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The NEC Engineering and Construction Contract (“ECC”) represents a complete rethink of the way in which other standard forms of contract approach many of the contentious issues in construction contracts.
The underlying intention behind the drafting of the NEC ECC was to allow for a document that is flexible, clear, simple, and encourages collaborative risk mitigation and good project management practice.
Nobody can argue that these are noble and, indeed, necessary values for a good engineering contract but behind the good intent lurks certain risks to both parties which are often undetected due to the seemingly egalitarian nature of the contract. Contractors, in particular, who are used to dealing with contracts that seem to favour the employer, often approach contracts let under the NEC with enthusiastic belief that they are automatically going to be better off. This can be a dangerous attitude to adopt.
The very nature of the NEC ECC is that it can be a more “equitable” form of contract but this comes at a price and the price is in the form of the need for greater and more thorough contracts administration. Put differently, in order to enjoy the benefits of the contract, the contractor has to do a lot more admin than what he may be used to, and the failure to do so may well nullify any potential benefit.
One of the key differences that the NEC brings to the project table is the management of risk. The approach here is on:
- Early identification
- Extensive recording and communication of risk events (before they become “claims”)
- Actively working together to deal with the risks
To achieve this, the NEC introduces processes that seek to encourage the parties to “look ahead” and to apply such “foresight” collaboratively to mitigate problems and minimize risks. To do this, requires clearly identified roles and responsibilities which, in turn require adherence to rigorous procedures. Non-adherence to the procedures means the results will not follow. This, in itself, poses a key threat to the contractor. Let’s examine this hazard a little closer:
The very essence of the NEC ECC contract is that it is premised on the supposition that the parties will adopt its processes holistically. The entire structure of the NEC ECC, in turn, risks being undermined by non-adherence to the processes and procedures that are integral to its nature. Because the agreement presupposes the parties will implement its procedures, the agreement, by its very nature, doesn’t always provide adequately for what happens if the parties don’t adopt its procedures! This can lead to a “contractual vacuum” where the parties may want to assert rights without clear directions as to how this should be done. This, in itself, can (and does) give rise to disagreements.
Let’s use an example: Clause 16 of the NEC ECC Core Clauses deals with “Early Warnings”. This has shown to be one of the most misunderstood concepts to newcomers to the NEC ECC but the general idea is for the Contractor to notify the Project Manager (“PM”) as soon as possible as to any event that could negatively affect the project. The PM then enters the early warning into a “Risk Register”, the parties meet and the risk event is tackled collaboratively. The Risk Register is updated all the time to reflect developments. (Think of the additional admin that may be needed here).
This is a superb provision that should exist in every construction contract. In fact, it should be done as a matter of course without it being a term of the contract (but that is another debate).
Let’s assume now that an event arises and the Contractor forgets to notify the PM. Let’s assume that the Contractor had gotten wind of a potential shortage of a key material but neglected to inform the PM until the material shortage became a reality. What happens now?
The NEC deals with this situation at core clause 63.5 where the PM assesses “Compensation Events”. Let’s assume that the Contractor, affected by the unavailability of the specified materials, notifies a Compensation Event. We’ll talk about the Compensation Event processes in more detail in the next newsletter, but for now let’s just look at clause 63.5. It states, in effect, that if the Contractor didn’t give an Early Warning, the Compensation Event is assessed as if the Contractor had given Early Warning.
This provision is difficult to grasp at first but what it really seems to mean is that, if the Employer had been warned earlier and would have taken steps to mitigate the event and the consequences of the event would have been less as a result of the mitigation, the Contractor is entitled to the lesser compensation and/or time.
One need only think a little about this proposition to see how it could give rise to considerable disagreement. Mull over these thoughts:
- In effect, the Contractor’s rights can be adversely affected by a hypothetical instance of what might have happened.
- Who decides what action would have been taken?
- What about the other effects of the supposed action? For example, if the Employer argues it would have changed the specification for the materials had it known, wouldn’t the change in spec’ have theoretically entitled the Contractor to another Compensation Event (eg. under clause 60.1(1)?)
- If the replacement materials would have cost more, does the Employer add this “saving” on to the Compensation Event?
Above all else, if the issue becomes a dispute, what legal principles is an adjudicator or arbitrator going to base his decision on? Bear in mind that, had the Contractor notified the Early Warning, it would have been entered into a risk register, debated and updated. How does one assess what might have happened in these processes?
None of these concerns arise, of course if the Contractor unfailingly notifies risk events as early as possible. This demonstrates how different the operation of the NEC ECC is depending on whether its prescripts are adhered to or not!
What then is the solution? Well, it seems to be that both parties must adhere dutifully to all of the processes in the agreement.
This, in turn, requires a new mindset and new methodologies to manage the requisite processes. ICT has never been more needed and contract administration
systems like C-COM by Contract Communicator are certainly worth looking into. C-COM captures, communicates and manages the NEC ECC contract processes and
can ease compliance dramatically. Without systems like this in place, it’s difficult to see how parties to NEC contracts can hope to take advantage of the potential that the NEC ECC undoubtedly has.
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