MacRoberts. A law firm as individual as you.

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1 MacRoberts. A law firm as individual as you. The New NEC4: Exploring the Key Changes Mike Barlow, Partner MacRoberts LLP Glasgow Edinburgh Dundee

2 1 THE NEC4 ENGINEERING AND CONSTRUCTION CONTRACT EXPLORING THE KEY CHANGES All views expressed in this paper are entirely those of the author and are not necessarily those of MacRoberts LLP. The information, materials and opinions in this paper are not exhaustive; they are for general information purposes only, are not intended to constitute legal or other professional advice; and should not be relied on or treated as a substitute for specific advice relevant to particular circumstances. EXECUTIVE SUMMARY The NEC4 Engineering and Construction Contract contains a significant number of changes to NEC3, some of which are matters of terminology, with other changes being more substantive in nature. NEC4 includes updates to reflect provisions typically sought by industry users, including a requirement for applications for payment and new provisions dealing with assignment, disclosure and the prevention of corrupt practices. The risk and insurance clause has also been substantially revised, while changes have been made to the Schedules of Cost Components and a number of secondary Options have been added. Although the publishers of NEC4 have clearly aimed to reduce the extent of amendments made to the standard form by way of Z clauses, some of the changes made in NEC4 will not go far enough for many users and it is highly likely that NEC4 users will continue to use Z clauses to amend the text of the standard form itself, rather than just adding new project-specific clauses. In that regard, no standard form of contract is perfect and NEC4 is in a similar position to other standard forms of contract. In the author s view, however, for those parties who have decided to use an NEC Engineering and Construction Contract (as opposed to another standard form of contract), NEC4 is a clear improvement on NEC3, to the point where it is difficult to see why one would continue to use NEC3. That is subject to the overriding point that amendments are likely to be required by way of Z clauses to meet the specific requirements of the project and the parties, including to address some of the issues highlighted in this paper. INTRODUCTION The aim of this paper is to identify and consider the main changes made in the recently published NEC4 Engineering and Construction Contract, which for ease of reference will simply be described as NEC4 throughout. Words that appear in italics in NEC3 have not been italicised in this paper, on the assumption that the reader will be familiar with that convention in the context of the NEC conditions of contract. Before looking at the NEC4 Engineering and Construction Contract in more detail, it is worth noting that the NEC4 Engineering and Construction Contract forms part of a wider suite of NEC4 standard forms. Essentially, the whole suite of NEC3 documents has been retained, subject to various amendments - and apart from the new NEC4 badge, those documents retain exactly the same names. The only exception is the Adjudicator s Contract, which has been renamed the "Dispute Resolution Service Contract". There are also four brand new standard forms in the NEC4 suite, namely: 1. the Design Build Operate contract ( DBO ) this form of contract combines responsibility for various functions that are usually disparate - design, build, and operation/maintenance but under DBO would be procured from a single provider. It may be that DBO will be more commonly used overseas than in the UK, because in the UK a DBO contract is more likely to be covered by a government form of contract (possibly a bespoke contract). 2. the Alliance Contract (currently in a consultation version only) this is a single, collaborative, multi-party contract based on an integrated risk and reward model; it is intended for use where the client wishes to fully integrate the design and construction team for major, complex projects. 3. the Professional Services Subcontract this is probably most relevant to major, complex projects where sub-consultants are engaged (e.g. where there is a lead designer such as an architect with other disciplines such as the civil and structural or M&E consultants acting as subconsultants to the lead designer). 4. the Term Service Subcontract as indicated by the name, this is simply to allow for subcontracting by the Contractor under an NEC Term Service Contract.

3 2 WHY HAS NEC4 BEEN ISSUED? NEC's stated reasons for replacing NEC3 were to support the changing requirements of users; to stimulate good project management; and to improve clarity and simplicity. NEC4 is the result of feedback received from members of the NEC User Group, which comprises around 400 organisations. It is clear that NEC s publishers are hoping that as a result of the changes made, users of NEC4 will make fewer amendments to the standard form (by means of Z clauses) than is the case for NEC3 - though it remains to be seen whether or not that will happen in practice. The NEC has published a useful summary of the changes made in its White Paper, which can be downloaded from the NEC website: Generation-whitepaper At first glance, much of NEC4 reflects the NEC3 ECC, so for example: the basic structure of the ECC remains the same main Options A-F have all been retained, with essentially the same roles those clauses that have not changed are generally in the same order (though not necessarily with the same clause numbers) and should have largely the same effect; there continue to be core clauses, main Option clauses, secondary Option clauses (comprising W, X and Y Clauses), a Schedule of Cost Components, Contract Data parts one and two, and an option to include Z clauses the contract continues to be written in the present tense. The view of the publishers of NEC is that NEC4 constitutes evolution not revolution. That is in my view a fair statement, though NEC4 does include quite a number of changes relative to NEC3 and it would be complacent to assume that NEC4 has not changed significantly from NEC3. One of the most striking changes in NEC4 (though not the most legally significant) relates to the new terminology of NEC4. NEW TERMINOLOGY OF NEC4 ECC Client In NEC4, the "Employer" has been renamed as the "Client" (and this applies to nearly all of the NEC4 suite of contracts). This may be viewed by NEC as a helpful change, but some may view it as an unnecessary distraction. The expression Employer (not Client ) is used in most other construction contracts such as JCT, FIDIC and MF/1 and some users will find it slow to adapt. At a practical level, if organisations have prepared standard Z clauses or template Works Information packages, those will need to be adjusted (as a minimum) to refer to the Client rather than the Employer, and indeed to the Scope rather than the Works Information (see below). Scope Another change to the terminology in NEC4 is that the "Works Information" has been renamed as the "Scope". Again, this amendment applies throughout the NEC4 suite of documents, so in the other NEC forms of contract, expressions such as "Service Information" and "Goods Information" will become the Scope too. The promotion of consistency across the NEC suite of contracts is probably the main benefit of this particular change, and to be fair to NEC (if a change was necessary) it is not entirely clear what the alternatives might have been. For example, the expression Specification would not necessarily include Drawings in the eyes of some users, while the expression Employer s Requirements is conventionally used with design and build contracts and might not be viewed as suitable to other situations. On the other hand, consistency of terminology is most useful to people who work with multiple NEC contracts. Someone who works only with e.g. the Engineering and Construction Contract would not be

4 3 troubled by the fact that under the NEC3 Term Service Contract, the equivalent to the Works Information is called the Service Information. The change from Works Information to Scope, like the change from Employer to Client, will require existing templates to be amended, and will require time to bed in with NEC users. Early Warning Register A genuinely useful change has been made to the expression "Risk Register", which in NEC4 is now called the "Early Warning Register". This will hopefully discourage the practice of trying to reallocate contractual risk by means of the Risk Register, which is a fairly common issue in practice under NEC3. The Risk Register was always intended by NEC for use as an aid to project management, and not as a device to change the risk allocation that was implicit in the conditions of contract. That could occur where the contract included a Risk Register at the outset, which was referenced in the Contract Data; that gave rise to a potential argument that a particular matter was an Employer s risk, and was therefore a compensation event. Some changes to clause 15 (Early Warning) itself have been made, and these are mentioned later in this paper. Gender Neutrality Another positive step is that NEC4 is now gender neutral. All references to "he" or "his" have been removed, and replaced with "it" or "its". Perhaps the only point to bear in mind here is that if you are drafting Z clauses, or need to update an existing set of Z clauses, this change in approach should be reflected in the drafting. CHANGES TO CORE CLAUSES UNDER NEC4 Clause 10.1 The very well-known clause 10.1 of NEC3 has been split into two separate clauses, namely clauses 10.1 and Clause 10.1 now requires the Parties, the Project Manager and the Supervisor to act as stated in the contract (which can be viewed as an enabling provision for the use of the present tense), while clause 10.2 separately requires the same parties to act in a spirit of mutual trust and cooperation. It is not clear what the legal effect, if any, of this separation of clauses might be. It is possible that this separation will encourage some Parties to re-open the debate as to the effect of clause 10, which under NEC3 was becoming a more settled issue. Definition of Subcontractor (Clause 11.2(19)) Under NEC4, the definition of Subcontractor has been changed to more clearly exclude sub-contractors who provide Plant and Materials which have been designed by a supplier, as opposed to the subcontractor. The revised definition is also restricted in relation to sub-contractors who provide a service necessary to Provide the Works, where the service must be provided in the Working Areas, and excludes the hire of Equipment and the supply of people paid for by the Contractor according to the time they work. The main effect of this revised definition will be to remove certain entities from the requirement to seek the approval of the Project Manager in terms of clause 26. It would be advisable for Clients to consider whether or not they wish additional controls in relation to the provision of specialist Plant and Materials in any particular case; if necessary, that should be addressed in the contract. Clause 13 (Communications) The drafting of clause 13.1 has been cut down slightly, though it is still flexible in that it simply requires all communications to be in a form that can be read, copied and recorded. This is a much more realistic approach than some of the rather old fashioned notices clauses that are still encountered in some contracts, which require service by recorded or special delivery post. Clause 13.2 has also been revised to allow the Scope to specify the use of a communication system. The obvious examples are together with web-based systems such as a drop box or a Cloud-based system. The Contract Data now contains an entry for addresses. Clause 13.4 has been amended so that if the Project Manager does not accept a communication sent to the Project Manager for acceptance, the Project Manager must state its reasons in sufficient detail to enable the Contractor to the correct the matter. This is a

5 4 useful change which should make it harder for the Project Manager to hide behind a blanket rejection of a communication from the Contractor. Clause 15 (Early Warning) In NEC3, this was covered by clause 16, but the old NEC3 clause 15.1 (Adding to the Working Areas) has been relocated (into clause 16.3) and early warning is now covered by clause 15 of NEC4. Under clause 15.2 of NEC4, there is a new requirement for the Project Manager to issue a first Early Warning Register within one week of the starting date. The Project Manager must also instruct the Contractor to attend a first early warning meeting within two weeks of the starting date. Thereafter, early warning meetings are then held as for risk reduction meetings under NEC3 (i.e. if either the Project Manager or the Contractor instructed the other to attend a meeting). Under NEC4, though, early warning meetings must in any event be held at no longer intervals than stated in the Contract Data, up to Completion of the whole of the works. Clause 15.2 now states that Subcontractors should attend early warning meetings if their attendance would assist in deciding the actions to be taken, which reflects the fact that Subcontractors often attended risk reduction meetings under NEC3 anyway. Clause 15.4 requires the Project Manager to issue the revised Early Warning Register within one (1) week of the early warning meeting. Clause 16 - Contractor's Proposals Clauses 16.1 and 16.2 are new provisions which introduce, in effect, a formal value engineering procedure. The Contractor (not just the Project Manager) can now propose changes to that part of the Scope that was provided by the Client (as opposed to Scope provided by the Contractor). Under clause 16.1, the Contractor can propose to the Project Manager that the Scope should be changed to reduce the amount paid to the Contractor. The Project Manager is then obliged to consult with both the Contractor and the Client about the Contractor s proposed change. Under clause 16.2, the Project Manager must respond to the proposal, either by accepting or rejecting it, or by informing the Contractor that the Client is considering the proposal. The Project Manager may instruct the Contractor to submit a quotation for a proposed instruction to change the Scope. If a change proposed by the Contractor in terms of clause 16.1 is accepted and an instruction to change the Scope is issued by the Project Manager under clause 16.2, this instruction would be a compensation event, with potential savings being shared between the Parties. Under main Options A and B, this is achieved by clause 63.12, which states that if there is a reduction in the total Defined Cost, the Prices would be reduced by an amount calculated by multiplying the assessed effect of the compensation event by the value engineering percentage (which should be defined in the Contract Data, with a default position of 50%). So depending on the level of the value engineering percentage, the Prices would be reduced by some (but not all) of the saving, with the Contractor benefitting accordingly. Under main Options C and D, the Prices remain the same in terms of clause which helps to protect the Contractor but there is a potential for the Parties to share any saving, under clause 54. It should be borne in mind that clause 16 is aimed at value engineering in relation to the amount to be paid to the Contractor for Providing the Works. Value engineering in relation to whole life costs is covered by new secondary Option X21 (see below). Clause 16.3 deals with the Contractor s proposals for adding an area to the Working Areas, and simply mirrors clause 15.1 of NEC3. Clause 17 (Requirements for Instructions) In NEC3, clause 17.1 was titled Ambiguities and Inconsistencies. Under clause 17.1 of NEC4, the Project Manager is required to state (instead of instruct ) how an ambiguity or inconsistency in or between the contract documents should be resolved. It is not entirely clear how clause 17.1 will operate in practice. What is the effect of a statement, as opposed to an instruction?

6 5 Some observers have suggested that from the Contractor s perspective, the safest answer is to assume that under NEC4, the risk of ambiguities and discrepancies in or between the contract documents will lie with the Contractor. That does not however seem correct given that certain changes, e.g. to the Scope, may well constitute a compensation event, in which case clause would come into play; furthermore, in some scenarios (e.g. a contract where the Contractor has only limited design responsibility) it would not seem appropriate for the Contractor to bear the risk. According to Volume 4 of the NEC guidance on NEC4, where the Project Manager does not have the power to change the relevant contract document (e.g. where the change would be to a document other than the Scope or to a Key Date under clause 14.3 or to the Bill of Quantities under clause 60.6 of Options B or D), all the Project Manager can do is to inform the Parties as to how the contract should be changed; the Parties would then have to agree what to do. This does seem logical but the drafting of clause 17.1 itself is somewhat opaque and would benefit from being redrafted to more clearly set out the process. Clause 18 (Corrupt Acts) Clause 18.1 contains a new requirement stating that the Contractor must not do a Corrupt Act. Corrupt Act is defined as offering, promising, giving, accepting or soliciting an advantage as an inducement for an action which is illegal, unethical or a breach of trust, or abusing any entrusted power for private gain, in connection with the contract (or any other contract with the Client). Most non-nec contracts in the UK would expressly mention the Bribery Act 2010 in this connection, but in keeping with NEC s aim of being an international contract, the core clause is not specific to any particular jurisdiction. The definition of Corrupt Act is however fairly wide and many users will be satisfied with it as it stands. Interestingly, although the definition refers to accepting an inducement, only the Contractor (and not the Client) is prohibited by clause 18 from committing a Corrupt Act. The Contractor is also obliged to take action to stop a Corrupt Act of a Subcontractor or supplier of which it is or should be aware, and to include equivalent provisions to clause 18 in its subcontracts and contracts for the supply of Plant and Materials and of Equipment. Clause 18 is supported by new clause 91.8, which allows the Client to terminate the Contractor s engagement if the Contractor commits a Corrupt Act, unless it was done by a Subcontractor or supplier and the Contractor either was not aware (and should not have been aware) of the Corrupt Act, or if the Contractor informed the Project Manager of the Corrupt Act and took action to stop it as soon as the Contractor became aware of it. Clause 22 (Using the Contractor s Design) Clause 22.1 of NEC4 has been expanded so that the Client is entitled to use and copy the Contractor s design for other purposes as stated in the contract, not just other purposes as stated in the Works Information (as it was under clause 22.1 of NEC3). Clause 22.1 also requires the Contractor to obtain from Subcontractors equivalent rights for the Client to use material prepared by Subcontractors. Given the risk that the subject matter of clause 22 will not be dealt with adequately elsewhere in the contract, it is disappointing that core clause 22 was not expanded further to expressly cover (for example) the use and copying of the Contractor s designs and documents in connection with the advertisement or sale of the works, or (more importantly) to expressly require that the IPR licence carries the right to grant sub-licences, plus the right to transfer the IPR licence to third parties, as is usually required in the marketplace. This is a missed opportunity by the drafters of NEC4 and will make it more likely that Clients continue to amend clause 22 by way of Z clauses, despite the introduction of NEC4. Clause 26 (Subcontracting) Clause 26.2 has been expanded, in that as well as prohibiting the appointment of a Subcontractor until the identity of the Subcontractor has been accepted by the Project Manager, the Contractor should not engage a Subcontractor until the Project Manager has accepted the proposed subcontract documents,

7 6 to the extent required by the conditions of contract. Under clause 26.3, the Contractor must submit the proposed subcontract documents, other than pricing information, unless the proposed subcontract is an unamended NEC contract (except where amendments were made in accordance with any Z clauses under the NEC4 main contract), or unless the Project Manager has agreed that no submission was required. This goes beyond the equivalent provision in clause 26.3 NEC3, which required the submission only of the conditions of contract for the proposed subcontract, as opposed to submission of the subcontract documents in their entirety. Some users of NEC4 are likely to find this procedure somewhat cumbersome in practice. Clause 28 (Assignment) New core clause 28.1 requires both Parties to notify the other Party if they intend to transfer the benefit of the contract or any rights under it. There is no restriction on any transfer by the Contractor, but the Client may not transfer a benefit or right if the party receiving the benefit or rights does not intend to act in a spirit of mutual trust and cooperation. This is a highly unusual and off market formula for what should have been a very straightforward and relatively uncontroversial clause. Not only is there no restriction on the Contractor s right to assign, but it is strange to constrain the Client s right to assign in this manner. I expect that many Clients will simply delete clause 28 by way of a Z clause and replace it with a more standard provision, allowing e.g. an unqualified right to the Client to assign its rights under the contract to its funders. Clause 29 (Disclosure) New core clause 29.1 provides that neither Party may disclose information obtained in connection with the works except when necessary to carry out their duties under the contract. Clause 29.2 states that the Contractor may only publicise the works with the Client s agreement. These new clauses are however so brief that they are unlikely to satisfy any Party in receipt of legal advice. For example, most lawyers would wish to carve out disclosures that were required by law; by a ruling of a competent court; under the rules of stock markets; to legal, accountancy and insurance advisers; and information already in the public domain through no fault of the disclosing party. Again it is disappointing that what should have been a simple and uncontroversial provision is likely to generate another avoidable Z clause. Clauses 31 and 32 (Programme) Clause 31.2 of NEC has always been very demanding in terms of the sheer amount of detail that must be included in the programmes submitted by the Contractor for acceptance by the Project Manager. There is a new requirement in clause 31.2 of NEC4 whereby a programme submitted for acceptance should be in the form stated in the Scope. If there is a mismatch between the Scope and clause 31, it is not entirely clear how this new wording ties in with the preceding bullet points in clause 31.2, which would presumably need to be satisfied too. One of the key problems with NEC3 in practice is that the compensation event regime does not work properly if there is no Accepted Programme in place. That could occur because the Project Manager was overwhelmed with the sheer volume of compensation events, and/or because the Project Manager either rejected the Contractor s submitted programme, or simply failed to respond at all. To help address this problem, an addition has been made by NEC4 to clause 31.3, whereby if the Project Manager does not notify acceptance or non-acceptance of the Contractor's programme within two (2) weeks of submission, the Contractor may notify the Project Manager of that failure. If the Project Manager has still not responded by the expiry of a further one (1) week after the Contractor s notification, the programme is to be treated as having been accepted by the Project Manager. This is a welcome development because the compensation event regime is so heavily reliant on there being an Accepted Programme in place. It should be noted, however, that there is still considerable scope for the Contractor s programme to be rejected, simply because of the wide range and extent of information that under clause 31.2 must be contained in programmes submitted for acceptance. There

8 7 is also the point that if a poorly-developed programme is treated as having been accepted by the Project Manager because of the new wording of clause 31.3, that would not be particularly helpful for the project either though that is an issue for the Client to address in its relationship with the Project Manager. Separately, under NEC4, clause 32.1 has been amended so that the revised programmes submitted by the Contractor need not show the effects of implemented compensation events. The drafters of NEC have stated that this amendment was made to avoid any potential misunderstanding that nonimplemented compensation events are excluded from the programme (which they consider is not the case). Clause 31.2 still requires the programme to show the order and timing of the operations which the Contractor plans to do in order to Provide the Works, which the NEC guidance indicates should cover all works, whether introduced as compensation events or otherwise. Clause 34.1 (Instructions to Stop or Not to Start Work) Under clause 34.1 of NEC3, the Project Manager was entitled to instruct the Contractor to stop or not to start any work, and was thereafter entitled to instruct the Contractor to re-start or start that work. Clause 34.1 has been expanded under NEC4 so that the Project Manager is actually required to give a subsequent instruction to the Contractor to re-start or start that work, or to remove the work from the Scope. Any such removal would usually constitute a compensation event that would be assessed in the normal manner under clause 60. Although clause 34.1 does not specify a deadline for when the Project Manager must subsequently give an instruction to re-start, start or omit the work, under clause 91.6 either Party can terminate the Contractor s engagement if an instruction has not been issued within thirteen (13) weeks of the original instruction to suspend. Accordingly, clause 91.6 effectively provides a longstop for the purposes of clause Clause 36 (Acceleration) In addition to the new value engineering provisions under clause 16 (Contractor s Proposals), clause 36 has been amended to allow either the Contractor or the Project Manager to propose an acceleration of the works under clause 36.1, with a view to achieving Completion prior to the current Completion Date. If both the Project Manager and the Contractor are prepared to consider the proposed acceleration, the Project Manager will instruct the Contractor to provide a quotation, which must be done within three (3) weeks of the instruction. (Under NEC3, the Contractor s quotation had to be provided within the period for reply, which was a variable period.) The Contractor s quotation should include the Contractor s proposed change to the Prices and a revised programme showing the earlier Completion Date and the revised Key Dates. If the Contractor s quotation is accepted, the Prices, Key Dates and Completion Date are changed, and the revised programme is accepted by the Project Manager, as was the case under NEC3. Clause 40 (Quality Management System) The name of Section 4 has changed from Testing and Defects to Quality Management. A new clause 40 (Quality Management System) has been inserted, requiring the Contractor to operate a quality management system which complies with the requirements stated in the Scope. Under clause 40.2, the Contractor must submit a quality policy statement and a quality plan to the Project Manager for acceptance. The Project Manager can reject either of these if it does not allow the Contractor to Provide the Works (i.e. to do what is required by the contract). If the Project Manager instructs the Contractor to correct a failure to comply with the quality plan, that instruction is not a compensation event. Interestingly, clause 40 refers to the Project Manager rather than the Supervisor. Under the rest of Section 4 of NEC4, which deals with tests, inspections and defects, it is the Supervisor rather than the Project Manager who is involved in many of the technical aspects.

9 8 Section 5 - Payment Please note that the sub-headings below do not appear in NEC4 and are included here for convenience only. Clause 50.1 (Assessments by the Project Manager) Under clause 50.1 of NEC4, the Project Manager s assessments are required at the end of each assessment interval (e.g. a calendar month) up to when the Supervisor issues the Defects Certificate or when the Project Manager issues a termination certificate. Under NEC3, assessments were required until four weeks after the issue of the Defects Certificate and at Completion of the whole of the works. In relation to the final amount due under the contract, please see below under clause 53. Clause 50.2 (Applications for Payment) NEC3 was not entirely in keeping with the market norm, in that NEC3 did not require the Contractor to submit an application for payment as a pre-condition to the assessment by the Project Manager of amounts due to the Contractor. Clause 50.4 of NEC3 did state that in assessing the amount due, the Project Manager was obliged to consider any application for payment made by the Contractor but that fell short of a concrete requirement for a payment application. This has been addressed in NEC4, where clause 50.2 requires the Contractor to submit an application for payment to the Project Manager, before each assessment date, setting out the amount that the Contractor considers is due at the assessment date. Clause 50.2 goes on to state that the Contractor s application for payment must be in the form stated in the Scope and must include details of how the Contractor assessed the amount in its application. The Project Manager is obliged to consider any application for payment submitted by the Contractor before the assessment date. Clause 50.3 (Amount due if an Application for Payment is Submitted) Clause 50.3 (like the corresponding clause 50.2 in NEC3) is the key provision that determines the amount due at the assessment date i.e. the Price for Work Done to Date, plus other amounts to be paid to the Contractor, less amounts to be paid by or retained from the Contractor. Importantly, though, in NEC4, clause 50.3 is now prefaced with the words If the Contractor submits an application for payment before the assessment date. Clause 50.4 deals with the amount due where the Contractor fails to submit its application for payment before the assessment date (please see below). It should be noted that the previous wording at the end of clause 50.2 of NEC3, relating to tax being included in the amount due, has been deleted. New clause 51.5 of NEC4 provides that any tax which the law requires a Party to pay to the other Party is added to any payments made under the contract. The old clause 50.2 wording of NEC3 was potentially problematic and gave rise to some concerns, and clause 51.5 of NEC4 is a step forward in that regard. Clause 50.4 (Amount due if an Application for Payment is not Submitted) Clause 50.4 deals with the situation where the Contractor fails to submit its application for payment before the assessment date. In that situation, the amount due is the lesser of (a) the amount the Project Manager s assesses is due at the assessment date assessed as though the Contractor had submitted an application before the assessment date and (b) the amount due at the previous assessment date. The meaning of (a) is somewhat confusing, and since (b) will apply in most cases, one wonders if (a) could have been omitted for clarity - perhaps with some additional wording to allow a deduction where amounts to be paid by or retained from the Contractor could reduce the amount due at the previous assessment date (e.g. because defects in the work done have since been identified). Either way, clause 50.4 does incentivise the Contractor to submit applications for payment in accordance with the contract.

10 Clause 50.9 (Assessing the Amount due in Options C, D, E and F) 9 In those main Options in which (broadly speaking) the Contractor is paid Defined Cost for the works (i.e. main Options C, D, E and F), NEC4 includes a new clause Under clause 50.9, the Contractor is required to notify the Project Manager when a part of Defined Cost has been finalised and to make its records available for inspection, to demonstrate that the part of Defined Cost has been correctly assessed. The Project Manager is then required to review those records and to issue its response to the Contractor within thirteen (13) weeks. If the Project Manager identifies errors in the Contractor s assessment or requests further records, the Contractor has to correct those errors or submit additional records within four (4) weeks. The Project Manager then has a further period of four (4) weeks within which to respond. Importantly, clause 50.9 contains a deemed acceptance provision. If the Project Manager fails to notify its decision on the relevant part of Defined Cost within the time stated, the Contractor s assessment of Defined Cost is treated as correct. This process is likely to be helpful to the smooth running of projects, because the parties are encouraged to assess Defined Cost during the course of the works rather than waiting until the works are finished - by which time many of the people involved in the project (throughout the supply chain) may have moved on to pastures new. It also helps to reduce a potential risk for the Contractor that existed under NEC3, whereby the Project Manager could, in principle, disallow costs long after the Contractor had paid its subcontractors and suppliers in respect of the relevant part of the works. In that situation, the Contractor (faced with a reduction in or repayment of Defined Cost under the main contract) would almost certainly have great difficulty in recovering the corresponding amounts under its subcontracts and supply orders. From the Client s perspective, though, unlike other deemed acceptance procedures under NEC4, there is no requirement for the Contractor to notify the Project Manager of its failure to issue a decision before the Contractor s assessment is treated as correct. Some Clients may wish to insert such a requirement into clause 50.9 via Z clauses, though the purist might argue that a competent and efficient Project Manager should have no difficulty in responding within the stipulated time limits. Clause 51.1 (Payment Certificates) Core clause 51.1 of NEC4 is largely unchanged from NEC3, but now includes a requirement that payment certificates issued by the Project Manager should include details of how the amount due has been assessed. (In the UK, most NEC4 contracts will be subject to Part II of the HGCRA 1996, as amended, so Option Y(UK)2 will have been selected. Clause Y2.2 contains the usual HGCRA requirements for payment certificates.) Clause 53 (Final Assessment) NEC4 now includes a more formal final account type procedure in Clause 53 (Final Assessment), which brings NEC more into line with other standard forms of construction contract. Clause 50.1 of NEC3 did provide for an assessment around four weeks after the issue of the Defects Certificate but NEC3 lacked the finality provisions of NEC4. The new provisions are detailed below. Clause 53.1 Under clause 53.1, the Project Manager is required to make an assessment of the final amount due, and to certify a final payment, no later than four (4) weeks after the Supervisor issues the Defects Certificate (or, if termination has occurred, no later than thirteen weeks after the Project Manager issued a termination certificate). The final payment should then be made three (3) weeks after the assessment, unless a different period is stated in the Contract Data. Clause 53.2 If the Project Manager fails to assess the final amount due as required by clause 53.1, the Contractor can issue its own assessment of the final amount due.

11 10 If the Client agrees with the Contractor s assessment, the final payment should then be made within the same timescales as under clause Clause 53.3 Clause 53.3 of NEC4 provides that an assessment of the final amount due, that is issued within the time stated in the contract, will be conclusive evidence of the final amount due under or in connection with the contract unless it is referred to the appropriate dispute resolution procedure. The process varies depending on whether dispute resolution Option W1, W2 or W3 has been selected. If Option W1 is included in the contract, to prevent the assessment of the final amount due becoming conclusive, a Party must: refer the dispute to the Senior Representatives within four (4) weeks of the assessment being issued, refer any issues not agreed by the Senior Representatives to the Adjudicator within three (3) weeks of the list of not agreed issues being produced (or when that list should have been produced), and refer to the tribunal its dissatisfaction with the Adjudicator s decision within four (4) weeks of that decision being made. If Option W2 is included in the contract, which will be the most common scenario in UK NEC4 contracts, to prevent the assessment of the final amount due becoming conclusive, a Party must: refer the dispute to the Senior Representatives or to the Adjudicator within four (4) weeks of the assessment being issued, refer any issues referred to but not agreed by the Senior Representatives to the Adjudicator within three (3) weeks of the list of not agreed issues being produced (or when that list should have been produced), and refer to the tribunal its dissatisfaction with the Adjudicator s decision within four (4) weeks of that decision being made. If Option W3 is included in the contract, to prevent the assessment of the final amount due becoming conclusive, a Party must: refer the dispute to the Dispute Avoidance Board, refer to the tribunal its dissatisfaction with the recommendation of the Dispute Avoidance Board within four (4) weeks of that recommendation being made. Clause 53.4 To complete the final account process, clause 53.4 states that the assessment of the final amount due will be changed to reflect any agreement reached by the Parties, and a decision of the Adjudicator or recommendation of the Dispute Avoidance Board which has not been referred to the tribunal within four (4) weeks of the decision or recommendation being made. That changed assessment will then become conclusive evidence of the final amount due under or in connection with the contract. Section 6 (Compensation Events) Clause 60.1(20) NEC4 includes a new compensation event, namely where the Project Manager notifies the Contractor that a quotation for a proposed instruction has not been accepted. This seems like a fair amendment to make, and will be a welcome change for Contractors who under NEC3 had to prepare such quotations entirely at their own cost. It always seemed somewhat inequitable that Contractors were not reimbursed this type of cost under NEC3. New clause 60.1(20) should also discourage Clients and their Project Managers from issuing an excessive number of requests for quotations, given that there will now be a cost and potentially a time - consequence for the Client of doing so.

12 11 Clause 60.1(21) NEC4 now includes the potential for additional compensation events, over and above those already listed in clause 60.1(1) to (20), to be added into the Contract Data part one. Interestingly, this facility previously existed in the June 2005 edition of NEC before it was deleted by the June 2006 Amendments. The difficulty with the June 2006 Amendment was that if an Employer wished to adjust the risk profile to reflect additional, project-specific compensation events, it was necessary to do so by way of Z clauses. (Rather strangely, the Contract Data part one in NEC3 did allow additional Employer s risks to be added which would then constitute compensation events by virtue of clause 60.1(14) but it did not cater for matters that would constitute compensation events without being Employer s risks.) Clause 60.1(21) of NEC4 will again allow additional compensation events to be built into the contract simply by completing the Contract Data part one accordingly. This is a welcome improvement on NEC3. Clauses 61.1 and 61.2 Clause 61.1 of NEC3 has been split up into two clauses in NEC4, namely clauses 61.1 and Clause 61.1 simply requires the Project Manager or Supervisor to notify a compensation event at the time of the relevant communication, where the compensation event arises from the Project Manager or Supervisor giving an instruction or notification, issuing a certificate or changing an earlier decision. By virtue of clause 13.7, that notification should be issued separately from the communication itself. Clause 61.2 requires the Project Manager to include in its notification under clause 61.1 an instruction to the Contractor to submit a quotation, unless the event arises from the fault of the Contractor, or has no effect upon Defined Cost, Completion or meeting a Key Date. It is not immediately clear what should happen if the Contractor is of the view that the event will in fact have an effect upon Defined Cost, Completion or meeting a Key Date; in some instances it may be that the Contractor will be better placed than the Project Manager to make this judgement, so the revised wording of clause 61.2 may be an issue in practice. Clause 61.3 Under clause 61.3, the Contractor is obliged to notify the Project Manager of an event which has happened or is expected to happen as a compensation event if the Contractor believes that the event is a compensation event and the Project Manager has not already notified that event to the Contractor. Clause 61.3 goes on to set out the well-known time bar provision, which provides that unless the Contractor notifies a compensation event within eight (8) weeks, the Prices, Completion Date and Key Date(s) are not changed. There are two changes worthy of note in the revised clause The time bar provision continues to carve out certain matters. Under NEC3, the carve out covered the Project Manager or Supervisor giving an instruction, issuing a certificate, changing an earlier decision or correcting an assumption. Under NEC4, the carve out has changed slightly, and relates to the Project Manager or Supervisor giving an instruction or notification, issuing a certificate or changing an earlier decision. The correction of assumption is something that should be notified (under clause 61.6) so there is no need to expressly mention assumptions in clause Under NEC3, the 8 week period was measured from the Contractor becoming aware of the event. Under NEC4, the 8 week period is measured from the Contractor becoming aware that the event has happened. This may seem like a fine distinction but it is likely to be scrutinised closely during any disputes. Clause 61.4 Clause 61.4 of NEC4 has been re-ordered relative to NEC3 and interestingly there is now a new reason for the Project Manager declining to grant time or money. If the event notified by the Contractor was not notified within the timescales set out in the conditions of contract, there will be no change to the Prices, Completion Date or Key Dates. The grounds for declining to change the Prices, Completion Date or

13 12 Key Dates also appear to be purely a factual matter rather than something decided by the Project Manager, unlike clause 61.4 of NEC3. Clause 61.7 The time period for either the Project Manager or the Contractor notifying a compensation event has also been extended in clause 61.7, from the defects date to the issue of the Defects Certificate. Clause 63 (Assessing Compensation Events) Clause 63.1 Clause 63.1 is a crucial clause in NEC because it sets out the basis on which changes to the Prices are assessed. (It should be borne in mind that the Prices are not necessarily what the Contractor will be paid; the key expression on that point is the Price for Work Done to Date). In NEC4, clause 63.1 has been amended to incorporate the concept of a dividing date. (NEC3 practitioners often called it the switch date but NEC have chosen a different expression.) Clause 63.1 reflects the same terminology as for 61.3 where it states that where a compensation event arises from the Project Manager or the Supervisor giving an instruction or notification, issuing a certificate or changing an earlier decision, the dividing date will be the date of that communication. For other compensation events, the dividing date will be the date of notification of the compensation event. The concept of a dividing date is important because under clause 63.1 of NEC4, the change to the Prices is assessed as the effect of the compensation event on: the actual Defined Cost of the work already done by the dividing date the forecast Defined Cost of the work not done by the dividing date, and the resulting Fee. Although the terminology and structure of clause 63.1 in NEC4 has changed somewhat from NEC3, the basic effect would appear to be unchanged. The concept of forecasting an effect on Defined Cost has always seemed potentially problematic in circumstances where a compensation event is being assessed after the work in question has been done. The NEC wording would appear, in effect, to require a retrospective forecast in respect of at least some of the impact on Defined Cost, which is a difficult concept. This issue arose, in the context of an NEC3 Professional Services Contract, in the Northern Irish case of Northern Ireland Housing Executive v. Healthy Buildings (Ireland) Limited [2017] NIQB 43. The Case of Northern Ireland Housing Executive v. Healthy Buildings (Ireland) Limited The Healthy Buildings case related to two separate Asbestos Surveying Services Contracts in the form of the NEC3 Professional Services Contract (June 2005 with June 2006 amendments) ( PSC ), where the assessment of a compensation event was in dispute. Although two contracts were involved, it was agreed that the two contracts were effectively identical for the purposes of the case. The questions for determination by the High Court of Justice were whether (1) on a true construction of clauses 60 to 65 of the PSC, the assessment should be calculated by reference to the forecast Time Charge or the actual cost incurred by the Consultant, and (2) whether actual costs were relevant to the assessment process in clauses 60 to 65 of the PSC. Although the case related to the pre-april 2013 NEC3 PSC rather than the ECC, the wording of clause 63.1 is similar in both forms of contract. It was held that where compensation events were assessed after the relevant work had been completed, as was the situation here, the assessment should proceed on the basis of the best information available regarding the actual costs and time incurred, as opposed to a true forecast. The judge said that to give an efficacious and business-like interpretation to the contract a quotation which arises in those

14 13 circumstances, rather than as a genuine forecast, ought to be informed by the best information available as to the actual time and cost incurred as a result of the instruction.. it [would be] a strained and unnatural interpretation of the contract to rely on the word forecast in Clause 63 to prevent access to the best evidence in a situation such as this, where the forecast is in reality a claim for work that has been done by the time of the quotation. The Court also commented that a refusal by the Consultant to provide time sheets and records for work done would be contrary to the mutual trust and cooperation requirements of clause It remains to be seen whether this decision will be followed elsewhere and if so, whether the concept of a dividing date under NEC4 will have any material impact. It may be significant that in the Healthy Buildings case, (1) the Court was, by virtue of clause W2.4(3), able to look at information or evidence concerning actual costs that had not previously been available to the Adjudicator, and (2) the contractual procedure had not been followed by the Employer, who had failed to give timeous notice that its instruction constituted a compensation event and sought quotations some months after that instruction. There may be a concern that Clients will encourage their Project Managers to delay the assessment of compensation events in order to try to save money by waiting until actual costs are known, rather than operating mainly on the basis of forecasts in accordance with the NEC philosophy. The timescales in NEC4 could allow that to happen without the Client being in breach, depending on the nature and duration of a compensation event. It may also be significant that the wording in clause 65.2 of NEC3 has been amended see now NEC4 clause 66.3 (mentioned below). Clause 63.2 New core clause 63.2 states that the Project Manager and the Contractor may agree rates or lump sums to assess the change to the Prices. Clause 63.4 New core clause 63.4 provides for the reduction of the Prices as a result of certain compensation events. Clause 63.5 While clause 63.1 deals with the money effect of compensation events, clause 63.5 covers the time impact. Clause 63.5 is similar to the corresponding NEC3 provision (clause 63.3), except that NEC4 clause 63.5 brings in the concept of the dividing date. Instead of referring simply to the impact of the compensation event on planned Completion as shown on the Accepted Programme, NEC4 refers to the Accepted Programme current at the dividing date. This could be controversial in certain circumstances, since by the time a compensation event is assessed, a more up to date (and more representative) Accepted Programme might be in place. Clause 63.5 goes on to state that only those operations which the Contractor has not completed and which are affected by the compensation event are changed. This is a factual matter, so if (for example) the relevant Accepted Programme indicates that a particular operation was complete, but it was not in fact complete, then this should be taken into account when the time impact of the compensation event is assessed. Clause 63.8 Clause 63.8 of NEC4 (which corresponds to clause 63.6 of NEC3) provides that the assessment of the effect of a compensation event should include a risk allowance for matters which have a significant chance of occurring and are not compensation events. No doubt this amendment has been made to reflect the new wording of Section 8 (see below); in NEC3, this provision referred to matters which were at the Contractor s risk under the contract. Clause 64.2 Clause 64.2 of NEC4, which deals with the Project Manager s assessment of the programme for the remaining work, has been expanded so that the Project Manager will assess the compensation event if