contract?

Flexibility

Clarity and simplicity

Stimulus to good management

Promoter’s advisor

Professional Services Contract

Contractor Engineering and Construction Contract

Contractor’s designer

Professional Services Contract

Contractor’s supplier

Supply Contract

Contractor’s subcontractor

Engineering and Construction Sub Contract

Professional Services Contract

Construction Operate and Maintain

Operation and maintenance contractor

Term Service Contract

Facility manager

Professional Services Contract

All with common

• principles

• structure

• language

Develop Business Case / Design

NEC flexibility: a contract for (almost) everything

Also a ‘Short’ and simpler version of each contract

Z

A B C D E F

X1

X2

X3

X4

X5

X6

X7

X1

2

X1

3

X1

4

X1

5

X1

6

X1

7

X1

8

X2

0

W1 W2

C

X5

X6

Z

X1

8

X2

0

payment option

additional conditions

secondary options

dispute resolution option

1 - 9core clauses

jurisdiction - specific options

W2

Y(UK)2 Y(UK)3Y(UK)1 Y(UK)2 Y(UK)3

Flexible options – ECC contract

Y(NZ)1 Y(NZ)2

‘local’ options!

E, FReimbur-

sable

Contractor’s incentive ... and risk

Clie

nt’s

ris

k ... a

nd

fle

xib

ility

BPriced with

BoQA

Priced withact. sched.

Risk allocation on target

contact depends on

‘share profile’D

Target with BoQ

CTarget with activity schedule

Flexible: estimating and efficiency risk –allocated via choice of main option

• X1 Price adjustment for inflation

• X2 Changes in the law

• X3 Multiple currencies

• X4 Parent company guarantee

• X5 Sectional Completion

• X6 Bonus for early Completion

• X7 Delay damages

• X12 Partnering

• X13 Performance bond

• X14 Advanced payment to the Contractor

Flexibility. ECC Secondary options

Multi-party

And then ‘secondary options’ to suit your contract

or

• Y(NZ)1 The Construction Contracts Act 2002

• Y(NZ)2 Third party rights

• X15 Limitation of the Contractor’s liability for his design

to reasonable skill & care

• X16 Retention

• X17 Low performance damages

• X18 Limitation of liability

And then ‘secondary options’ to suit your contract

• Y(UK)1 Project Bank Account

• Y(UK)2 The Housing Grants, Construction and Regeneration Act 1996

• Y(UK)3 The Contracts (Rights of Third Parties) Act 1999

• Z additional conditions of contract

NEC. A tool to allocate and manage risk

Management, Procurement and Law, 2009, No 4.

Flexibility. Procurement strategy

The ‘normal’:

• Employer ‘design – bid – build’

• Contractor ‘design and build’

And procurement itself has moved on…

• Better risk management

• ‘Partnering’ and ‘Collaborative working’

• Target contracts

• ‘Frameworks’

• ‘Early contractor involvement’ (ECI)

• Alliancing

All these are encouraged and supported by the use of a modern

form of contract……..

12

13

Flexibility. As you need it

• Complex or simple

• Any sector

• Any discipline(s)

• Clear and flexible risk allocation

• Anywhere in the world

(Almost) any procurement strategy

14

Clarity. You can read it!

• Plain, readable English, minimal legal jargon

• Excellent structure

• Minimal subjective judgements

• Based on processes, backed up by flow charts

• Required actions in present tense

• Timescale for every action

The Employer shall indemnify and hold harmless the Contractor, the Contractor’s Personnel, and their respective agents, against and from all claims, damages, losses and expenses (including legal fees and expenses) in respect of (1) bodily injury, sickness, disease or death, which is attributable to any negligence, wilful act or breach of the Contract by the Employer, the Employer’s Personnel, or any of their respective agents, and (2) the matters for which liability may be excluded from insurance cover, as described in sub-paragraphs (d)(i), (ii) and (iii) of Sub-Clause 18.3 [Insurance Against Injury to Persons and Damage to Property].

15

Language. FIDIC

Language. NECPresent tense and in English!

• Specifically designed to stimulate good management of

– the relationship between the parties

– the work in the contract

• The contract is a project management system

• The contract has to be read and used by Project Manager and Contractor

• The procedures need to be followed

– contract is not ‘left in the drawer’

– training and systems required

17

Stimulus to good management

communicationsAccepted

Programme

early warningcompensation

events

Key tools to stimulate to good management

19

NEC encourages collaboration

• Clause 10.1: ‘The Employer, the Contractor, the Project Manager and the Supervisor shall act as stated in this contract and in a spirit of mutual trust and co-operation’

Core clauses

• X20 Key Performance Indicators

Increasing collaboration

• Option C – target contract

• early contractor involvement

• communications

• Accepted Programme

• early warning

• compensation events

Channel Tunnel Rail Link Crossrail London Olympics 2010

All procured using NEC contracts

User GroupKnown use

InterestDownloads

NEC used in UK, South Africa, Hong Kong, New Zealand, Dubai,

Holland and …. Antarctica

NEC Global

Hong Kong government

mandated NEC in 2015

Use increasing in New Zealand

Some Chinese contractors have

used NEC in India

South Africa

• One of 4 contract forms sanctioned by government

• used extensively in power and chemicals

• US$10bn Programme to upgrade South Africa’s ports and railways

• Transnet’s teams partner with team from Hatch, Mott MacDonald and Goba

• ECC3 and PSC3 used

North AfricaShell Environmental clean up

• Value: € millions

• Contracts: ECC Option D

• 2008 - 1010

• Contractor: Bilfinger Berger Environmental (Germany)

• Project Manager: Shell Global Solutions

• Training – by NEC

• “Modern collaborative approach reduces the potential for contractual conflict on technically and logistically complex projects.

• Structured change management process helps project team agree the effects of compensation events very quickly after they become known.

• NEC3 stimulates good management and provide a consistent set of clear, flexible and contracts for a global and diverse client organisation”

Benefits of NEC3

Benefits of NEC3

• “The flexibility, clarity and stimulus to good management at the heart of NEC3 contracts, together with the fact they can and have been used successfully across the world, means they are ideal as the basis for a consistent set of contracts to be used by a global and diverse organisation such as Shell. We will be seeking to communicate their benefits to our colleagues across the group.”

• Andrew Lee, Head of Remediation Project Services, Shell Pet Dev Co of Nigeria

• But training required – and very clear documents

Indira Gandhi International Airport, Terminal 3, Delhi, India

• Value: $1 billion

• Contracts: ECC, PSC, TSC

• 2006-2012

• Employer: Delhi International Airport (P) Ltd

• Contractor: Larson & Toubro

• Project Manager: GMR Group

Benefits of NEC3

• ‘NEC3 is a neutral and fully-integrated family of contracts, well-proven in multiple jurisdictions around the globe, making the family an ideal choice for this wide-ranging project with most subcontractors and consultants headquartered outside India.

• All NEC3 forms are written for international use so no customisation was necessary for use within India.

Hong Kong

• 2001 Tang report called for ‘non-contractual partnering’

• Development Bureau called on spending departments to do ‘trial projects’, from 2009

• Various sectors, various options

• ECC, TSC and now PSC

• NEC now mandated for construction 2015 and 2016

Happy Valley, Wan Chai, Hong Kong

• Value: HK$678 m (£53 m)

• Contracts: ECC Option C, ECS

• 2012 - 2018

• Employer: Drainage Services Department, Hong Kong SAR

• Contractor: Chun Wo

• Project Manager: Chief Engineer (DSD)

• Cost audit: Mott MacDonald

Benefits of NEC3

• “The NEC3 contract suite promotes a spirit of mutual trust and co-operation between contracting parties and key stakeholders.

• The pain/gain share mechanism in the ECC sets common goals for employers and contractors, encouraging collaboration, innovation and cost saving.

• The ECC early warning and compensation event process ensures contract issues are speedily resolved and risks properly managed throughout.

• Use of the ECS extends NEC3 collaboration and risk management benefits through the entire supply chain.”

Antarctica

• ‘Halley VI’ Antarctic Research Station

• British Antarctic Survey

• Design competition; negotiated target contract with sole tenderer; project-specific risk allocation

• Procurement advisor: Mott MacDonald

• Standard weather clause needed attention!

Europe – International Criminal Courtat the Hague, Netherlands

• €147 million

• ECC option C

• Oct 2012 – Oct 2015

• Employer: International Criminal Court

• Contractor: Visser & Smit Bouw and Boele & van Eesteren (Courtys)

• Project Manager: Brink Groep

NEC chosen over FIDIC and Dutch standard form

NEC was chosen after detailed comparison with FIDIC

Neil Bradley, client PM said of NEC:

• “Promotes proactive collaboration between the client and the contractor, engendering a transparent way of working.

• Encourages early identification and discussion of risks and other issues, and ensures that risks are managed by the party who is best suited to do so.

• Offers a unique pricing mechanism based on incentives and profit sharing.

• Is written in easy-to-understand English, with no legal language”.

Benefits of NEC3

New Zealand Meridian Energy

• Largest renewable energy suppler in New Zealand

• Compared and reported on NEC and FIDIC at ‘The 11th Annual Contract Performance Management Summit, Construction & Infrastructure Contract Masterclass, Auckland, February 2009’

• Has since moved to NEC for almost all its procurement –works and services

• An ‘early adopter’ of NEC in New Zealand

800mW underground Manapouri hydropower station.

NZ$30 mechanical and electrical refurbishment programme.

NEC3 ECC target cost contract.

The 80 year old Waitaki power station is an historic part of the electricity network.

A range of work using over 50 NEC3 contracts.

Meridan, New Zealand

Christchurch International Airport, New Zealand - Airside Civil Work

• Value: NZ$9.7m (£5m)

• Contracts: ECC, ECS

• May 2010 - Dec 2012

• Employer: Christchurch International Airport Limited

• Contractor: The Isaac Construction Company

• Project Manager: Coffey Projects

Benefits of NEC3

• "NEC3 is based on a simple philosophy of partnering, collaboration and a best-for-everyone approach, and not a master-servant style of traditional contracts used.

• The contract went very well and the incentive to share possible time, financial and safety issues promoted a non-adversarial approach to contracting. We are very keen to work under this type of contract on future projects.“

• All airside civil works subcontractors were appointed using the NEC3 Engineering and Construction Subcontract to ensure timescales for communication were fully integrated along with the early-warning process. "The back-to-back subcontracts brought subcontractors into the spirit of the main contract and empowered them actively to support the contractor in managing risks and opportunities"

Mt Mercer wind farm – AustraliaMeridian Energy

• First NEC in Australia? Completion 2014.

• On time and budget, A$260 million

• Downer EDI: A$70 million ECC contract for design and construction main electrical and civil works

• Senvion Australia had a separate ECC contract to supply and install the 64 wind turbines.

FCO - British Consulate in Perth -fit out

• 2012

• AUD $850k

• local PM and contractor

• design team, QS and project sponsor in the UK.

• First use of NEC in Australia?

So what for the organisation?

Process Technology

People

41

Pitfalls? Jurisdiction?

• NEC designed to be used internationally

• His Honour Humphrey Lloyd QC: “there are no real barriers to the NEC3 Engineering and Construction Contract being used internationally”

• ICE Management, Procurement and Law Prestige Lecture, ICE, 24 November 2008

Pitfalls? Jurisdiction?

NEC Newsletter, No,47, July 2009

http://www.neccontract.com/news/index.asp?Type=Newslett

ers#

Pitfalls

The main pitfall in NEC is simply not

doing what it says in the contract.

NEC – we need

• RT_C

• DWISIT_C

• _TTEO

• Culture and behaviours

– Get ‘contractual’

– AND talk to each other

• System

• Training

• Read The _ Contract

• Do What IT Says In The _ Contract

• _Talk To Each Other

So what for Australia?

Contact

• Richard Patterson, BA MBA CEng MICE

• NEC and Procurement Specialist

• Mott MacDonald

• https://www.linkedin.com/today/author/coolsoberandsmiling

• Mott MacDonald Ltd

• 22 Station Road, Cambridge, CB1 2JD

• richard.patterson@mottmac.com

• +44 (0) 1223 463 606

www.mottmac.com

Mott MacDonald