nec: lessons from nearly 20 years in the uk and elsewhere ... · richard patterson, mott macdonald...

Richard Patterson, Mott MacDonald

NEC: Lessons from nearly 20 years in the UK and elsewhere : implications for Hong KongHong Kong Institute of Surveyors, 24 April 2012

© Mott MacDonald, April 2012

2

Housekeeping

• Safety

• Facilities


3

Introductions

• Richard Patterson

• Chartered Engineer

• Mott MacDonald Procurement Practice

• 21 years with Mott MacDonald

• Many forms of contract

• 15 years with the NEC

• A year with NEC as an NEC Consultant


4

There is a plan

• Some real basics on NEC

• Pre-award – contract preparation

– The right contract

– structure

– Z clauses

– Works Information

– Early Contractor Involvement (ECI)

• Post-award – contract management

– programme

– early warning (Risk Register and project risk register)

– compensation events

– target cost issues

• Preparing for NEC – so what?

• Bedtime reading


5

NEC is well proven. And why we are here.

• 1985 UK Institution of Civil Engineers (ICE)

– review existing contracts, case law

– development work for a new contract

• 1991 - Consultative version - South Africa, Hong Kong, UK

• 1995 - Engineering and Construction Contract (2nd Ed.)

• 10 years of successful use and expansion of NEC family

• Specifically endorsed by South African government

• 2005 - NEC3 launched - users’ feedback; new contracts

• 2005 - specifically endorsed by UK government

• 2009 – trials by Hong Kong Government


6

By the way, please, just ‘NEC’

•N – it’s clearly not new

•E – it’s for far more than engineering

•C – it’s more than ‘just’ a contract


7

NEC principles – some really good ideas

Clarity and simplicity

Stimulus to good management

Flexibility

Flexibility – the NEC Family

ECCEngineering & Construction Contract

TSCTerm Services Contract

ECSCEngineering & Construction

Short ContractTSSC

Term Services Short Contract

PS

CP

rofe

ssio

nal S

erv

ices C

ontra

ct

Supply Contract

Supply Short Contract

design construction operationbusiness case

ECSEngineering & Construction

Subcontract

ECSSEngineering & Construction

Short Subcontract

Framework Contract

Adjudicator’s Contract

Supply

Low

High

Com

ple

xity


9

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

Flexibility – the Engineering and Construction

Contract (ECC)

W2

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


10

NEC is a stimulus to good management

• clear documents, roles and processes

• sort it out NOW approach

• focus on programme

• collaborative risk management

• effect of change based on forecast effect on time and

cost – not eg a historical bill of quantities

• flow charts for all processes

• A contract focused on the project – radical!


11

Pre-award lessons


12

Start with right NEC contract !

• Engineering and Construction Contract (ECC) vs Engineering and Construction Short Contract (ECSC)

• Term Service Contract (TSC):

– Designed for a service, not really as a ‘term contract’. X19 Tasks need work

– vs NEC Framework Contract

– vs ‘flexed’ Engineering and Construction Contract (ECC)

• Whatever you do:

– Requirements and constraints

– Risk

– Time

– Price

Core

Options

conditions of contract

Schedule (s)

of Cost

Components

Option Z

Contract Data

part one

part two

activity

schedule

orbill of

quantities

SiteInformation

Works

Information

incorporates by ref.

AcceptedProgramme

form of

agreement requires info.to be stated in

Don’t mess with the structure - ECCHK seems to have developed

two sets of

‘standard’ Z clauses….


1414

Curb the Z clauses!

• Mott MacDonald at NEC Annual Seminar 2011:

• ‘To what extent have Z

clauses impacted on the

NEC’s success as a modern

contract?’

• Very happy to share


1515

• ‘Additional conditions should be used only when

absolutely necessary to accommodate special

needs such as those peculiar to the country in

which the work is to be done.’

(Guidance notes, 2005)

• Contra proferentum

• Of course, HK government has its reasons

Guidance from NEC


1616

The clauses support & interlink the whole – beware


17

‘Types’ of Z clause identified in the research

Onerous and

unfair, 8%

Legal

clarifications,

2%

Valid, 6%Works

Information,

24%

Shrinking

Obligations,

20%Lack of NEC

Knowledge,

16%

Turning back

the clock, 16%

Risk profiling,

8%


1818

• Overall 73% believed Zs create a more adversarial contract

Z clauses create a more adversarial contract


19

Valid Z clauses?

• Mott MacDonald shared its ‘issues’ on ECC2 with NEC. Very few remain in ECC3.

• Properly incorporating the Schedules of Cost Components

• Application for payment

• Intellectual Property Rights (IPR)

• Option A, B – ‘value engineering clause’

• Options C and D - timing of payment of Contractors share

• Project specific risk allocation changes


2020

• If extensive amendments required, use another form of contract!

• Drafters must be fluent in, and subscribe to, the principles of the NEC contract

• Z clauses should:

– be kept to a minimum

– not alter the general principles of NEC contracting

– be drafted in the style of the NEC

– use language from other clauses where possible

– be presented as an appendix to the Contract Data part one

Z clause lessons


2121

• Drafters of Z clauses should:

– produce and use amended flow-charts

– provide rationale to support the inclusion of Z clauses at tender stage

• The team must produce effective and correct contract documents alongside the Z clauses

• Consider requesting prices for different options including and excluding certain Z clauses

Z clause lessons – more!


22

But, forget the Z clauses, what do you

actually want?!


23

Works Information – what does it say on the tin?

• 20.1 ‘The Contractor Provides the

Works in accordance with the Works

Information.’

• 54.1 (option A and C) ‘Information in

the Activity Schedule is not Works

Information or Site Information.’

• 60.1 ‘The following are compensation

events.

– (1) The Project Manager gives an instruction changing the Works Information …..

If it’s not ‘on the tin’ (in the WI) then the Contractor does not have to do it. Poor WI: busy Project Manager!


24

Works Information

• This is where the effort is required!

• No standard structure imposed by ECC

• But many references from the conditions

– All listed in the Guidance Notes

– Eg work to be done by the Completion Date

– parts of the works designed by Contractor (21.1)

– particulars of design for submission (21.2)

• Consider template/preface to ensure Works Information covers all these issues

• Repeat users should develop a template


25

Anyone preparing Works Information should read...


26

Managing uncertainty and risk using‘Early contractor involvement’ or ‘Two stage tendering’

forecast outturn cost

base

risk

timefeasibility, outline design, detailed design, constructionaw

ard

of c

ontra

ct

client’s riskContractor’s risk

‘the Prices’

ECC contract for ‘phase 2’PSC contract for ‘phase 1’

OR single ECC contract with ‘break point’


27

Post-award lessons


28

Key issues for a successful implementation of

an NEC project

• Communications– ‘As discussed….’ – ie TALK to each other

– Clear system to formalise communications

• Programme (ECC) / plan (TSC)

– Meeting at least monthly

• Early warning and risk reduction

– Meeting at least weekly

• Compensation events

– Meeting ideally weekly

• Defined Cost (on target contracts)


29

The programme has to be taken seriously

• Programme is key to project management – and so to ECC

• Detailed requirements for contents and updating of programme

– More than ‘just’ a bar chart

• Even substantial contractors have been shocked!

• Get the first Accepted Programme in place at contract award

• Soft copy

• Monthly routine: discuss, understand, agree prior to formal ‘submission’


30

Early warning (Cl 16)

• vital part of ECC – reciprocal obligations to both notify and solve

• Contractor and PM give an early warning… aware of a matter which could

– increase the total of the Prices

– delay Completion,

– delay meeting a Key Date or

– impair the performance of the works in use


31

Early warning (Cl 16)

• Early warning has teeth!

• Sanction if not given

– Cl 63.5 – compensation event assessed as if Contractor had given early warning

– Option C and D – Disallowed Cost includes those costs incurred because no early warning given


32

Early warnings and the Risk Register

• PM enters early warning matters in Risk Register – new in NEC3

• risk reduction meeting; those attending co-operate in

– making and considering proposals to avoid or reduce risk, seeking solutions, deciding actions, updating Risk Register

• PM revises Risk Register to record decisions and issues


33

So what is the Risk Register….

Risk Register includes a

• description of the risk and

• a description of the actions which are to be taken to avoid or reduce the risk

The Risk Register in NEC3 has caused some confusion…..

A project risk register,the contract,

and the ECC’s Risk Register

Description

of the risk

Likelihood

Impact

(time)

Impact

(cost)

OwnerCost

allowanceExpiry date

Actions to

avoid or reduce

the risk

Actions to avoid or reduce the risk

Actual expiry date

Predicted expiry date

Cost allowance‘Owner’Impact (cost)Impact (time)Likelihood (%)Description of risk

If relevant and ‘to be ‘talked about’ in

post award ‘risk reduction meetings’

then include in CD1include in CD1 as

‘the following matters will be

included

in the Risk Register’

Contractor required to do?If so, then in

Works Information.

If C’s design then in

‘WI for C’s design’

At clients risk?

Also cut and stick as

additional ‘compensation event’(option Z) or

possibly ‘Employer’s risk’from Contract Data part one

Client’s risk? – overall amount

included in Client’s contingencyoutside Prices

Contractor’s risk? – overallamount included in the ‘Prices’

the contract

Included, after award, as the ECC Risk Register


35

project risk register and Risk RegisterDescription

of the riskActions to avoid or reduce the risk

Some project level risks may make it to Contract Data part 1 or 2 and

so to ECC Risk Register

All early warnings go to ECC Risk

Register – but are they ‘worth’

going on project risk register?


36

project risk register and Risk Register

• The ECC PM updates the Risk Register (RR) and may also be the pm who manages the ‘project risk register’ (prr)!

• RR has a subset of the columns of the prr

• RR may have risks (rows) that do not merit going on the prrand

• prr will have higher level project risks (rows) that do not belong on the RR for the contract

• Can we manage this as one database / spreadsheet?

• Need to keep the ECC Risk Register simple and used


37

Risk Register

timefeasibility, outline design, detailed design, construction

awar

d of

con

tract

ECC Risk Register

project risk register


38

Early warnings and the Risk Register

• Encourages collaboration and proactive risk management

• Properly managed, it will also help

– management of risk

– management of change and

– processing of compensation events


39

• For any ‘early warning’

– Information phase

– Agree aims

– Generate ideas

– Develop action plan – actions to be clear and precise

– Update the Risk Register

• What about:

– ‘Technical Queries’ (TQs)

– ‘Requests for Information’ (RFIs)

NEC ‘Risk Register’ – consideration and tips


40

NEC ‘Risk Register’ – consideration and tips (2)

• PM has to beware of changes to the Works Information

• Works best if integrated through the supply chain with NEC3 contracts and subcontracts – run by Contractor?

• Beware clogging up process with too many risks with low

likelihood and low impact

• Use a projector to put on to the wall: update there and then!


41

It’s all about change

• And who or what likes change?

poor Works Info. = stressed Project Manager

change management = compensation events


42

You need to actively manage compensation

events from day 1

• Need to agree you want to manage them… and monitor progress

• Clear processes and timescales in contract

• The team needs:

– Accepted Programme and programming skills

– QSs that understand cost and risk and the Contractor’s cost system

– An agreed format for quotations

– A way of working with Contractor for acceptable quotations

– Negotiation skills – and empowerment

• Use Project Manager’s assumptions (61.6)

• Roll up the little ones?


43

For each compensation event

• Agree the sub-clause

• Be clear on the desired outcome

– eg clear changes to Works Information

• Discuss alternatives (62.1) for ‘alternative ways’

– Technical alternatives

– Time vs cost?

• Discuss risks and so any possible Project Manager assumptions (61.6)

• Changes to Contractor’s working?

• Change to Completion Date?

• Change to Defined Cost?

• Review before formal submission


44

Prices, £

time

at tender

completion date

changed Prices and Completion

Date due to compensation

eventsPWDD

‘Incremental certainty?’

No gap here if A or B


45

Cost - on a well run NEC target contract…

• Monitoring the Defined Cost against target

– understand the Contractor’s cost accounting system – in detail

– get items in the Fee separately coded at source

– monitor cost weekly

– formal audit plan

• Disallowed Costs – accounts and records

– ensure and record any agreement ‘around the edges’ of the definition

– ‘disallow’ as far as possible at source in Contractor’s management accounting system

– monitor weekly


46

NEC ‘health checks’ – how well are you doing?

• Date of and days since last Accepted programme

• Monthly and cumulative number of early warnings raised and outstanding

• Date of and days since last update to Risk Register

• Cumulative number and value of CEs notified

• Cumulative number and value of CEs implemented


47

NEC - So what for my organisation?

Process Technology

People


48

Process - review internal processes

• Pre-award

– determining procurement strategy

– Tender docs – review ‘standard’ specifications and drawings

– develop templates and/or guidance for eg Contract Dataand Works Information

• Contract management

– appointment of staff to ECC roles and delegation of actions

– change management – decision making

– ‘standard’ forms for communications

– audit

A real challenge here in Hong

Kong


49

Technology – use it

• Pre-award

– better ways of storing/sharing/maintaining documents

• Contract management

– planning software

– Consider how ECC processes to be communicated and recorded

• word and excel?

• database?

• proprietary software?


50


51

It’s all about people, stupid

• People– are they right for collaboration?

– willing to learn and change?

– empowered and competent to make decisions?

• Training– training needs assessment

– ECC awareness for most; specific training for specific needs

– planning, costing, negotiation?

– ‘roll-out’ of organisation’s templates etc

– joint training with supply chain

– project start-up workshops


52

Bedtime reading


53

Some articles of mine, I hope, may be of interest

ICE’s ‘Civil Engineering’, May 2001Using NEC for multiple site,

undefined contracts

2001

NEC Newsletter No 40, Oct 2007NEC and Risk Management2007

Site Recorder, Magazine of the Institute of Clerks of WorksNEC – A real opportunity for the Clerk of Works

NEC Newsletter, No,47, July 2009Use of NEC in legal jurisdictions

other than English law

2009

ICE’s Management, Procurement andLaw, 2009, No 4.

Using NEC contracts to managerisk and avoid disputes

2009

May 2010 edition of 'The Partner', which is ‘the annual publication of

PSL, which is a CBI and BIS initiative to promote collaborative business relationships www.pslcbi.com '

NEC contracts as an enabler to Partnering2010

NEC Newsletter No 51, July 20106 key links in the ECC2010

Tunnels and Tunnelling Magazine, Dec 2010Ground Conditions and Risk Allocation:

Combining the NEC Engineering and Construction Contract (ECC) and the

Geotechnical Baseline Report (GBR)

2010

NEC Newsletter No 56, October 2011NEC3: contracts for partnering2011

Where publishedTitleYear


54

NEC manuals

• NEC Managing Reality

– Five volumes covering all aspects of NEC (ECC)

• Barry Trebes (Mott MacDonald)

and Bronwyn Mitchell

• Thomas Telford publishing


55

NEC3 A User’s Guide

• NEC3 A User’s Guide

• Jon Broome

• ice publishing

• Published March 2012


56

• NEC demandsgood documentation

• NEC demands active management

Remember:

NEC is not a panacea or an easy answer


57

Further information

• www.neccontract.com

• www.mottmac.com

• [email protected]

• +44 (0) 1223 463 606

• and / or

• Hayman Choi here in Hong Kong

• [email protected]

• +852 2828 5826


5858

www.mottmac.com

Mott MacDonald

nec: lessons from nearly 20 years in the uk and elsewhere ... · richard patterson, mott macdonald...

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