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ISSUE No.38 APRIL 2007

newsletter

BY SIMON FULLALOVE, EDITOR

U S E R S' G R O U P

Over 200 attend

User's Group seminar

Over 200 members of the NEC Users' Group attended the Group's annual seminar last month at the ICE in London. The unprecedented attendance reflects growing usage of NEC3 contracts worldwide as well as the ever-increasing size of the Users' Group, which now has 374 members. After a welcome from Users' Group chairman Rudi Klein, delegates heard how NEC is helping to deliver projects on time and to budget for public and private sector clients including the National Health Service (NHS), Anglian Water and the London Borough of Merton.

Public-sector frameworks

Derek Rothwell, director of procurement of OGC's trading arm OGC Buying Solutions, announced that NEC3 is now being included as an option in its standard public-sector framework contracts. In July 2005 OGC formally recommended NEC3 for all public-sector construction work on the basis it was the first and only contract to satisfy the Achieving Excellence in Construction principles. Cliff Jones, senior construction manager of NHS ProCure21, and Joseph Stanton, commercial manager of Laing O'Rourke, then provided an update of the NEC-based framework programme launched in 2003. The programme has so far been used to procure National Health Service hospital projects in England worth £2 billion. A total of 154 schemes are already completed and a further 55 are under construction.

The 20,000 seat aquatics centre for London 2012 will be designed and built using NEC3

solids quality programme, with a particular focus on risk management. Jason Russell, principal engineer at London Borough of Merton, then described the borough's NEC3-based contract strategy for highway works in the context of local government's `sustainable communities' initiative.

seminar and conference presentations from the Users' Group section of the NEC website at www.neccontract.com using their member log-in details. For more information, please contact Kate Martin at [email protected] neccontract.com.

Olympic update

Over 100 delegates also attended the NEC Conference supported by ICE and RICS in London in December last year entitled `NEC contracts: delivering projects on time and on budget'. Presenters included Morag Stuart, head of procurement for the UK Olympic Delivery Authority (ODA), who confirmed NEC3 was being used as the standard contract for procurement of London 2012 facilities. Culture secretary Tessa Jowell announced on 15 March 2007 that the ODA's total construction budget was now £5.3 billion. Users' Group members can download all

CONTENTS

Procurement strategy and contracts ­ getting it right Update on the NEC Supply Contract New course on managing NEC programmes A new user's guide to NEC contract formation The `prevention principle' and clause 61.3 of NEC3 Frequently asked questions Diary 2 2 3 4 5 6 8

Sustainable communities

Ian Turner, programme manager at Anglian Water Services, supported by Ian Turner and Mark Enzer from Mott MacDonald, next explained how the NEC3 Engineering and Construction Contract was being used to deliver a £100 million bioNEC USERS' GROUP NEWSLETTER· No.38· APRIL 2007

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getting it right

BY RUDI KLEIN, NEC USERS' GROUP CHAIRMAN Decisions about procurement strategy and decisions about which contract to use are very different. But when it comes to construction, there is often confusion between the two types of decision and the contractual `tail' ends up wagging the procurement `dog'. Procurement is the purchase of goods and services to meet an identified need. A procurement strategy is concerned with decisions about the resources needed to be purchased and how and when those resources are to be deployed to ensure the need is met. Once a strategy is resolved, decisions can then be made about the relevant contract to be used. However, when it comes to construction works, the initial debate is more often than not about the form of contract to be used. Why? Because our overriding preoccupation is with risk-avoidance rather than with making decisions that will ensure that the finished product meets the need.

Procurement strategy and contracts:

News

from the NEC panel

BY NIGEL SHAW, NEC PANEL CHAIRMAN

New NEC3 contracts expected this autumn

Since I last wrote in Issue back in July 2006, considerable progress has been made on the NEC3 Supply Contract and Term Service Short Contract. As I write, the final drafts are being reviewed and flowcharted. The flowcharting is an important part of the production of all NEC contracts as it provides a logic test and will often throw up issues that were not spotted through a general review of the contract. Guidance Notes are also being written for each contract and it is anticipated that publication will be sometime this autumn. Subject to final ratification, I also expect a Supply Short Contract to be part of NEC3 Supply Contract package. Although this would be little more than a `back of the order form' terms, there is value in providing a brief set of conditions using standard NEC terms and techniques.

services through better construction, stated the following. `Where suppliers are involved at an early stage the quality of designs is better, leading to efficient and higher quality construction delivering lower whole life costs and the required service delivery outcomes. Departments should involve construction suppliers early on in the design process, where appropriate paying for their time on a fee basis.' Not surprisingly the major causes of defects in construction relate to design decisions. According to research by the Building Research Establishment, persistent failure to communicate information about the design or proposed design to suppliers responsible for developing and implementing the design is by far the major cause of defects. Unfortunately we are still a long way from reaching a point where the delivery team can own the design and cost assumptions upon which it is based.

NEC policy statements

Many new users often find it difficult to appreciate how NEC can achieve their objectives and / or struggle to understand its terminology. For example, I recently met a senior person within industry stated that NEC is only a partnering contract when using option X12. Of course, using any NEC contract creates a bi-party partnering arrangement; using option X12 facilitates a multi-partnering approach. To overcome such perceptions, the NEC panel is in the process of drafting a number of policy statements that will be published on the NEC website. The subjects include

Design: the weak link

The major weakness in procurement strategies relates to the design process. As we all know, success on any project is ultimately dependent upon decisions made during the design process and how well risk has been identified and managed within that process. But I find it extraordinary that design teams are still the exclusive preserve of consultants. The design process itself is often poorly managed and riskmanagement issues hardly get a look in. Non-involvement of contractors and even manufacturers in the design team ­ especially those delivering and installing high value components and systems ­ is not a sensible procurement strategy. Design consists of an iterative dialogue, but this dialogue cannot be productive unless all key members of the delivery team are appointed early enough in the project.

NEC makes it possible

However, from the NEC perspective, there is no problem in appointing contractors or, indeed, manufacturers as members of the design team. They can be appointed under the Professional Services Contract and, as the NAO suggests, paid a fee for their design input. It is assumed the contractor will want to carry out the construction works, because that is its core business. More importantly, this will be necessary to ensure seamlessness of delivery. In such a situation the NEC Engineering and Construction Contract (or Sub-Contract) should be used. An excellent explanation of procurement and contract strategy is included in the NEC publication Managing Reality Book 2 by Bronwyn Mitchell and Barry Trebes. For further information please contact the author on 020 7313 4919 or email [email protected]

prevention achieving transparency under NEC risk management the role of the project manager partnering early warning.

The first two statements on prevention and achieving transparency under NEC will be published later in spring 2007. For further information please contact John Hawkins on 020 7665 2217 or email [email protected]

Involving suppliers in design

A couple of years ago the National Audit Office (NAO) in its report, Improving public

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New course

BY GLENN HIDE, NEC CONSULTANT NEC contracts have `raised the bar' in terms of programme management, which in turn has required greater understanding of programming issues by project teams. A new course was launched last month to help planners, project managers and everyone else involved with NEC projects to understand the importance of properly managing the contract programme.

on managing NEC programmes

Programming obligations

The most popular NEC form, the Engineering and Construction Contract (ECC), obliges contractors to produce and maintain, and project managers to accept, a progressed `live' programme. ECC forces key aspects such as float, logic links, time risk allowance and key dates to be understood, planned, monitored and revised as appropriate. It becomes a key tool to aid parties to make decisions, often as a result of notified early warnings. It provides a thorough audit trail for all parties to assess in particular the reasons for any delay at the point which they occur. The fundamental aspects for managing an ECC programme are ensure 'best practice' project management of a project. It is only common sense that both parties would want to understand where the contract actually is in terms of financial/time implications at any point in time. In terms of the first issue, the contractor's recourse is to notify an early warning if the period for reply is exceeded following a programme issue, which should at least prompt a risk-reduction meeting to discuss. Within the industry there still appears to be too large a percentage of projects that do not have an accepted programme in place, or has an out-of-date programme with current works progressing to a significantly different sequence or timescale. It is everyone's responsibility on a project to play their part to ensure this does not happen. With regards to the second issue, it has been voiced many times before that it is `impossible' for a contractor to comply with clause 31.2 of the contract. However it is important to remember the intent of NEC. It is a stimulus to good management and looks to ensure that the programme becomes a tool that the whole project team can use, rather than merely being a retrospective or theoretical high-level reporting tool. There is in fact nothing within clause 31.2 that a competent contractor would not or should not consider during part of the tender process in order to ascertain both anticipated cost and duration of a project. It is a case of taking that information and being able to show, monitor and develop it for the duration of the project. need a good support network within their own team. The role of the planner within that team is hence a key aspect in the successful management of a project. The detail and level of programme management is something that the contract has brought to the forefront and it is probably fair to say that, as an industry, it is an area that needs to be improved upon. It is essential that all team members fully understand the requirements and effects of programme management to manage properly their particular aspects of the contract processes. The team as a whole should take ownership of the programme ­ not just the person operating the planning software.

foresight ­ identifying issues and dealing

with them as they occur

detail ­ quality and content of programmes collaboration ­ all parties feeding into a

process that ultimately allows a revised programme becoming accepted as the true state of the project in terms of what has happened and what is expected to happen. From this the affect of change or progress can be more easily and accurately evaluated.

Typical extract from an ECC programme ­ it is vital such programmes are properly managed

Effective management essential

ECC lays out most of the ground rules as to how the programme should be administered. The reality is that some of these aspects become a little tricky to administer under a live contract and it is very easy for one party to fall behind in administering it. This is particularly problematic where, with hindsight, a different main option may have been more applicable. The parties are left to best manage the situation, particularly where there are more design issues than envisaged and hence compensation events. Quickly the programme can become out of date and, without great care, unmanageable. This most commonly seems to occur on a project when one or both parties are new to NEC and where there is a significant amount of change. Here the contract can start off on the wrong foot and in some cases never quite recover. The role of project managers is pretty varied, particularly on large projects. This means they

Programming workshop launched

Programming issues and requests from NEC Users' Group members have resulted in a new course being launched by the NEC entitled `NEC3: ECC programming workshop'. The workshop, the first of was held in London on 21 March 2007, provides a broad review in terms of general planning aspects and provides detailed information on suggested ways to manage the key aspects of an NEC contract. It provides a good overview of all key disciplines, including project managers and commercial staff as well as planners, to help understand the function of the various roles, what they specifically can feed into the programming process and, more importantly, how the programme affects them and their own administration within the contract. More details of the workshop can be found at www.neccontract.com or by emailing [email protected]

Two common issues

The two biggest issues that are commonly voiced in terms of programme are

project manager does not accept or is mute

with regards to acceptance of a submitted revised programme programme submitted by a contractor has insufficient detail in accordance with clause 31.2 of the contract. Both scenarios result in the fact that a revised or accepted programme is not in place for a period of time, and in some cases the life of the project. This completely undermines the intent of the contract and the systems it puts in place to

NEC USERS' GROUP NEWSLETTER· No.38· APRIL 2007

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A new user's guide to NEC contract formation

BY KEITH KEOWN, CYRIL SWEETT The NEC is a non-traditional construction form with different methods and procedures ­ and this difference extends to the setting up and preparation of the contract itself. This article, which is aimed at new NEC users, examines contract formation with regards to the NEC main contract, the Engineering and Construction Contract (ECC). It also sheds light on some of the major components of an ECC, such as works information and site information. handbook contains a model articles of agreement and this model should be used unless the client has its own form. options B and D). The ECC makes it clear that the contract prices are not works information so the information in activity schedules or bills of quantities cannot be used as information for the provision of the works. The contract prices are only a pricing document.

Contract conditions

The ECC contract conditions come in six forms depending on which main option is chosen. The main options are A, B, C, D, E and F. Each of these options determines the payment mechanism for the contract and presents a spectrum from contractor's risk (options A and B), shared-risk (options C and D) to employer's risk (options E and F). Options A and C appear to be used most frequently in practice. There are a variety of secondary options (options X1 to X 20 plus four specialist options W1, W2, Y (UK) 2 and Y (UK) 3), which can be used to bolt on additional conditions of contract. Examples are conditions for parent company guarantee (X4), liquidated damages (X7) and retention (X16). Where the Construction Act applies (which will probably be most UK construction projects), options W2 and Y(UK)2 should always be used. As noted above, many traditional contract procedures (for example provisional sums) are absent from the ECC and if these procedures are required then new clauses will have to be drafted. Bespoke contract clauses are called Z clauses and are to be included with the contract data part one. Z clauses are to be avoided as they often conflict with the NEC philosophy and usually tilt the contract in favour of one party.

Works information

The contractor's overriding obligation is to provide the works in accordance with the works information (NEC3 clause 20.1). This emphasises the importance of the works information as the contractor is only obliged to do those things that the works information states it is to do. For this reason, the works information must be both comprehensive and carefully prepared. Works information will not only contain the drawings and specification but also general information such as health and safety requirements and site constraints. This general information will in some ways be similar to traditional preliminaries. However it is inadvisable to use the standard preliminaries from other forms of contract (such as the JCT) on an ECC form as such preliminaries often contain a variety of items from site overhead items (site offices, security) to additional contract provisions. As noted previously, the ECC works on a different basis to traditional forms and it is likely that traditional preliminaries will conflict with other parts of the ECC contract.

NEC philosophy

The NEC deliberately breaks from standard construction forms to avoid both traditional thinking and what it considers inefficient aspects of these other forms. Instead it aims to simplify the construction contract and build into it various real time-management procedures that help people to manage projects better by ensuring cost and time certainty. ECC contract conditions are sparse, providing the minimum provisions to make a construction contract work. Traditional contract users will be surprised to find no provisions on final accounts, dayworks, provisional sums, named subcontractors and so on. All these traditional contract components have been left out as they are considered counter to good management.

ECC contract structure

The ECC has a clear and rigid structure, which is as follows

Site information Contract data

The contract data in some ways is similar to the JCT appendix providing project specific information. The contract data comes in two parts (parts one and two). Part one is information provided by the employer and contains the usual project information such as contract timing, insurance requirement and so on. Part two is information provided by the contractor in its tender return. It is vital that this information is provided and provided correctly as it will impact on the contractor's cost recovery. In particular the part two information contains various percentages that will be used to calculate the equivalent of its overheads and profit and its on-cost on any compensation event. Site information is not works information although, under traditional contracts, these two items are often mixed together. Under the ECC, the works information identifies the nature and extent of the works, while site information essentially provides the backdrop (existing building information for example) and baseline (usually ground conditions) that the contractor works to. The ECC conditions treats works information and site information very differently so it is vital they are separated. Site constraints such as working hours should be treated as works information.

articles of agreement contract conditions contract data contract prices works information site information.

It is worth noting there is no hierarchy of documents in the ECC. The contract is very precise over the functions of each of the above components and they do not conflict. A hierarchy of documents is therefore contrary to this precision.

Conclusion

An ECC contract must be prepared with care. It does not work like a traditional contract and if it is prepared as such, then it will not work properly. The NEC guidance book Managing Reality provides excellent guidance on this subject. For further information please contact the author on 020 7061 9332 or email [email protected]

Articles of agreement

The ECC does not come with articles of agreement and in fact an ECC contract could be prepared without this section, as it adds nothing to the obligations and duties of the parties. However, mainly for legal reasons, it is useful to have articles clearly to establish the document as a legally enforceable contract. The ECC

Contract prices

Contract prices is the ECC name for the contract pricing document. It will either be an activity schedule (provided by the contractor under main options A and C) or a bill of quantities (provided by the employer under main

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The `prevention principle' and clause 61.3 of NEC3

BY PETER BARNES, ALWAYS ASSOCIATES Clause 61.3 of NEC3 says edent' clause noted above, the NEC3 Guidance Notes ­ which are not in themselves a contract document but which do give an indication of the intention of those drafting NEC3 ­ state that the project manager should (normally) give notice of ten of the compensation events while the contractor should (normally) give notice of the other nine compensation events. Among those compensation events which the contractor should normally give notice, are weeks `of becoming aware of the event'. There is a school of thought that says that the eight-week period starts from when a competent contractor should have become aware of the compensation event. However, clause 61.3 does not say that the contractor is to notify the event within eight weeks of when a competent contractor would have become aware of the event, nor even within eight weeks of when the contractor itself should have become aware of the event. Consequently, there is an equally valid school of thought which says that, as no such wording is contained in clause 61.3, the indication is that the clause is only concerned with the date when the contractor was actually aware of the compensation event. The test in this respect is therefore objective, and this factor may make it difficult for an employer that wishes to rely on clause 61.3 to show by evidence the date when the contractor was actually aware of the compensation event. Therefore, this possible area of doubt relating to the required timing of the notice may affect the effectiveness of clause 61.3. In addition to the timing of the notice there is, of course, also the question of how the courts may construe the effectiveness of clause 61.3 as a `condition precedent' clause per se.

'The Contractor notifies the Project

Manager of an event which has happened or which he expects to happen as a compensation event if The Contractor believes that the event is a compensation event and The Project Manager has not notified the event to the Contractor If the Contractor does not notify a compensation event within eight weeks of becoming aware of the event, he is not entitled to a change in the Prices, the Completion Date or a Key Date unless the Project Manager should have notified the event to the Contractor but did not.' From the wording of the clause it is clear that if a contractor does not give the required notice in respect of certain compensation events, then it is not entitled to obtain money and/or further time in respect of those events. This type of clause is known as a `condition precedent' clause. But how can a `condition precedent' clause of this type be reconciled with another established principle of law known as the `prevention principle'?

a failure by the employer to allow access

to and use of part of the site either by the access date or the date shown on the accepted programme (clause 60.1 (2)) a failure by the employer to provide something which it is to provide by the date for providing it shown on the accepted programme (clause 60.1 (3)) a breach of contract by the employer which is not one of the other compensation events in the contract (clause 60.1 (18)). Clearly the three compensation events listed above all relate to breaches by the employer. Therefore, in respect of any of these three compensation events, would the prevention principle apply? If the above events occurred, and if the contractor failed to give notice as required by clause 61.3 (with the result that the employer would not have the power under the contract to grant an extension of time to the contractor), would the employer be unable to recover liquidated damages (known as delay damages under NEC3) from the contractor?

The `prevention principle'

A fundamental principle of law is that a party cannot benefit from its own breach of contract to the detriment of the injured party. This is sometimes referred to as the `prevention principle'. In the Peak Construction v McKinney Foundations (1970) case the court decided that where a delay occurred as a result of the employer's breach of contract but there is no power in the contract to grant an extension of time for such a circumstance, the employer is not entitled to levy liquidated damages because there is no longer an appropriate date from which such liquidated damages should run. Because of the principle, many commentators are of the opinion that where a contractor is precluded from obtaining an extension of time in respect of a delay caused by a clear breach by the employer, simply because the contractor has not provided the required notice (i.e. because it has not complied with a `condition precedent' clause), this is analogous to provisions that incorporate inadequate extension-oftime mechanisms. In other words, if, in respect of certain delay events, in particular those that relate to breaches by the employer, the contractor does not give the notice required by the `condition precedent' clause and the employer therefore does not have the power to grant an extension of time under the terms of the contract, it is a commonly held view that time becomes `at large'. But is this actually the case?

Court guidance

Clause 61.3 of NEC3 is untested in the courts, and in fact there is no English law on the question of how the non-compliance by a contractor with a `condition precedent' clause may affect the contractor's entitlement to an extension of time in respect of delays caused by a breach by the employer. However, one Australian case and one Scottish case may provide some guidance as to how the courts may view the effectiveness of clause 61.3. From Australia The Australian case is Gaymark Investments Pty Ltd v Walter Construction Group (1999). In that case the contract contained a clause (clause SC19.1) which said that the contractor was entitled to an extension of time provided that it demonstrated to the satisfaction of the supervisor that it had taken all proper and reasonable steps necessary and within its control to preclude the occurrence of the delay and / or to avoid or minimise its consequences, and had demonstrated to the supervisor's satisfaction that it had been delayed. Because the contract failed expressly to provide for the situation where the employer caused delays, coupled with a failure by the contractor to comply with the provisions of clause SC19.1, the court found that the `prevention principle' applied and the employer was unable to recover liquidated damages. The key point to note is that the contract was considered to be deficient by not expressly providing a remedy of extensions of time in respect of acts of prevention by the employer causing delay.

`Condition precedent' clauses

In respect of `condition precedent' clauses, the English courts have been reluctant to uphold clauses that deprive a contractor of relief simply because it fails to give notice. It is considered that for any such clause to be effective it would need to state the precise time when the notice must be given and it would need plainly to spell out the consequences of not giving the notice. In respect of clause 61.3 of NEC3, the courts may also take into account the fact that clause 63.4 of NEC3 confirms that changes to the prices, the completion date or a key date are the only right of the employer and the contractor in respect of a compensation event. The contractor can therefore only rely on relief pursuant to clause 61.3 and cannot circumvent that clause by making a claim for damages at common law. The contractor's entitlement is therefore restricted entirely to clause 61.3, and this may mean that that `condition precedent' clause would be the subject of considerable scrutiny.

Timing of notice Applicable events

In the NEC3 there are 19 compensation events under core clause 60.1 (i.e. clauses 60.1 (1) to 60.1 (19) inclusive). In respect of the clause 61.3 `condition precNEC USERS' GROUP NEWSLETTER· No.38· APRIL 2007

In considering the `condition precedent' clause in question, a key point, as noted above, would be the timing of the notice required by the clause. Clause 61.3 requires the contractor to notify the appropriate event within eight

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From Scotland The Scottish case is City Inn Ltd. v Shepherd Construction Ltd. (2003). In that case, the contract included a clause which allowed the contractor to give notice within 10 days of an architect's instruction if it considered an instruction of the architect would require adjustment of the contract sum or delay completion. Another clause stated that the contractor was not entitled to an extension of time if it failed to give the required notice. The contractor did not give the required notice (and was not granted an extension of time) but argued in court that the clause in question was a penalty clause. However, the court held that the clause in question did not impose any obligation on the contractor when it received an architect's instruction but rather gave the contractor the option to take certain action if it sought the protection of an extension of time in the circumstances in which the clause applied. If the contractor failed to take the option available to it, then it was not the employer's original breach but the contractor's own failure to comply with the notice requirements that exposed it to liquidated damages. If the contractor had complied with the notice provisions, it could have avoided liquidated damages.

FAQs

BY ROBERT GERRARD, NEC USERS' GROUP SECRETARY In this issue we look at some more of the recent helpline questions asked, both for NEC2 and NEC3. In all cases it is assumed there are no amendments that materially affect the standard NEC contract referred to.

Further NEC2 and NEC3 questions

NEC2 Acceleration

Question Can you tell me where I stand regarding an acceleration request from a client. Can I be instructed to accelerate before a price has been agreed (the acceleration request is due to the client and not our non-performance) as in the case of clause 60.1? The question is, can a contractor be forced to accelerate before a price has been agreed and if not, what clause stops the client from using clause 29.1 of the 2nd edition of the NEC Engineering and Construction Contract (ECC2)? Answer Acceleration is dealt with in clause 36 and is initiated by the project manager, not the client. In ECC project managers have the power to instruct you to submit a quotation for acceleration. Project managers cannot instruct you unilaterally to accelerate; they are basically asking you a question which is `are you prepared to accelerate?' If you want to submit a quotation you do so and need to submit details of this within the period for reply ­ how the prices are affected, the completion date and so on. If you do not wish to submit a quotation to accelerate, that is your prerogative under ECC but you need to submit reasons for saying `no'. You cannot be compelled under ECC to accelerate. Clause 29.1 just says you need to obey instructions from the project manager which are `in accordance with this contract'. This is the key bit: there is no such instruction that project managers have at their disposal to instruct you to accelerate. You are being asked a question and you need to say yes or no. I have generally found acceleration to be problematic, especially late on in a project ­ resources are practically falling over each other and it is inefficient. That said, if you are happy to accelerate, and the time and cost effects are acceptable to both you and your project manager / client, then go for it. But there is a great danger in pressing the `go' button before agreeing terms of acceleration.

Conclusions

The decisions in the Gaymark and City Inn cases may appear somewhat contradictory. However, on analysis, it is considered that the decision in the Gaymark case was based on the fact that the contract was ambiguous as to whether notification was a `condition precedent' to entitlement to an extension of time in the circumstances where the employer caused the delay. It very much followed the principle that a party is not entitled to benefit from its own breach except in cases where very clear language is used. However, in the City Inn case there appeared to be no such ambiguity. Whether clause 61.3 of NEC3 will be upheld by the English courts depends on whether it is considered to be sufficiently clear to contemplate the levying of liquidated damages (delay damages) in circumstances where the contractor has failed to give notice in respect of a delay that was caused by the employer's breach. On the face of it, clause 61.3 appears to be sufficiently clear in that respect (although there is a possible area of doubt regarding the timing of the notice); and such an interpretation of clause 61.3 would be consistent with the underlying philosophy of the NEC3 contract. This requires the contractor and the project manager to give early warning of potential risks, so that those potential risks can be properly managed by the parties. For further information please contact the author on 01992 576440 or email [email protected]

Volume discounts

Question I am looking for information on the operation of `volume discount' mechanisms within NEC contracts. I believe that these clauses are particularly relevant in the ECC2 option C contract. Can you provide with more information on this or suggest a way of finding out more information? Answer I am not aware of any volume-discount mechanisms in NEC2 or NEC3 contracts other than likely to be included in the forthcoming NEC3 Supply Contract. But as this is a working draft and not in the public domain, then it is probably not this that you are referring to. It may be that there have been some Z clauses on a contract to permit this? It is difficult for me to speculate otherwise but, in terms of basic financial administration of an unamended ECC3, core clause 52.1 states that defined cost includes, `other amounts at open market or competitively tendered prices with deductions for all discounts, rebates and taxes which can be recovered'. Whether using this for assessing compensation events for options A to F or assessing price for work done to date in options C to F, the expectation of clause 52.1 is that the contractor feeds through into the accounts and discounts that it obtains through, for example, bulk buying. The difficulty in policing this is

NEC3 changes

Michael Rowlinson's article on specific changes to core clauses 1 and 2 in NEC3 will be published in the next issue.

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how do you decide which project and therefore client gets the benefit of discounts once the ceiling has been exceeded. For example, a concrete supplier says to a contractor the price is £50 / m3 delivered up to 1000 m3 in a calendar year and, once this ceiling is exceeded, the price drops to £45 / m3. For ease, I would suggest that clients should be paying the rate at the time, be it the £50 or £45, but I understand usually this discount is a one-off central payment back from supplier to contractor ­ that is the contractor pays £50 / m3 for the whole year then gets a £5 / m3 rebate at the end of the year when the final quantity is known. However difficult, the contractor is obliged to feed such discounts into the accounts as described. If it is just basic commercial transactions that drive the price down, then again the cost paid should be fed through either as part of compensation events or the price for work done to date process for options C to F. If options A or B are used and the discount is obtained by the contractor, and nothing to do with any compensation events, then good luck to the contractor ­ this is part and parcel of its commercial dealings in a price-based contract.

defects before completion is only intended to be a disallowed cost if the defect is caused by the contractor not complying with a constraint on how it is to do the work, for example a prescribed method of working or a constraint on timing of the work. I understand this would mean the contractor's costs of rectifying defects before completion are included in the defined cost, providing any constraints have been observed. Under option C, these costs would be shared between contractor and employer under the pain/gain share arrangement in clause 53. However, the concept that the contractor (and subcontractors) should effectively be reimbursed, even partly, for defective work would appear to be inherently unfair and inequitable. Please could you confirm that this is indeed the correct interpretation of clause 11.2 (25). Answer Your reading of the contract is correct, with one exception that I will come to at the end. This is both logical and reasonable when viewed from the perspective of financial risks associated with the work. Options C and D share most of the financial risks and rewards involved in constructing the works. That applies equally to the risk of defects occurring. With options A and B, most of these financial risks, including the risk of defects, are the contractor's. The contract wherever possible ensures that the reward and commensurate risk of any decisions are with the same party, or shared by them. In options C and D that means that the employer shares the rewards for the works being carried out more economically, whereas in options A and B that is entirely the contractor's reward. Therefore in options C and D the commensurate risk that goes with that reward, that is there will be more defects in the works, is also shared, whereas in options A and B it is entirely the contractor's risk. Viewed that way the contract is, in my opinion, both logical and reasonable. The one exception to your reading of this matter is the treatment of subcontractors. The liability for their defects will depend not only upon the ECC option but also upon the terms of their subcontract. If a subcontractor is also on and option C or D subcontract then your assessment will be correct and this will be a risk that will be shared between the contractor and the subcontractor, and the contractor's share of that risk (but not the subcontractor's) will then be shared again between the contractor and the employer. On the other hand, if the subcontractor is on options A or B or some other form of subcontract that puts the risk of correcting defects with the subcontractor, then the contractor should insist upon the terms of that subcontract being applied and make the subcontractor correct defects without cost to the contractor, and hence the employer. If the contractor fails to do that, and pays the subcontractor to correct a defect, then the second bullet of 11.2(25) can be used to disallow that payment. In these circumstances, if the subcontractor fails to correct the defect then the subcontract conditions (or common

law) will allow the contractor to correct it and deduct the cost from the subcontractor. Again if the contractor fails to deduct that cost when it should have, the second bullet of 11.2(25) can be used. If the contractor does deduct the cost of correcting this defect from the subcontractor, the revised wording of 11.2(23) ensures that the employer does not double deduct it.

Weather

Question On the evening of 5 July last year, 48.8 mm of rain fell which caused damage to completed works. The overall rainfall that fell during July was 92 mm. According to the Met Office, the 1-in-10 year value for precipitation during July is 96.1 mm and the 1-in-10 year value for the wettest day is 30.2mm. It is accepted that the monthly precipitation experienced of 92 mm is below the 1-in-10 year average, however the rainfall on 5 July of 48.8 mm is substantially higher than the 1-in-10 year average. The question is therefore, does the weather event of 5 July, when substantially more rain fell in one day than the 1-in-10 year average for one day, constitute a compensation event under the contract?'. The conditions of contract are the ECC3 option C and the relevant clause is clause 60.1(13), unamended. Within the contract data part 1 the weather measurements to be recorded for each calendar month are the cumulative rainfall and the number of days with rainfall more than 5 mm. Answer First thing I would note is that if there was damage, then this is an insurance matter covered in the first row of the clause 84.2 insurance table. It is clearly not a defect, you have done nothing wrong, the rainfall caused damage that should be dealt with by insurance. That aside, clause 60.1(13) is clear that one looks at weather measurement being recorded within a calendar month. So, if you get a bad storm lasting two days at the end of February and start of March, they are taken as independent events in each month. The contract data part 1 as you note on your project are cumulative rainfall (mm) and the number of days with rainfall more than 5 mm. The intention is that these are independent weather measurements but the weather over an entire month is measured, not on an hourly, daily or any other basis. The bullet in contract data part 1 reads, `The weather measurements to be recorded for each calendar month are...'. This is saying count up the number of days with rainfall more than 5 mm and compare this to the 1in-10 year average, but do so on a calendar month-by-month basis. So I would say no, the compensation event is to be judged for each weather measurement that occurs per calendar month regardless of the highs and lows within a particular month. The new NEC3 feature I am sure you are aware of is the time-barring effect of clause 61.3 for the contractor not notifying compensation events within eight weeks of becoming aware of the event.

Option N price adjustment for inflation

Question On an ECC2 option C contract, a contractor has split the price for work done to date (PWDD) into preliminaries, civils, architectural and mechanical and electrical works, and worked out a separate price adjustment factor (PAF) to apply to each value. The project manager has said that this is incorrect as clauses N1.1 and N4.2 require a singular PAF which is applied to the whole PWDD for each assessment. Do you agree with the contractor or the project manager? Answer The intention is that there is a single PAF calculated in accordance with whatever the proportions and indexes were prescribed in the contract data part 1 at the time of tender. Nowhere does it say that there are a number of PAFs, which I think would be so difficult to attempt to describe in a condition of contract or apply in application anyway. The proportions are intended to be such that they have some bearing to the likely proportional split of such components in the particular project, but it can only ever be an approximate averaging exercise. The single PAF is applied each time the amount due is assessed and is basically applied to the change in PWDD since the last assessment of the amount due. There is no suggestion this should be calculated as you suggest the contractor has done. On simple reading of the contract, it is a single PAF applied to the whole PWDD for that month. So, I would have to agree with the project manager.

NEC3 Paying for correcting defects

Question The Guidance Notes for ECC3 clause 11.2 (25) on page 61 state that the correction of

NEC USERS' GROUP NEWSLETTER· No.38· APRIL 2007

7

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New workshops events launched

BY VICTORIA RUSSELL, NEC EVENTS NEC Events has launched three new workshops ­ one on programming and two on pre- and post-contract matters ­ to complement its extensive range of training events on the NEC suite of contracts. The Engineering and Construction Contract (ECC) programming workshop reviews the contract planning process and explains how to manage key programming aspects ­ see page 3 for more details. The first event was held in London on 21 March. The next programming workshop will run on 11 September 2007 in Manchester. The pre- and post-contract workshops for the Term Service Contract (TSC) and ECC will take place respectively in London on 25 April and in Ascot on 1 May. Using a series of interactive case studies they provide guidance on completing contract data parts 1 and 2, assessing tenders and dealing with the integrated management processes and procedures in ECC and TSC. All three new workshops cost £235 plus VAT or £211.50 plus VAT for NEC Users' Group platinum and gold members. For further information please contact Victoria Russell on 020 7665 2445 or email [email protected]

NEC Users' Group members New members shown in bold

A B Rhead & Associates Limited A D Architects Ltd Advent Project Management Limited African Products (Pty) Ltd Aggregate Industries UK Ltd Alexander Bruce Consultants Ltd Alfred McAlpine Civil Engineering Allen Construction Consultancy Alpheus Environmental ALSTOM Power Ltd Alway Associates (London) Limited AM Moran Ltd Amber Valley Housing Ltd AMEC Group Ltd AMEC Group Ltd ­ Industrial Amec Utilities Ltd Anderson Strathern Anglian Water Services Ltd Aniscon Consulting Anthony Collins Solicitors Anthony G Barker Arena Housing Association Limited Areva T & D NZ Ltd Arup Ascon Limited Ashford Borough Council BAA plc Babtie Group Balfour Beatty Construction Ltd Balfour Beatty Major Projects Ballast Nedam Engineering Barton Plant Ltd Barwa Real Estate Beachcroft LLP Bechtel Ltd Berkeley Consulting Bevan Brittan Bezuidenhout & Partners cc Bezzant Limited Biffa Waste Services Limited Birse Build Limited Birse Civils Limited Birse Metro Limited BIW Technologies Black and Veatch Ltd Bluestone Surveying Limited Bolton Metro Borough Council Bowdon Consulting Limited Brealeygreen Brent Housing Partnership Brett Construction Ltd Brewer Consulting Bridgend County Borough Council Bristol International Airport British Nuclear Group Brodies LLP Bunton Consulting Buxton Development Partnership BWB Partnership Capita Symonds Ltd Capstone Design & Consulting Carillion Plc Carillion Services Limited Carillion Transport Projects Castle Hayes Pursey LLP CCM Associates CCS Group PLC Censeo Contract Consultants Ltd Central Procurement Directorate Centrum S.A. Chandler KBS Chelmer Housing Partnership Cheshire County Council Child Graddon Lewis Circle Anglia Housing Trust Limited City of Westminster City of Worcester City University School of Law Clifford Chance CLM Delivery Partner CMS Cameron McKenna Comhairle Nan Ellean Siar Commercial Management Consultants Ltd Commercial Solutions Construction Change Management Ltd Construction Management Services Contracts Consultancy Limited Corderoy Cornwall County Council Costain (COGAP) Costain Limited Crown International Technology Limited Cruden Construction Limited Ctori Construction Consultants Limited Currie and Brown Cyril Sweett Limited Darlington Borough Council Davis Langdon LLP Dawnus Construction Limited Dean and Dyball Construction Limited Dearle & Henderson Ltd Denton Wilde Sapte Department for Regional Development ­ Roads Service Dept. for Regional Development (NI) ­ Water Service Devon County Council Doig & Smith Doncaster Metropolitan Borough Council Dorset County Council Dudley Smith Partnership Duffy Civil Engineering Dundee City Council Earth Tech Engineering Ltd East Lothian Council East Riding of Yorkshire Council EC Harris Edmund Nuttall Limited EMCOR Rail Limited Engineering Contract Strategies Entec UK Ltd Enterprise World Limited (EWL) Environment Agency Environmental Resources Management Erinaseous Property Maintenance plc Ernest J Bayton ESKOM Essexcare Trenching Ltd Eversheds Faber Maunsell Faculty of Engineering Faithful & Gould Farrans (Construction) Ltd Fenwick Elliott LLP Field Group plc Fitzpatrick Contractors Ltd Focus Project Management Fone-Alarm Installations Ltd Forward Consult Limited Framatome ANP Frank Griffiths Assoc Ltd Franklin & Andrews Limited Freshfields Bruckhaus Deringer G F Tomlinson Building Ltd G J Taylor Consultancy Galliford Try Gardiner & Theobald Management Services Gateley Wareing Solicitors Gent Limited Geodynamics Consultancy Ltd Glamorgan Engineering Consultancy Glasgow City Council Glaxo Smith Kline Gleeds Gleeds Energy Glendamere Services Gloucestershire County Council GMH Planning Ltd Goring Berry LLP Granshaw Limited GrantRail Limited Greenstone Environmental Ltd Grontmij GVE Commercial Solutions Gwynedd Consultancy H & B International (pty) Ltd Halcrow Group Limited Hammonds Hampshire County Council Hannah Reed and Associates Ltd Hanson Construction Projects Harelaw.co.uk Haringey Council ­ Grants & Regeneration HBG UK Ltd Highlands & Islands Airports Ltd Hobson & Porter Ltd Hull City Council Hull Property Hunter & Partners Hyder Consulting Engineers Hyundai Engineering & Construction Company Ltd Interserve Project Services Limited J Breheny Contracts Ltd Jackson Civil Engineering Limited Jacobs Babtie Group James Frett & Associates Jigsaw JMP Consultants John McCall Architects John Newson & Co John Papworth Ltd JT Mackley & Co Ltd Kajima Corporation Kate Williams ­ Barrister Keepmoat Regeneration Kensington & Chelsea TMO Kent County Council Keppie Design Ltd Killoughery Construction Ltd Kirkham Board Associates Knowles Koop Pipeline Division / NACAP Lafarge Contracting Lagan Construction Ltd Laing O'Rourke Lancashire County Council ­ EnvironmentDirectorate Lancaster City Council Land and Water Group Land Engineering (Scotland) Ltd Land Securities Trillium Laser Civil Engineering Limited LEB Process Automation & Consulting Leicester City Council Lincolnshire County Council London Area Procurement Network London Borough of Harrow London Borough of Merton London Borough of Redbridge London Borough of Waltham Forest Lovells, International Law Firm Management Process Systems Limited Mansell Construction Services Limited Mansell plc Marina Developments Ltd May Gurney Mead (SJ) Ltd Metronet Rail BCV Ltd Metronet SSL Ltd Ministry of Finance and Economic Affairs MJ Gleeson Group Plc MJA Consulting Mooney Kelly Cost Consultants Morgan Est Plc Morgan Estate Rail Ltd Morrison Construction Services Limited Mott MacDonald Mouchel Parkman Services Ltd MWH National Grid Company plc National Roads Authority NBS Neath Port Talbot County Borough Council NEC Panel Needlemans Ltd Newcastle City Council ­ Engineering Services NG Bailey & Co Ltd NHS ProCure21 Nicholson Graham & Jones Norfolk County Council Norman Rourke Pryme LLP Northern Ireland Housing Executive Northumbrian Water Limited Norton Rose Norwest Holst Construction Ltd Nottinghamshire County Council O.J. Simone Ltd Office of Government Commerce OGC Buying Solutions O'Hare Engineering Ltd Oil Search Limited Osborne Clarke Oxfordshire County Council Pacific Consultants International Parkview International London Plc Parsons Brinkerhoff Ltd Patronus Consulting Ltd pdConsult Ltd Pellings Peter Brett Associates Peter Freankel and Partners Ltd Peter J Douglas Engineering Ltd Pickavance Consulting Ltd Pinsent Masons Poole Dick Associates Posford Haskoning Limited Project Constructions Management Project Partnering Services Ltd PTR Services Ltd Quantum Consult Ltd Quigg Golden Ltd R A Gerrard Ltd Raynesway Construction Southern Limited Rexer Construction Ridge and Partners LLP Ridgeway Consulting Ltd Rivers Agency Robert J. Wren Associates Robert West Consulting Roger Lewendon Associates Rotherham Metropolitan Borough Council Rowecord Engineering Ltd Royal Borough of Kingston Royal Haskoning RPS Consulting Engineers Ltd RWE Innogy plc RWE Nukem Limited S & P Ltd Scott Wilson Seacore Limited Selman Developments Limited Serco Limited Shairwood Contracts Ltd Sheffield City Council Sheffield Design and Project Management Shepherd Construction Ltd Shoosmiths Siemens Plc Simmons & Simmons Skanska Construction UK SLR Consulting Limited Sokhela Siyabonga Construction Somerset Consult South African NEC Users Group Association South Gloucestershire Council South Lanarkshire Council Specialist Engineering Contractors' Group wStaffordshire Engineering Services Suffolk County Council Surrey County Council Swansea Housing Association Ltd Synergie Scotland Ltd Systech Legal Services Limited T E Beach (Contractors) Ltd Taylor Woodrow Construction Ltd Telereal Services Ltd Telford Hart Associates Tendring District Council Thames Water The Clarkson Alliance Ltd The Gibson Hamilton Partnership The National Assembly for Wales The Villages Housing Association Ltd THSRC Thurlow Associates Ticor South Africa TPS Schal Trench Farrow ­ Mountbatten Project Tube Lines Ltd Tubelines Projects Directorate Tuffin Ferraby & Taylor Tulloch Prime Contracting Ltd Turner & Townsend Tweeds UK Nirex Ltd UKAEA Union Railways (North) Limited University of Salford Van Oord UK Ltd VHE Construction plc Viridor Waste Suffolk Ltd Volker Stevin Ltd W B Simpson & Sons (Tiling) Ltd W S Atkins Warwickshire County Council Wates Construction Ltd Watson Burton Welsh Heath Estates West Berkshire Council West Sussex County Council Westinghouse Electric Belgium S.A. Westinghouse Rail Systems Westminster Dredging Co. Ltd. Wheeler Group Consultancy White Young Green Environmental Windmill Demolition Co Ltd Windsor Contract Management Worcester Community Housing Worcestershire County Council Wragge & Co LLP Wrekin Construction Company Limited WS Atkins WSP Civils WSP Development WSP Group Yorkshire Water Services Ltd

NECDIARY

Date Event Venue

19 April NEC3: Introduction to the ECC 25 April NEW NEC3: TSC pre and post-contract workshop May* NEC Users' Group workshop 01 May NEW NEC3: ECC pre and post-contract workshop 16 May NEC3: Introduction to the ECC 22 May NEC3: ECC project managers' workshop 22 May NEC3: Preparing and managing ECC contracts 22 May 22 May June* June* 12 June 18 June 26 June 11 July 30 August 10 September 11 September 17 September 19 September 26 September 27 September October* October* 09 October 16 October 05 November 15 November 20 November 21 November NEC3: Role of the project manager under the ECC NEC3: Preparing and managing ECC contracts NEC Users' Group workshop NEC Users' Group workshop NEC3: Introduction to the ECC NEC3: Engineering and Construction Short Contract NEC3: Introduction to the TSC NEC3: Introduction to the ECC NEC3: Introduction to the ECC NEC3: Professional Services Contract NEC3: ECC Programming Workshop NEC3: Introduction to the ECC NEC3: Introduction to the TSC NEC3: ECC project managers' workshop NEC3: Preparing and managing ECC contracts

Ascot London London Ascot Birmingham Glasgow Birmingham Glasgow Birmingham Manchester Glasgow Leeds Birmingham London London Glasgow Manchester Manchester Manchester Manchester Birmingham Glasgow

NEC Users' Group workshop London NEC Users' Group workshop Birmingham NEC3: ECC compensation events workshop London NEC3: Introduction to the ECC Ascot NEC3: ECC project managers' workshop Manchester NEC3: Introduction to the ECC Bristol NEC3: Introduction to the TSC Ascot NEC3: Preparing and managing ECC contracts Ascot London

04 December NEC3: Introduction to the ECC

Key: * ­ precise date to date to be fixed; bold ­ NEC Users' Group event; ECC ­ Engineering and Construction Contract; TSC ­ Term Service Contract. For further details of courses and events please visit the NEC website at www.necontract.com

Constructive contributions to the newsletter are always welcomed and should be emailed to the editor Simon Fullalove at: [email protected] (Tel: 020 8744 2028 Fax: 020 8891 2462). Current and past issues of the newsletter are also available on the NEC website at www.neccontract.com. All other enquires should be made to the NEC manager Rekha Thawrani, NEC, 1 Heron Quay, London, E14 4JD, Tel: 020 7665 2446, Fax 020 7538 2847, e-mail [email protected]

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