The NEC4 Engineering and Construction Contract: A Commentary

By Brian Eggleston

The authoritative guide to the NEC4 Engineering and Construction Contract

The New Engineering Contract (NEC) is one of the leading standard forms of contract for major construction and infrastructure projects. The latest edition of the contract (NEC4) is now a suite of contracts widely used in the UK, Australia, Hong Kong, South Africa, Ireland, and New Zealand. This timely and important book provides a detailed commentary on the latest edition of the main NEC4 Engineering and Construction Contract (NEC4 ECC) form. It explains how the contract is intended to operate and examines each clause to consider its application and legal interpretation. It also draws upon the author's highly successful third edition of the book covering the previous contract. It identifies and comments on the changes between the current and previous version of the form.  

After a brief introduction to the new edition of the form, The NEC4 Engineering and Construction Contract offers in-depth chapters covering everything from main options and secondary option clauses to risk assurances and NEC 4 family contracts. In between, readers will learn about general core clauses, the obligations and responsibilities of the contractor, testing and defects, payments, compensation events, and much more.

• Covers the latest version of the NEC Engineering and Construction Contract, the leading standard form contract for major construction projects
• Examines the new contract clause by clause and compares it with the previous edition
• Previous editions were widely acknowledged as detailed and fair analyses of the NEC contracts
• Written by a highly regarded contracts commentator, experienced arbitrator, and adjudicator

The NEC4 Engineering and Construction Contract: A Commentary is an excellent book for construction industry professionals working for clients, employers, main contractors, project managers, subcontractors, and specialist contractors.

• Language: English
• Publisher: Wiley
• Release date: Mar 1, 2019
• ISBN: 9781119478799

Book preview

Chapter 1

Introduction

1.1 Overview

NEC4 is a generic name for a suite of contracts developed by the Institution of Civil Engineers, and published by its wholly owned subsidiary Thomas Telford Ltd. NEC stands for New Engineering Contract, a name originating from the publication in January 1991 of a consultative version of what was then a new approach to the drafting of construction contracts.

1.2 Background

The background to the development of the New Engineering Contract (NEC) does much to explain its style and content. In the 1980s there was ongoing debate within the Institution of Civil Engineers (ICE), the lead body for the production of the ICE Conditions of Contract – at that time the standard form used for most civil engineering works in the UK – as to the direction of future contract strategies. At issue were questions as to whether the then existing standard forms adequately served the best interests of the Parties by focusing on the obligations and responsibilities of the Parties rather than on good management, and whether an entirely new approach was needed to promote co-operation and to reduce confrontation. The prevailing view was that something new was needed, particularly for sizeable contracts where attention to good project management was the key to successful completion.

1.3 Objectives

The drafting team for the first version of the NEC was charged with three specific objectives for the new contract:

that it should be more flexible in its scope than existing standard forms

that it should provide greater stimulus to good project management than existing standard forms

that it should be expressed more simply and clearly than existing forms.

Maintenance of those ambitions has been the bedrock of the 1993, 1995, 2005, 2013 and now 2017 editions of the NEC contracts.

For the 2017 edition, those ambitions have been expanded:

to provide even greater stimulus to good management

to support new approaches to procurement which improve contract management

to inspire increased use of NEC in new markets and sectors.

1.4 Impacts of change

As evident from the above, it was a matter of policy from the outset that NEC contracts should be different in form and content from other standard forms of construction contracts. And they certainly are.

The early editions of the NEC were greeted with mixed reviews varying from effusive praise to shock and horror. But such a range of reactions was inevitable given the extent to which the NEC differed from traditional standard forms of construction contracts in its procedural and terminological changes, and the extent to which it required changes in attitudes and long-standing practices. Moreover, there were those who recognised that change, however well intended, can bring with it unintended consequences, and that effecting change in the construction industry has never been easy to achieve. For, as Rudyard Kipling wrote a century or so ago in his bricklayer's tale:

I tell this tale, which is strictly true,

Just by way of convincing you

How very little since things were made

Things have altered in the building trade.

Not surprisingly, therefore, ambitious expectations that improved contract management and reduction of conflict could be achieved with a contract that was deliberately different from previously used construction contracts have not all been achieved. In particular, moving the focus of the conditions of contract from detailing the obligations and liabilities of the Parties to detailing the particulars of project management seems to have overlooked some of the more obvious consequences of such a change.

It used to be said that a good contract was never taken out of the drawer until it was needed. That axiom, however, has no application to NEC contracts. Such contracts are not simply sets of conditions of contract, they are also manuals of project management and, as such, they should never be taken off the desk, less still put in a drawer.

And one clearly unintended impact of the NEC changes to project management is that the scope for disputes has been greatly increased. Thus, it is now commonplace for pleadings/submissions in respect of formalised disputes arising under NEC contracts to cover differences not only on substantive matters but also administrative/procedural matters. And, not infrequently, the latter types of disputes seem to be the ones that generate most animosity, conflict and lack of trust between the Parties. Some of this arises where the Parties are not equally matched in relation to dealing with the procedural burdens of their NEC contract, and that imbalance, of itself, generates not only hostility but also more disputes.

There is additionally another unintended factor which surfaces in many NEC adjudications. It can be summarised as disappointment, at various levels within the Parties’ management structures, that the NEC requirements for mutual trust and co-operation have not produced the financial and time-related outcomes that were expected. And then the blame games commence.

1.5 The NEC4 suite of contracts

Within the NEC4 Engineering and Construction Contract, hereafter in this book ECC4, there are six Primary Options, which include priced contracts, target cost contracts, a cost reimbursable contract, and a management contract. However, these simply reflect the flexibility of scope of ECC4 itself. They do not count separately as part of the ever-growing suite (or family as it was previously called) of NEC contracts. That suite, with the introduction of NEC4, numbers sixteen separate contracts:

Engineering and Construction Contract (ECC)

Engineering and Construction Subcontract (ECS)

Engineering and Construction Short Contract (ECSC)

Engineering and Construction Short Subcontract (ECSS)

Professional Service Contract (PSC)

Professional Service Subcontract (PSS)

Professional Service Short Subcontract (PSSC)

Term Service Contract (TSC)

Term Service Subcontract (TSS)

Term Service Short Contract (TSSC)

Supply Contract (SC)

Supply Short Contract (SSC)

Design Build and Operate Contract (DBO)

Alliance Contract (ALC)

Framework Contract (FC)

Dispute Resolution Service Contract (DRSC).

1.6 Characteristics of NEC contracts

As noted above, NEC contracts are drafted with the objectives of achieving flexibility, stimulus to good project management, clarity and simplicity.

Flexibility is pursued partly by drafting which avoids terminology specific to the practices of particular industries, but principally by providing primary and Secondary Option clauses which allow contracts to be built up by the selection of pricing mechanisms and contractual provisions deemed appropriate for any particular project.

Stimulus to good project management is pursued by the emphasis that NEC contracts place on communications, co-operation, programming and risk management.

Clarity and simplicity objectives are pursued by drafting which is intentionally and conspicuously different from that of other standard forms in style and structure. Short sentences are used, cross-referencing is avoided and so too is technical and legal jargon. And, to assist in understanding and application of the provisions of NEC contracts, User Guides and Flow Charts are available from the publishers. However, the differences of opinion which surfaced when NEC contracts were first published as to whether their drafting achieved clarity and simplicity remain. The charge made by an eminent lawyer of the time that the draftsmen had used ‘ladybird language’ may have been a little unfair in the light of the NEC's subsequent progress. But, more recently, the comment by His Honour Mr Justice Edwards-Stuart in the case of Anglian Water Services Ltd v. Laing O'Rourke Utilities Ltd (2010) that the drafting of an NEC2 contract seemed to represent ‘a triumph of form over substance’ will probably be recognised by many involved in the use or interpretation of NEC contracts as fair comment.

1.7 Structure of the NEC4 Engineering and Construction Contract (ECC4)

Option and clause structure

In order to create a set of ECC4 conditions for a particular contract, the Client (previously the Employer):

makes a selection from the six Main Options as to which type of pricing mechanism is to apply

includes in the contract the nine sections of common Core Clauses, and the Main Option clauses applicable to the selected Main Option (the pricing option)

specifies which of the three options for resolving and avoiding disputes applies

selects and includes within the contract which, if any, of the twenty-two Secondary Option clauses are to apply, and

includes in the contract, under Secondary Option Z, any Additional Conditions of Contract.

The six Main Options of ECC4 are:

Option A – Priced contract with activity schedule

Option B – Priced contract with bill of quantities

Option C – Target contract with activity schedule

Option D – Target contract with bill of quantities

Option E – Cost reimbursable contract

Option F – Management contract.

Each of the Main Options is published in a separate volume which includes the relevant Core Clauses for the particular option. Additionally there is a single volume covering all six options.

The clauses for any particular ECC4 contract are assembled by incorporation of:

Core Clauses

Main Option clauses

Secondary Option clauses.

The Core Clauses are standardised terms, grouped into sections, under nine headings

General

The Contractor's main responsibilities

Time

Quality management

Payment

Compensation events

Title

Liabilities and insurance

Termination.

The Main Option clauses are, in effect, Core Clauses particular to each of the Main Options, A to F. They are not optional in themselves.

The Secondary Option clauses, which, in ECC4, are prefaced X1–X22, Y (UK) 1–3, and Z, are optional in the sense that to be incorporated into the contract they have to be listed in the Contract Data. However, some of the Secondary Option clauses such as X7 for delay damages and X16 for retention, would be regarded in most construction contracts as essential rather than optional, so care needs to be taken in their selection, and/or omission.

Care also needs to be taken in respect of Options W1, W2, and W3, which relate to resolving and avoiding disputes. These appear in ECC4 between the Core Clauses and the Secondary Option clauses and it is mandatory to select one of these options for inclusion in the contract.

The full list of Secondary Option clauses in ECC4 is:

1.8 Changes ECC3 to ECC4

Because the full extent of the changes from ECC3 to ECC4 is extensive and complex, they are identified and considered in Chapter 2 and other parts of this book. But, in summary, the obvious and the important core clause changes are:

ECC4 retitles and expands the ECC3 section 4 clauses on ‘Testing and Defects’. In ECC4 the new title of section 4 is ‘Quality Management’ and within that expanded section there are requirements for operation by the Contractor of a quality management system, which incidentally are also passed down to Subcontractors and sub-Subcontractors.

ECC4 has new dispute and avoidance procedures which include the involvement of Senior Representatives and the use of Dispute Avoidance Boards.

ECC4 requires the Contractor to submit applications for interim payments.

ECC4 introduces a set of new provisions on assessment and payment of the final amount due.

ECC4 uses a new term ‘the dividing date’ for determining when actual Defined Cost changes to forecast Defined Cost for the purposes of assessments of compensation events.

ECC4 renames the ECC3 provisions on risk reduction meetings and risk registers as early warning meetings and early warning registers.

ECC4 replaces the ECC3 term ‘risks’ with ‘liabilities’ and retitles section 8 ‘Liabilities and Insurance’.

ECC4 defines ‘a Corrupt Act’ and has provisions relating thereto.

ECC4 lists two additional compensation events, the first covering the Contractor's costs when a requested quotation for a proposed instruction is not accepted, the second covering, as a matter of formality, additional compensation events stated in the Contract Data.

ECC4 permits the Contractor, as well as the Project Manager, to propose acceleration to achieve earlier Completion Dates and changes to Key Dates.

However, it should not be taken from the above list that all other changes are insignificant, even if at first sight they may appear so. Thus, the terminological change from ‘Works Information’ in ECC3 to ‘Scope’ in ECC4, which runs through the entirety of ECC4, will generally be of no contractual consequence. But in the context of clause 14.3, which in ECC3 empowers the Project Manager to change the ‘Works Information’ and where the corresponding clause in ECC4 empowers the Project Manager to change the ‘Scope’, there is evidently room for debate on how far it is wise to depart from the legal principle that words should be given their ordinary meaning. No Contractor of right mind would enter into a contract where the scope of the works (in its ordinary meaning) could be changed at the will of the Client or the Project Manager.

1.9 Review of points of interest

In Chapter 1 (Introduction) of my book on NEC3, I identified under the following headings nine ‘points of interest’ arising from studies of NEC3 and earlier editions of NEC contracts:

Entire Agreement

Exclusion of common law rights

Conditions precedent to compensation event entitlements

Role and powers of the Project Manager

Changes to Works Information (now Scope)

Prevention

Quotations for compensation events

Assessment of compensation events

Dispute resolution.

All of these will be reviewed in detail in later chapters of this book, but by way of summary, and in the light of the provisions of ECC4, judicial comments on ECC3, and personal experience in ECC3 arbitrations and adjudications, the observations set out in the following sections can be made.

1.10 Entire agreement

ECC4 retains, with a very minor change of wording, the provision introduced in ECC3 at clause 12.4 that the contract is the ‘entire agreement between the Parties’. Nothing of note has changed in the meantime, and it remains the case that it is still open to debate as to what is intended by the provision. It may be that it is intended to exclude common law remedies for breach, or it may be that its purpose is to emphasise that the obligations and liabilities of the Parties are confined strictly to the four corners of the signed contract.

Further comment on this is provided in Chapter 5, but it is worth noting here that arguments about the application of clause 12.4 have surfaced in numerous adjudications under ECC3 contracts where disputes have arisen as to whether certain agreements between the Parties are of contractual effect, and as to the extent to which a distinction is intended between the terms ‘entire agreement’ as found in clause 12.4 and ‘complete contract’ as found in the Contract Data Sheet, Part one.

The Parties to ECC4 contracts should, therefore, exercise great caution in reaching what are sometimes called ‘supplementary agreements’ and would be wise to enter into such agreements only after taking legal advice.

1.11 Exclusion of common law rights

The debate as to whether NEC contracts exclude the Parties’ rights to sue for damages for breaches of contract remains unsettled. There is a good case for saying that in main contracts, the intention is that the Contractor's rights are so curtailed by the contractual rights provided in the compensation event procedures of the contract, particularly as one such event is expressed as breach of contract by the Client. That, however, does not dispose of the Client's rights. And when stepped down into the ECC4 subcontract, that same point applies to the Contractor's rights.

1.12 Conditions precedent to compensation event claims

The question as to whether or not, or when, claims, valid on their facts, can be invalidated by failure to comply with time-bars, goes well beyond examination of the time-bars in respect of the compensation events stated in ECC4. It is a question applicable to all types of commercial contracts. More is said on this in Chapter 14.

For all NEC contracts, time-bars in respect of claims have, from the outset, been treated as an integral part of maintaining good project management. However, achieving incorporation into the contracts of workable and legally acceptable provisions has proved a difficult task, as is evident from each new version of the ECC.

ECC4 retains, subject to a minor wording change, the ECC3 requirement for compensation events to be notified within eight weeks (clause 61.3). But, for a possible exception to this rule, see the comments in Chapter 22 on the decision of the Northern Ireland Court of Appeal in the case of Northern Ireland Housing Executive v. Healthy Buildings (Ireland) Limited.

1.13 Role and powers of the Project Manager

There was some doubt in the early years of ECC contracts as to whether the Project Manager was to act more as the Employer's agent than as an independent contract administrator. That point was considered in the 2005 case of Costain Ltd (Corber), where Mr Justice Jackson reasserted the long-standing legal rule that certifiers, including Project Managers, have a duty to act fairly and honestly as between the Parties. The second point was clarified by the inclusion in ECC3 of a new clause 12.3 requiring changes to the contract to be signed by the Parties. That clause remains unchanged in ECC4.

1.14 Changes to Scope (previously Works Information)

ECC4 retains, in clause 14.3, the curiously simplistic statement that the Project Manager may give an instruction which changes the Scope (previously Works Information). Further comment on this is provided in Chapter 6.

1.15 Prevention

Concerns were expressed in many quarters when a set of provisions was introduced in clause 19 of ECC3 defining ‘Prevention’ in a manner which could be taken as going well beyond ‘force majeure’ or ‘beyond the control of the Parties’, and which potentially placed responsibility for all such matters on the Employer. The corresponding ECC4 clause 19 contains some minor changes, but they are unlikely to be sufficient to halt the practice of some Clients of deleting the clause in its entirety. For further comment see Chapter 7.

1.16 Quotations for compensation events

ECC4 retains, with some minor drafting changes, the provisions in clause 62.6 of ECC3 whereby unless the Project Manager responds to the Contractor's quotation for a compensation event within three weeks, it is deemed to be accepted by the Project Manager. The oddity that such quotations can be disputed by the Client and altered by an Adjudicator apparently remains.

1.17 Assessments of compensation events

The basics of the ECC3 clause 63 provisions on assessments of compensation events, including those for division between forecast cost and actual cost are retained in ECC4, albeit with various drafting changes. However, see Chapter 22 for comment on the Northern Ireland High Court judgment in a second Northern Ireland Housing Executive v. Healthy Buildings Limited case. Put simply, the Judge held in favour of actual cost assessment over forecast cost assessment in circumstances where actual cost was available at the time the assessment was made, quoting from an earlier case: ‘why should I shut my eyes and grope in the dark when the material is available to show what work they actually did and how much it cost them’.

1.18 Dispute avoidance and dispute resolution

For contracts which expressly required the Parties to act in a spirit of mutual trust and co-operation, ECC3 and preceding ECC contracts had surprisingly little to offer by way of non-adversarial dispute avoidance and dispute resolution procedures. ECC4, however, rectifies that with its new, structured approach to such matters.

If properly applied, the new approach should:

Reduce the number of disputes going to adjudication

Improve on-site and off-site relationships between the Parties

Ensure that senior management becomes aware of developing problems – factual, contractual and financial – before they get out of hand.

Should these improvements be achieved, that alone would make production of ECC4 well worthwhile.

Chapter 2

Changes from ECC3

2.1 Evolution

ECC4 uses as a marketing slogan the catchy phrase ‘evolution not revolution’. And, as will be seen from the detail which follows in this chapter, that is generally a fair statement of what was intended and what has been achieved.

The underlying principles, the drafting style, and the option structure format of ECC4 remain as in previous editions of ECC. However, ECC4 has an increased range of Secondary Option clauses and a completely new approach to avoiding and resolving disputes. Apart from this, there are few great surprises. However, there are a good number of minor improvements drafted to clarify clauses which, in previous editions, have been sources of concern. And, strikingly, there are a great many textual changes between ECC4 and its predecessors, which may prove troublesome if users of ECC4 do not adjust rapidly to the new order.

2.2 Features and enhancements

The preface to ECC4 lists as ‘features’ and ‘enhancements’:

a new design, build and operate contract

a new multiparty alliance contract

new forms of subcontract

finalisation of cost elements during the contract

party-led dispute avoidance

increased standardisation between contracts

enhanced guidance to users.

These are, however, high-level changes applicable to the suite of NEC4 contracts, and although some items in the list may impact indirectly on ECC4, only two items in the above list impact directly on ECC4. These items are: finalisation of cost elements and party-led dispute avoidance.

Important as these two items are, it would be imprudent to assume that they are indicative of the full amount of change between ECC3 and ECC4. The reality is that the majority of clauses in ECC4 differ, albeit in the main slightly, from the wording of the corresponding clauses in ECC3.

2.3 Terminological changes

The majority of the textual changes are no more than terminological, thus:

‘the Employer’ is changed to ‘the Client’

‘Works Information’ is changed to ‘Scope’

‘risk reduction meeting’ is changed to ‘early warning meeting’

‘Risk Register’ is changed to ‘early warning register’

‘notifies’ is changed to ‘informs’.

Additionally, all gender-specific terms in ECC3, such as ‘he’ and ‘his’ are replaced in ECC4 with gender-neutral wording.

Few, if any, of these terminological text changes are likely to have significant impact on the Parties’ contractual obligations and liabilities but, given the importance that NEC contracts place on written notices and communications, it is essential that the new terminology is adopted and put into use from the outset. And similarly it needs to be recognised from the outset that a certain amount of clause renumbering and rearrangement has taken place.

The ECC4 changes which do have the capacity to create contractual change are to be found in the Core clauses, the Dispute Resolution clauses, and the Secondary Option clauses of the contract.

2.4 Changes to core clauses

The grouping of the nine sets of core clauses in ECC4 (the Sections, as hereafter referred to) is the same as the grouping in ECC3. But, two of the Sections are retitled in ECC4. Thus, in ECC4, section 4 is titled ‘Quality Management’ and section 8 is titled ‘Liabilities and Insurance’. In ECC3 those titles were ‘Testing and Defects’ and ‘Risks and Insurance’.

In ECC4, the Sections and the clauses therein are numbered and listed as follows:

General: clauses 10.1–19.1

The Contractor's Main Responsibilities: clauses 20.1–29.2

Time: clauses 30.1–36.3

Quality Management: clauses 40.1–46.2

Payment: clauses 50.1–53.4

Compensation Events: clauses 60.1–66.3

Title: clauses 70.1–74.1

Liabilities and Insurance: clauses 80.1–86.3

Termination: clauses 90.1–93.2.

The significant changes in the core clauses from ECC3 to ECC4, taking them section by section, and without at this stage any commentary, are as follows.

General

Clause 10.1 of ECC3 stated, in a single sentence, that the Employer, the Contractor, the Project Manager and the Supervisor ‘shall act’ as stated in the contract, and in a spirit of mutual trust and co-operation. In ECC4 those obligations, if they are such, are redrafted and split between clauses 10.1 and 10.2. Clause 10.1 states that the Parties, the Project Manager and the Supervisor ‘shall act’ as stated in the contract. Clause 10.2 states that the Parties, the Project Manager and the Supervisor shall ‘act’ in a spirit of mutual trust and co-operation. More is said on this interesting change in Chapter 6.

Clause 11.2, listing ‘Identified and defined terms’ has, in ECC4, a new subclause defining ‘a Corrupt Act’. Additionally, ECC4 clauses 15.1 and 15.2 replace the ECC3 references to ‘the Risk Register’ and ‘risk reduction meetings’ with references to ‘the Early Warning Register’ and ‘early warning meetings’. Further changes appear in the definitions of ‘The fee’ and of ‘A Subcontractor’.

Clause 14.2 of ECC4, relating to delegation, has considerably more points of detail than the corresponding clause of ECC3.

Clauses 15, 16, 17, 18 and 19 of ECC3 deal in turn with ‘Adding to the Working Areas’, ‘Early warning’, ‘Ambiguities and inconsistencies’, ‘Illegal and impossible requirements’, and ‘Prevention’. ECC4 rearranges and changes clauses 15–19 such that they deal in turn with: Early warning, Contractor's proposals, Requirements for instructions, Corrupt Acts, and Prevention. Each of these clauses relates to matters of potential importance.

The Contractor's Main Responsibilities

For the most part, clauses 20.1–29.2 of ECC4 match the corresponding section clauses of ECC3. However, clauses 28 and 29 of ECC4, dealing respectively with Assignment and Disclosure have no ECC3 equivalents. And, although both concern legalistic matters rather than day-to-day construction matters, these clauses also relate to matters of potential importance.

Time

Clauses 30–36 of ECC4 cover, under the section heading ‘Time’, such matters as starting, completion, programmes, access, suspensions, take over and acceleration. There are a few textual changes from ECC3 but none are of any great significance. There are, however, some important new provisions within the ECC4 batch of clauses. Thus, clause 31.3 of ECC4 now provides for deemed acceptance of a programme if the Project Manager does not notify acceptance or non-acceptance within a stipulated time-limit. Clause 34.1 requires that if the Project Manager has given instructions to stop or not to start work, instructions must subsequently be given to restart or remove the work. And clause 36.1 of ECC4 now permits the Contractor as well as the Project Manager to propose acceleration to achieve completion before the completion date.

Quality Management

In ECC3, section 4 clauses 40.1–45.2 came under the heading ‘Testing and Defects’. In ECC4, the section is retitled ‘Quality Management’. The ECC3 clauses are retained in ECC4 without any significant change as clauses 41.1–46.2. However, in ECC4, section 4 commences with three new clauses (40.1–40.3) subtitled ‘Quality Management System’. These clauses contain contractual provisions, new to ECC contracts, that the Contractor should operate such a system, and should do so in compliance with stipulated requirements.

Payment

The ten clauses 50.1–52.1 in the ‘Payment’ section of ECC3 principally concerned the mechanism and rules for interim payments. The sixteen clauses in the ‘Payment’ section of ECC4 cover both interim payments and rules for making assessments of the final amount due. Most of the ECC3 clauses which are retained in ECC4 are modified in some respect, but these changes are points of detail rather than substantive change. The big change between ECC3 and ECC4 comes in the new group of clauses, 53.1–53.4, which provide in ECC4 a comprehensive and extensive set of provisions for making, and dealing with, the assessment and payment of the final amount due to the Contractor.

Compensation Events

Section 6 of ECC3 contained thirty-one numbered clauses, excluding the nineteen numbered compensation events. It was, by far, the largest group of clauses in the contract. That remains the case in ECC4, which has thirty-seven numbered clauses, excluding twenty-one numbered compensation events.

The two additional compensation events in ECC4 concern quotations for proposed instructions which are not instructed, and additional compensation events stated in the Contract Data.

However, there has also been a considerable amount of redrafting throughout the ECC4 compensation event clauses, most of which is inconsequential, but some of which, in certain circumstances, could be important.

Title

The ECC3 clauses 70.1–73.2 covering matters relating to plant, materials, and objects on the site are replicated in ECC4 with terminological changes and only two changes worthy of note. The first of those changes is that whereas by clause 73.2 of ECC3 the Contractor has title to materials from excavation and demolition only as stated in the Works Information, under clause 73.2 of ECC4 the Contractor has title unless the Scope states otherwise. The second change is that ECC4 has an additional clause, 74.1, which states that the Contractor has the right to use material provided by the Client only to provide the Works, and that this right may be made available to a Subcontractor.

Liabilities and Insurance

The fifteen clauses of ECC3 covering ‘Risks and Insurance’ have been rearranged, renumbered and reworded in the corresponding fifteen clauses of ECC4. Apart from that, there are few changes of substance. The only change which stands out is that in ECC4 a fault in the design contained in an instruction from the Project Manager changing the Scope expressly becomes a Client's liability.

Termination

Similarly there are only a few changes of substance between EEC3 and ECC4 in the fifteen numbered clauses relating to termination. The most striking change is that in ECC3, whilst the Contractor could only terminate for a reason in the Termination Table and the Employer could terminate for any reason (clause 90.2), in ECC4 the phrase ‘the Employer may terminate for any reason’ is omitted, with clause 90.2 now stating ‘A Party may terminate for a reason identified in the Termination Table.’ Three other changes are worthy of note. Firstly, the provisions in clause 90.4 of ECC3 regarding certification and payment after termination are changed in ECC4 such that for most of the listed reasons the Client is not obliged to pay after the termination date. Secondly, there is a new clause 91.8 in ECC4 concerning termination on the grounds of corruption, and thirdly, the default period activating the Contractor's right to terminate on the grounds of non-payment (clause 91.4) is extended in ECC4 to thirteen weeks, from the eleven weeks allowed in ECC3.

2.5 Changes to dispute resolution procedures

The dispute resolution procedures of ECC3 were contained in Options W1 and W2, one of which had to be included in the contract as a Main Option. In ECC4 there are three such Main Options: W1, W2 and W3.

The use of any one of these three options provides an entirely new approach to dispute avoidance and resolution. For whereas both ECC3 Options W1 and W2 went no further than providing rules and procedures for adjudication and tribunal review, within Options W1, W2 and W3 of ECC4 there are provisions not only for adjudication but also for involvement of Senior Representatives, and the formation of Dispute Avoidance Boards.

So revolutionary and extensive are the changes that there is little point in attempting to identify, in this chapter, point-by-point changes between ECC3 and ECC4.

2.6 Changes to Secondary Option clauses

As noted in Chapter 1, ECC4 has twenty-one ‘X’-labelled Secondary Option clauses, excluding the unused X19. It also has three ’Y’-labelled clauses and one ‘Z’-labelled clause, in total twenty-five clauses. In total, ECC3 had nineteen Secondary Option clauses. The changes accounting for this difference are that there has been a certain amount of renumbering and relabelling, but, more importantly, there are six additional Secondary Option clauses in ECC4:

Option X8 – Undertakings to the Client or Others

Option X9 – Transfer of Rights Option

Option X10 – Information Modelling

Option X11 – Termination by the Client

Option X21 – Whole Life Cost

Option X22 – Early Contractor Involvement.

There are some drafting changes in ECC4 in those Secondary Option ‘X’ clauses which have matching ECC3 Secondary Option ‘X’ clauses, but these are mainly points of detail.

2.7 Data sheet changes

Finally, as regards changes, it should be noted that the ECC4 Contract Data sheets (Part one – Data provided by the Client) and (Part two – Data provided by the Contractor) differ slightly from the ECC3 Contract Data sheets. Most of the changes simply reflect Primary and Secondary Option changes, but since both data sheets commence with a warning that completion in full is essential to create a ‘complete contract’ every required entry is of potential importance. Moreover, some of the entries go beyond simply listing ‘data’ by stating, in terms, contractual obligations. See, for example, the entry required at Part X15 of the Client's data sheet, which refers to insurance cover for claims made against the Contractor for failing to use the skill and care ‘normally used by professionals’ designing works of a similar nature, and the comment thereon in Chapter 8.

Chapter 3

Main options

3.1 Introduction

ECC4 retains the same six Main Options found in ECC3, these being:

Option A – priced contract with activity schedule

Option B – priced contract with bill of quantities

Option C – target contract with activity schedule

Option D – target contract with bill of quantities

Option E – cost reimbursable contract

Option F – management contract.

These provide, in descending order, sets of provisions which are effectively ‘pricing options’ with a range such that Option A provides maximum certainty of price for the Client, and Option F provides the least.

Additionally, ECC4 has three ‘dispute-related’ options which sit between the Main Options and Secondary Options in the sense that one of these dispute-related options has to be selected to suit each particular project to complete the Main Options. ECC3 had only two such dispute-related options: W1 and W2. ECC4 has three: W1, W2 and W3. The reason for this addition is the inclusion in ECC4 of provisions for Dispute Avoidance Boards. The ECC4 set of dispute-related options is:

Option W1: Used where Adjudication is the method of dispute resolution and the UK Housing Grants, Construction and Regeneration Act 1996 does not apply.

Option W2: Used where Adjudication is the method of dispute resolution and the UK Housing Grants, Construction and Regeneration Act 1996 applies.

Option W3: Used where a Dispute Avoidance Board is the method of dispute resolution and the UK Housing Grants, Construction and Regeneration Act 1996 does not apply.

The Client is required to state in Part one of the Contract Data which Main Option is to be used and which dispute resolution option is selected. In most cases the choice will be entirely that of the Client. However, sometimes potential tenderers are invited to propose which Main Option should apply as part of pre-qualification procedures. When partnering is intended prospective Contractors may be allowed to have a say in which Main Option should be used.

Users of ECC4 should be alert to the fact that each Main Option has its own particular clauses which are additional to the core clauses in the nine main sections of the contract. In particular a point to note is that although the definitions in the core clauses stop at number 20 in clause 11 of the base contract, there are other definitions particular to Options A to F which take the numbering through to 35.

3.2 Contract strategy

Contract strategy is not an exact science. There are some guiding principles but every Client is unique in their aspirations, circumstances and preferences.

For some Clients, certainty of price is the dominant aspiration, and then, given few restrictive circumstances and few particular preferences, the obvious strategic choice will be a lump sum contract with Contractor's design. For other Clients certainty of price may be secondary to considerations of quality, operations/restrictions, or the need for a quick start and a fast finish. Which method of procurement, which type of contract, and which form of contract then become more complex questions. Some Clients, on the strength of past experiences or hopes for the future, develop preferences for certain methods of procurement and certain forms of contract. Rational analysis of selection criteria to determine contract strategy may then become secondary to selection of the most suitable Contractor.

One of the main strengths of ECC contracts is their flexibility. If a Client does develop a preference for their use, they have much greater choice of procurement route than with other standard forms. The Client has six Main Options to choose from and construction management is available as a further Option. For those who need to study contract strategy in detail, useful starting points are CIRIA Report R85 Target and Cost Reimbursable Construction Contracts or the RIBA publication Which Contract. As a checklist for matters to consider, however, the following may be helpful:

which Party is to be responsible for design

how important to the Client is certainty of price

what views prevail on the allocation of risk

how firmly known are the Client's requirements and what likelihood is there of change

what operating restrictions apply on the Client's premises or in the construction of the works

what emphasis is to be placed on early commencement and/or rapid completion

what flexibility does the Client need in the contractual arrangements – e.g. to terminate at will

how anxious is the Client to avoid or to minimise formal disputes and legal proceedings

how important to the Client is the concept of single point responsibility.

In considering preferred procurement policies, it is worth noting here the distinction between ‘construction management’ and ‘management contracting’. Under ‘construction management’, the works required by the Client are procured by appointment of a firm to oversee and manage packages of works contracts let between the Client and specialist/trade Contractors. Under ‘management contracting’, the works required by the Client are procured by packages of works contracts let between the Contractor and the specialist/trade Contractors. The ECC4 Main Option F, Management Contract, is ‘management contracting’ as described above. ECC4 does not have a standard option for ‘construction management’. However, if required, this can be formulated by the Client appointing a construction management Contractor as Project Manager under the NEC4 professional service contract. The duties of the construction manager would then be to advise the Client on the placing of the works contracts under whichever Main Options of ECC4 are most appropriate and then to act as Project Manager of the works contracts.

For an interesting case on the duties of construction managers see Great Eastern Hotel Ltd v. John Laing Ltd (2005).

3.3 Responsibility for design

The general principle that should influence the choice of Party to be responsible for design is that of competence – which Party can most competently undertake the design?

If professional design firms are to be employed, whether by the Client or the Contractor, the question of competence in this general sense does not arise. But with Contractor's design an obvious advantage for the Client is that a choice of designs may be put forward by the tenderers. A further potential advantage is that the Contractor's expertise is more likely to be used to the full when the freedom to develop that expertise in the design is permitted.

ECC4 caters for this to some extent in its Secondary Option X22 – early Contractor involvement. But this secondary option is used only with Main Options C (target contract with activity schedule) and E (cost reimbursable contract).

If the Client already has their own in-house design resources it may be neither efficient nor economic to place design responsibility with the Contractor. Or it may be that in-house design teams are more closely in tune with the Client's requirements than any Contractor could be. Moreover, in some situations there are matters of confidentiality as to the purpose or operation of the works which are wholly decisive as to whether design briefs can be issued to tenderers and as to which Party is responsible for design. In other situations there may be a reliance on specialist know-how or patented designs which is itself decisive as to design responsibility.

As a general rule, if the Client is able to specify their requirements in terms of a performance specification or quality standards there is much to be said for Contractor's design. Not only is the standard of liability of a Contractor for its design (fitness for purpose) applicable in most construction contracts higher than that of a professional designer (skill and care), but the scope for claims for extra payment from the Contractor arising out of the designer's defaults and deficiencies is eliminated. However, it should be noted that ECC4 does not follow that general rule applicable to most construction contracts as regards the standard of liability for Contractor's design, that being fitness for purpose. Instead, ECC4 applies the standard of professional skill and care to Contractor's design.

As to how the allocation of responsibility for design influences choice between the Main Options of ECC4 the main points to note are:

Option A – lump sum contract

Ideally suited to Contractor's design but can be used for Client's design or divided design responsibility providing the Client's design element is complete at the time of tender.

Option B – remeasurement contract

Not suited to Contractor's design because of the reliance on bills of quantities and the difficulties posed by the Contractor producing its own bills of quantities.

Option C – target contract (lump sum base)

As Option A but allows the Client more flexibility in developing their own design.

Option D – target contract (bill of quantities base)

Suffers from similar problems to Option B.

Option E – cost reimbursable contract

Permits maximum flexibility in allocation of design responsibility and allows development of the design as the works proceed.

Option F – management contract

Not suitable for allocation of the whole of design responsibility to the Contractor unless placed as a ‘design and manage’ contract, but particularly suitable for contracts with a high reliance on specialist Subcontractors who each undertake their own designs.

3.4 Certainty of price

For many Clients certainty of price is the decisive factor in contract strategy. Commercial pressures may dictate that either a project can be completed within a set budget or it is not worth commencing.

Option A (the lump sum contract) offers the best prospects for certainty of price – particularly when used with Contractor's design.

Option C (the target contract based on lump sum) fixes with some degree of certainty the maximum price but at tender it is less precise than Option A in fixing the likely contract price.

Options B and D (both bill of quantities-based) put the risk of accuracy of billed quantities and the consequences of remeasure on the Client and consequently both suffer from lack of price certainty.

Option E (the cost reimbursable contract) relieves the Contractor of any risk on price (other than in its fee). Consequently not only is the Client at risk on the price, with the contract itself providing no certainty of price, but the Contractor has little incentive by way of any target to minimise costs. Clearly Option E is not suitable if the Client is looking for certainty of price.

Option F (the management contract) is a cost reimbursable contract in so far that the Client and not the Contractor takes the risk on the costs of the works contracts. However, management contracts are frequently arranged on the basis of lump sum works contracts and this can introduce a good measure of cost control into the system. If the quotations for the works contracts can all be obtained before the letting of the management contract there can also be a good measure of price certainty.

3.5 Allocation of risk

The guiding principle on allocation of risk is that risk should be allocated to the Party best able to control it. Most contracts, including ECC4, show some regard for this principle but few, and ECC4 is no exception, take it to its ultimate conclusion. Two other factors frequently prevail.

One of these is that it is often considered better for the Client to pay for what does happen rather than what might happen – hence, unforeseen ground condition clauses. The other is that in the interests of fairness (and in some cases coincidental commercial interests) it is often accepted that the Contractor should not be required to carry risks which are uninsurable or which arise from matters beyond the influence of either Party – for example, changes in statute which affect the costs of construction. Taken together, the result of the above is that the Client can end up carrying some risks over which it has no control whatsoever. Thus if the government puts up labour taxes, the Client, on a cost reimbursable contract, usually pays the additional contract costs although it is only the Contractor