Course agenda. Course agenda. NEC3: Introduction to the Engineering and Construction Contract (ECC)
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1 NEC3: Introduction to the Engineering and Construction Contract (ECC) Course agenda Welcome and Introductions Session 1 elearning review Session 2 the ECC system and contract strategy the Options Session 3 General provisions and Contractor s main responsibilities Session 4 Time, testing and Defects Course agenda Session 5 Payment Session 6 - Compensation events Session 7 Other aspects of the ECC Session 8 Summary & open forum NEC3: Introduction to the Engineering & Construction Contract nec 04/2013 1
2 Course objectives Delegates should: Understand the philosophy of NEC Develop skills to advise on appropriate contract strategies Appreciate the use of Contract Data, Works Information and Site Information Course objectives Delegates should: Understand roles and responsibilities of key parties Understand important ECC clauses in particular early warning, programme, Risk Register, communications and compensation events Understand how to apply ECC in practice and achieve satisfactory solutions to problems Session 1 elearning review Recap of key points NEC characteristics stimulates good management flexible clear and simple NEC family for procurement of goods, works and services NEC3: Introduction to the Engineering & Construction Contract nec 04/2013 2
3 NEC family Project Manager PSC or PSSC Employer Adjudicator AC Designer PSC or PSSC Supervisor PSC or PSSC Contractor ECC Typical Employer designed arrangement Subcontractor ECS or ECSS Supplier SC or SSC NEC family Project Manager PSC or PSSC Employer Adjudicator AC Supervisor PSC or PSSC Contractor ECC Typical design & build arrangement Subcontractor ECS or ECSS Designer PSC or PSSC Supplier SC or SSC Session 2 The ECC system and contract strategy the Options The Option structure is modular in form with 5 modules, normally chosen by the Employer ALWAYS have the core clauses and Schedules of Cost Components Choose ONE main Option clause (A to F) which decides the mechanism for payment Choose ONE dispute resolution Option clauses (W1 or W2) Choose as many secondary Option clauses as required (prefixed X or Y) Add any additional clauses (prefixed Z) NEC3: Introduction to the Engineering & Construction Contract nec 04/2013 3
4 ECC structure Core clauses 1 General 2 The Contractor s main responsibilities 3 Time 4 Testing and Defects 5 Payment 6 Compensation events 7 Title 8 Risks and insurance 9 Termination ECC structure Main Option clauses are as follows: A - Priced contract with activity schedule B - Priced contract with bill of quantities C - Target contract with activity schedule D - Target contract with bill of quantities E - Cost reimbursable contract F - Management contract ECC structure Activity schedule (Option A) Lump sum contract Project well defined at tender Activities generally defined by Contractor Activities priced by Contractor Payment on completion of defined activities Milestone payments by grouping activities NEC3: Introduction to the Engineering & Construction Contract nec 04/2013 4
5 ECC structure Bill of Quantities (Option B) Project well defined at tender but change likely Standard method of measurement used Contractor prices items in BOQ at tender stage Contractor paid for quantity of work completed Original work is re-measured (but not necessarily changes) ECC structure Target cost contracts (Options C & D) Work must be adequately defined to establish target Target cost set by activity schedule (C) or bill of quantities (D) Contractor tenders Fee (2 types) Target moves with compensation events (Options C & D) and remeasurement (Option D) Contractor gets paid forecast Defined Cost + Fee Contractor is paid or pays a share of the difference between total costs and final target ECC structure Cost reimbursable contract (Option E) Used on emergency works, where scope undefined, experimental, research work Contractor tenders Fee (2 types) Contractor gets paid forecast Defined Cost + Fee Contractor has no financial risk (except adequacy of Fee) NEC3: Introduction to the Engineering & Construction Contract nec 04/2013 5
6 ECC structure Management contract (Option F) Contractor generally organises work only Most work carried out by Subcontractors Contractor tenders prices (lump sum) and Fee (2 types) Contractor gets paid forecast Defined Cost + Fee Contractor has limited financial risk, except for adequacy of Fee and prices for work he does himself ECC structure Employer E F C D B Financial risk of main Options A Contractor ECC structure Secondary Option clauses X1 - Price adjustment for inflation X2 - Changes in the law X3 - Multiple currencies X4 - Parent company guarantee X5 - Sectional Completion X6 - Bonus for early Completion X7 - Delay damages X12 Partnering X13 - Performance bond X14 - Advanced payment to the Contractor NEC3: Introduction to the Engineering & Construction Contract nec 04/2013 6
7 ECC structure Secondary Option clauses X15 - Limitation of the Contractor s liability for his design to reasonable skill & care X16 - Retention X17 - Low performance damages X18 Limitation of liability X20 Key Performance Indicators Y(UK)1 Project Bank Account Y(UK)2 The Housing Grants, Construction and Regeneration Act 1996 Y(UK)3 The Contracts (Rights of Third Parties) Act 1999 Z - Additional conditions of contract Other ECC contract documents Contract Data (CD) parts 1 & 2 details specifics see generic CD included in packs Prices depends on main Option chosen include activity schedule or bill of quantities Works Information (WI) specifies and describes the works and states any constraints mainly specification and drawings Supplied by Employer or Contractor (for his design) Site Information describes the Site and its surroundings Others eg programme, performance bond Session 3 General provisions and Contractor s main responsibilities General provisions Actions Identified and defined terms Communications Project Manager and Supervisor Early warning Contractor s main responsibilities Providing the Works Contractor s design People Working with the Employer and Others Subcontracting NEC3: Introduction to the Engineering & Construction Contract nec 04/2013 7
8 General provisions Actions (10.1) Act as stated in this contract obliges persons to do everything the contract states Act in a spirit of mutual trust and co-operation recommended in Latham Report underpins all NEC contracts legal interpretation? enforceability? Covers obligations and attitude General provisions Identified terms in Contract Data in italics Defined terms, capitalised and in 11.2 (2) Completion (certainty of requirements) (5) Defect (two types) (7) Equipment (8) Fee (covers all costs not in Defined Cost (52.1)) (12) Plant and Materials (14) Risk Register (17) Subcontractor General provisions Communications (13) Must be in a form that can be read, copied & recorded See example forms in packs Replies within period for reply or as in contract Notifications to be communicated separately NEC3: Introduction to the Engineering & Construction Contract nec 04/2013 8
9 General provisions Project Manager and Supervisor (14) Project Manager (PM) manages ECC for Employer PM has a great deal of authority PM must be even handed in matters such as assessing payment PM is only person who can instruct changes to WI PM constrained by need to give reasons if rejects a Contractor s submission if not in contract then Contractor is compensated Supervisor is checking Contractor s compliance with the WI General provisions Acceptance of any communication (programme, design etc) by the PM or Supervisor does not change the Contractor s responsibility to Provide the Works or liability for his design (14.1) PM or Supervisor may delegate any actions (14.2) General provisions Early warning (16) - a vital part of ECC Contractor and PM have a duty to notify the other as soon as they are aware of a matter which could increase the total of the Prices delay Completion, delay meeting a Key Date or impair the performance of the works in use (16.1) Contractor may give an early warning by notifying PM of any other matter which could increase total cost PM enters early warning matters in Risk Register (16.1) NEC3: Introduction to the Engineering & Construction Contract nec 04/2013 9
10 General provisions Early warning (16) Either party may at any time instruct the other to attend risk reduction meeting (16.2); those attending co-operate in making and considering proposals to avoid or reduce risk, seeking solutions, deciding actions, updating Risk Register (16.3) PM revises Risk Register to record decisions and issues (16.4) Encourages collaboration, innovation and ability to adjust to circumstances during the contract Contractor s main responsibilities Providing the Works (20) Contractor Provides the Works in accordance with the WI Contractor s design (21) Contractor designs the parts of the works which the WI states he is to design Default is Employer design Design acceptance before proceeding Reasons for not accepting design Contractor s main responsibilities People (24) Contractor employs each key person stated in Contract Data or Employs replacement person accepted by PM Reasons for not accepting (24.1) PM may instruct removal of persons (24.2) NEC3: Introduction to the Engineering & Construction Contract nec 04/
11 Contractor s main responsibilities Working with Employer and Others (25) Multi-contract projects are coordinated through use of Key Dates, by which stated conditions have to be met If the PM decides (25.3) work does not meet Condition stated for a Key Date by the date stated and Employer incurs additional cost additional cost paid by the Contractor Optional no obligation to use Key Dates Contractor s main responsibilities Subcontracting (26) If subcontracts, Contractor still responsible for Providing the Works (26.1) Contractor submits name of each proposed Subcontractor to PM for acceptance (26.2) proposed subcontract conditions unless NEC contract is proposed or PM agrees no submission required (26.3) proposed contract data (26.4, Options C to F) Session 4 Time, testing and Defects Time Starting, Completion and Key Dates Programme Testing and Defects Searching for and notifying Defects Correcting Defects Accepting Defects Uncorrected Defects NEC3: Introduction to the Engineering & Construction Contract nec 04/
12 Time Starting, Completion and Key Dates (30) Contractor does not start work on Site until first access date (30.1) & does work so that Completion is on or before Completion Date PM decides date of Completion & certifies (30.2) Contractor does work so that Condition stated for each Key Date is met by Key Date (30.3) Completion Date can only be changed by PM as a result of compensation events, or acceleration (36) Time Take over (35) is not the same as Completion Contractor is responsible for works until take over Employer takes over within 2 weeks of Completion Employer may state in Contract Data he will not take over early, i.e. before Completion Date (35.1) Employer may take over part of works before Completion will be a compensation event if before Completion Date (60.1(15)) Time Programme (31) - very important in ECC Can be submitted with tender or post Contract Date (31.1) Accepted Programme is latest accepted by PM and includes (31.2) various key dates order and timing of operations order and timing of work of Employer and Others provisions for float, time risk allowances for each operation, a statement of how Contractor plans to do work identifying principal Equipment and resources Likely to be collection of documents which may include resource statements, information required schedules, network diagrams, bar charts Reasons for not accepting (31.3) NEC3: Introduction to the Engineering & Construction Contract nec 04/
13 neccontract.com Time Programme has to be updated regularly (32) Shows a number of things including the actual progress achieved on each operation & its effect on remaining work (32.1) How frequent? on instruction by PM when Contractor chooses interval stated in Contract Data (32.2) Testing and Defects Searching for and notifying Defects (42) Search provisions (42.1) Supervisor & Contractor notify each other of Defects they find (42.2) Correcting Defects (43) Contractor corrects notified Defects before end of defect correction period (43.2) Access required after take over to correct a Defect (43.4) NEC3: Introduction to the Engineering & Construction Contract nec 04/
14 Testing and Defects Completion defects date Defects notified: before Completion after Completion defect correction period defect correction period defect correction period before defects date Latest issue of Defects Certificate Testing and Defects Uncorrected Defects (45) Contractor pays where Contractor has not corrected Defect within defect correction period (45.1) Accepting Defects (44) Proposals that Defect not corrected (44.1) Quotation for reduced Prices and/or earlier Completion Date (44.2) Session 5 Payment Assessing the amount due Times for assessment and payment Schedule of Cost Components (SCC) Shorter Schedule of Cost Components (SSCC) NEC3: Introduction to the Engineering & Construction Contract nec 04/
15 Payment assessing the amount due PM assesses amount due at each assessment date (50.1) considers any application for payment Contractor has submitted (50.4) gives Contractor details of assessment (50.4) Assessments made at assessment interval Amount due is Price for Work Done to Date (PWDD) plus/less other amounts eg. retention, delay damages, KPIs (50.2) 1/4 PWDD retained if there is no first programme (50.3) Payment assessing the amount due - what is PWDD for each Option? Option A B C to F PWDD Total of Prices for completed activities 11.2(27) Quantities of completed work at BQ rates and proportions of lump sums 11.2(28) Defined Cost forecast to be paid before next assessment date + Fee 11.2(29) Payment assessing the amount due what is Defined Cost in Option C to F? Option C to E F Defined Cost Payments due to Subcontractors for work subcontracted and cost of components in SCC for other work, less Disallowed Cost (11.2(23)) Payments due to Subcontractors for work subcontracted and prices for work done by Contractor, less Disallowed Cost (11.2(24)) NEC3: Introduction to the Engineering & Construction Contract nec 04/
16 Payment assessing the amount due what is Disallowed Cost in Option C to F? Option Disallowed Cost C to E 11.2(25) Cost which PM decides eg - is not justified by the Contractor s accounts - should not have been paid to Subcontractor - was incurred only because Contractor did not give early warning - correcting Defects after Completion F As C to E plus 11.2(26) - payment to Subcontractor for work which CD states Contractor will do himself or Contractor s management Payment assessing the amount due what is Defined Cost in Option C to F? Defined Cost includes only amounts calculated using rates and percentages stated in the Contract Data other amounts at open market or competitively tendered prices with deductions for all discounts, rebates and taxes (52.1) Payment assessing the amount due what is the Fee in Option C to F? All Contractor s costs not included in Defined Cost are treated as included in Fee (52.1) The Fee (11.2(8)) is calculated by applying subcontracted fee percentage to Defined Cost of subcontracted work and direct fee percentage to Defined Cost of other work NEC3: Introduction to the Engineering & Construction Contract nec 04/
17 Payment times without Y(UK)2 assessment date 1 week PM certifies payment Certified payment is made 3 weeks or other period stated in CD Interest 51.2 Payment times with Y(UK)2 assessment date 7 days Y2.2 due date for payment 14 days or other period stated in CD Y2.2 final date for payment 7 days Y2.3 notice to pay less than PM s assessment Interest 51.2 Y2.4 suspension of performance of all or part of works Payment the SCC Used only in Options C to E Used for assessing both compensation events, and Price for Work Done to Date (PWDD) Contractor means the Contractor and not Subcontractors An amount is included only in one cost component and only if incurred to Provide the Works NEC3: Introduction to the Engineering & Construction Contract nec 04/
18 Payment the SSCC Used only for assessing compensation events in Options A and B in Options C to E if PM and Contractor both agree In Option A or B Defined Cost is cost of the components in the SSCC whether work is subcontracted or not 11.2(22). Therefore used to assess work carried out by Contractor and Subcontractor In Options C to E, SSCC is not used to assess work carried out by Subcontractors Amount is included only in one cost component and only if incurred to Provide the Works Payment the SCC & SSCC Components People Equipment Plant and Materials Charges Manufacture and fabrication Design Insurance Data completed in Contract Data Part 2 Session 6 - compensation events Definition Process Method of assessment Sanctions for non-compliance NEC3: Introduction to the Engineering & Construction Contract nec 04/
19 Compensation events - definition Compensation events are events which if they do not arise from Contractor s fault, entitle Contractor to be compensated for effect on the Prices, Key Dates and Completion Date Therefore it is important to remember that compensation events deal with both time and money Compensation events - definition Where are compensation events stated? 19 in subclause in main Options B & D Also in secondary Options X2, X12.3(6) & (7), X14.2, X15.2 and Y2.4 May be additional compensation events in secondary Option Z Compensation events - definition Compensation events, examples 60.1 (1) PM gives instruction changing the WI (2) Employer does not allow access to and use of part of the Site (3) Employer does not provide something (5) Default by Employer or Others (12) Contractor encounters certain physical conditions (13) A weather measurement is recorded, less frequently than once in ten year NEC3: Introduction to the Engineering & Construction Contract nec 04/
20 Compensation events - process There is a defined process to agree (or impose) the effects of a compensation event within defined time limits Notification (61) Quotation (62) Assessment (63/64) Implementation (65) Either Party can make sure that process and time scales are adhered to Compensation events - process Notification If the compensation event arises from PM or Supervisor instruction, certificate, changing decision, correcting assumption then PM notifies and instructs Contractor to provide quotation (61.1) Otherwise Contractor notifies (61.3) PM may also instruct quotation for proposed instruction (61.2) Compensation events - process Notification When Contractor notifies PM replies within one week with yes or no Answer is no if PM decides event is Contractor s fault, has not happened/will not happen, has no effect on Defined Cost or time, or is not a listed compensation event (61.4) Otherwise answer is yes and PM instructs Contractor to provide a quotation (61.4) NEC3: Introduction to the Engineering & Construction Contract nec 04/
21 Compensation events - process Quotation When instructing a quotation PM may instruct alternative quotations (after discussion with Contractor) (62.1), and/or state assumptions on which quotation is to be based (61.6), if effects are unclear Contractor provides quotation within 3 weeks (62.3), which can be extended by agreement (62.5) Compensation events - process Quotation PM replies within 2 weeks of receipt of quotation (62.3) The reply is one of following (62.3) Accept quotation Reject quotation, because it has not been prepared in accordance with contract, in which case PM must ask Contractor to provide revised quotation (with reasons), or tell Contractor he will make own assessment Note PM can t just reject Confirm that proposed instruction will not be given Compensation events - process Project Manager s assessment (64) PM makes his own assessment if Contractor has not responded within time PM decides Contractor has not assessed CE correctly No programme submitted by Contractor with quotation PM has not accepted Contractor s latest programme PM makes assessment within the time allowed for Contractor NEC3: Introduction to the Engineering & Construction Contract nec 04/
22 Compensation events - process Implementation Compensation event is implemented when PM accepts Contractor s quotation, PM notifies Contractor of own assessment, or Contractor s quotation is treated as having been accepted (65.1) Once implemented It is not reviewed if forecast is wrong (65.2) Only the Adjudicator can change it if one Party still disagrees (W1/W2) Compensation events method of assessment Change to the Prices Defined Cost of work already done forecast Defined Cost of work not yet done resulting Fee (63.1) Delay to the Completion Date length of time that, due to compensation event, planned Completion is later than planned Completion shown on Accepted Programme (63.3) Compensation events method of assessment If PM and Contractor both agree, rates and lump sums may be used as a basis for assessment (63.14 A,B,E&F, C&D) Otherwise Prices or rates in the BQ or Activity Schedule are NOT used NEC3: Introduction to the Engineering & Construction Contract nec 04/
23 Compensation events - sanctions If Contractor does not notify of CE he is supposed to (not one to be notified by PM) within 8 weeks of becoming aware of event, he loses rights to any additional time or money (61.3) If PM fails to reply to Contractor s notification of CE within 1 week, Contractor may give PM a reminder (61.4) If failure continues for a further 2 weeks after reminder, deemed that PM has accepted it is a CE & instructed a quotation to be provided (61.4) Compensation events - sanctions If PM fails within allowed time to reply to quotation (62.6), or assess quotation (64.4) Contractor may give reminder (62.6/64.4) If failure continues for a further 2 weeks after reminder, the Contractor s quotation is treated as having been accepted (62.6/64.4) Session 7 Other aspects of the ECC Title Risks & insurance Employer s risks Insurance Termination Dispute resolution NEC3: Introduction to the Engineering & Construction Contract nec 04/
24 Title Whatever title Contractor has to Plant and Materials passes to Employer when brought into Working Areas (70.2), or if they are outside the Working Areas, when they are marked by Supervisor (70.1) Objects and materials within Site (73) PM instructs how to deal with object of value or historic or other interest (73.1) Contractor has title to materials from excavation & demolition only as stated in the WI (73.2) Risks & insurance Risks & insurance 80 Employer s risks (damage and 3 rd party claims) 81 Contractor s risks (by difference) 83 Indemnity» Each party indemnifies the other» Net contribution Insurance cover 4 No Insurance policies 87 Insurance by Employer X18 Limitation of liability Termination Termination is of Contractor s obligation to Provide the Works (90.1) Contractor may terminate only for reasons in Termination Table (90.2) Employer may terminate for any reason (90.2) Stated reasons for termination (91) Procedures on termination (92) Payment on termination (93) NEC3: Introduction to the Engineering & Construction Contract nec 04/
25 Dispute resolution 2 options, W1 and W2 Choice is entered in Contract Data Part 1 W1 used unless HGCRA applies W2 used if HGCRA applies will concentrate on that Both options use adjudication as the primary means of dispute resolution Dispute resolution key points of W2 Adjudication can be at any time (W2.1(1)) Adjudicator is an independent 3 rd party who can be named in the contract, or agreed or appointed when the dispute arises (W2.2) Adjudicator has 28 days to make his decision, which can be extended by agreement (W2.3(8)) Adjudicator s decision is binding but not necessarily final (W2.3(11)) Subcontract joinder possible by agreement (W2.3(3)) Dispute resolution key points of W2 Final decision is made by tribunal named in Contract Data Part 1 Arbitration, or The courts (W2.4) Can t use tribunal until after Adjudicator makes decision (W2.4(1)) Parties have 4 weeks after decision to notify disagreement with it, otherwise becomes final as well as binding (W2.4(2)) NEC3: Introduction to the Engineering & Construction Contract nec 04/
26 Session 8 - Summary & open forum Questions and answers Were the course objectives met? Delegates should: Understand the philosophy of NEC Be able to advise on appropriate contract strategies Appreciate the use of Contract Data, Works Information and Site Information Understand the roles and responsibilities of key parties Understand important ECC clauses in particular early warning, programme, Risk Register, communications and compensation events Understand how to apply ECC in practice and achieve satisfactory solutions to problems Next steps? Further training? NEC Users Group membership? Internal NEC champion? Share best practice case studies/newsletter articles/document sharing? NEC3: Introduction to the Engineering & Construction Contract nec 04/
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