NEC: Lessons from nearly 20 years in the UK and elsewhere : implications for Hong Kong Hong Kong Institute of Surveyors, 24 April 2012

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1 NEC: Lessons from nearly 20 years in the UK and elsewhere : implications for Hong Kong Hong Kong Institute of Surveyors, 24 April 2012 Richard Patterson, Mott MacDonald

2 Housekeeping Safety Facilities 2

3 Introductions Richard Patterson Chartered Engineer Mott MacDonald Procurement Practice 21 years with Mott MacDonald Many forms of contract 15 years with the NEC A year with NEC as an NEC Consultant 3

4 There is a plan Some real basics on NEC Pre-award contract preparation The right contract structure Z clauses Works Information Early Contractor Involvement (ECI) Post-award contract management programme early warning (Risk Register and project risk register) compensation events target cost issues Preparing for NEC so what? Bedtime reading 4

5 NEC is well proven. And why we are here UK Institution of Civil Engineers (ICE) review existing contracts, case law development work for a new contract Consultative version - South Africa, Hong Kong, UK Engineering and Construction Contract (2nd Ed.) 10 years of successful use and expansion of NEC family Specifically endorsed by South African government NEC3 launched - users feedback; new contracts specifically endorsed by UK government 2009 trials by Hong Kong Government 5

6 By the way, please, just NEC N it s clearly not new E it s for far more than engineering C it s more than just a contract 6

7 NEC principles some really good ideas Flexibility Stimulus to good management Clarity and simplicity 7

8 Supply Supply Contract Supply Short Contract Flexibility the NEC Family High Complexity Low PSC Professional Services Contract ECC Engineering & Construction Contract ECS Engineering & Construction Subcontract ECSC Engineering & Construction Short Contract ECSS Engineering & Construction Short Subcontract TSC Term Services Contract TSSC Term Services Short Contract business case Framework Contract Adjudicator s Contract design construction operation

9 X3 X2 X1 Flexibility the Engineering and Construction Contract (ECC) Y(UK)2 X4 W1 X6 X5 Z X12 X7 X13 Y(UK)3 X16 X15 X14 W2 X20 X18 X17 A B C D E F additional conditions jurisdiction-specific options secondary options dispute resolution option payment option 1-9 core clauses 9

10 NEC is a stimulus to good management clear documents, roles and processes sort it out NOW approach focus on programme collaborative risk management effect of change based on forecast effect on time and cost not eg a historical bill of quantities flow charts for all processes A contract focused on the project radical! 10

11 Pre-award lessons 11

12 Start with right NEC contract! Engineering and Construction Contract (ECC) vs Engineering and Construction Short Contract (ECSC) Term Service Contract (TSC): Designed for a service, not really as a term contract. X19 Tasks need work vs NEC Framework Contract vs flexed Engineering and Construction Contract (ECC) Whatever you do: Requirements and constraints Risk Time Price 12

13 HK seems to have developed two sets of standard Z clauses. Works Information Don t mess with the structure - ECC form of agreement conditions of contract incorporates by ref. requires info.to be stated in Site Information Core Options Option Z Schedule (s) of Cost Components activity schedule or bill of quantities Contract Data part one part two Accepted Programme

14 Curb the Z clauses! Mott MacDonald at NEC Annual Seminar 2011: To what extent have Z clauses impacted on the NEC s success as a modern contract? Very happy to share 14

15 Guidance from NEC Additional conditions should be used only when absolutely necessary to accommodate special needs such as those peculiar to the country in which the work is to be done. (Guidance notes, 2005) Contra proferentum Of course, HK government has its reasons 15

16 The clauses support & interlink the whole beware 16

17 Types of Z clause identified in the research Onerous and unfair, 8% Valid, 6% Legal clarifications, 2% Works Information, 24% Risk profiling, 8% Turning back the clock, 16% Lack of NEC Knowledge, 16% 17 Shrinking Obligations, 20%

18 Z clauses create a more adversarial contract Overall 73% believed Zs create a more adversarial contract 18

19 Valid Z clauses? Mott MacDonald shared its issues on ECC2 with NEC. Very few remain in ECC3. Properly incorporating the Schedules of Cost Components Application for payment Intellectual Property Rights (IPR) Option A, B value engineering clause Options C and D - timing of payment of Contractors share Project specific risk allocation changes 19

20 Z clause lessons If extensive amendments required, use another form of contract! Drafters must be fluent in, and subscribe to, the principles of the NEC contract Z clauses should: be kept to a minimum not alter the general principles of NEC contracting be drafted in the style of the NEC use language from other clauses where possible be presented as an appendix to the Contract Data part one 20

21 Z clause lessons more! Drafters of Z clauses should: produce and use amended flow-charts provide rationale to support the inclusion of Z clauses at tender stage The team must produce effective and correct contract documents alongside the Z clauses Consider requesting prices for different options including and excluding certain Z clauses 21

22 But, forget the Z clauses, what do you actually want?! 22

23 Works Information what does it say on the tin? 20.1 The Contractor Provides the Works in accordance with the Works Information (option A and C) Information in the Activity Schedule is not Works Information or Site Information The following are compensation events. (1) The Project Manager gives an instruction changing the Works Information.. If it s not on the tin (in the WI) then the Contractor does not have to do it. Poor WI: busy Project Manager! 23

24 Works Information This is where the effort is required! No standard structure imposed by ECC But many references from the conditions All listed in the Guidance Notes Eg work to be done by the Completion Date parts of the works designed by Contractor (21.1) particulars of design for submission (21.2) Consider template/preface to ensure Works Information covers all these issues Repeat users should develop a template 24

25 Anyone preparing Works Information should read... 25

26 Managing uncertainty and risk using Early contractor involvement or Two stage tendering forecast outturn cost risk client s risk the Prices Contractor s risk base PSC contract for phase 1 award of contract ECC contract for phase 2 feasibility, outline design, detailed design, construction time OR single ECC contract with break point 26

27 Post-award lessons 27

28 Key issues for a successful implementation of an NEC project Communications As discussed. ie TALK to each other Clear system to formalise communications Programme (ECC) / plan (TSC) Meeting at least monthly Early warning and risk reduction Meeting at least weekly Compensation events Meeting ideally weekly Defined Cost (on target contracts) 28

29 The programme has to be taken seriously Programme is key to project management and so to ECC Detailed requirements for contents and updating of programme More than just a bar chart Even substantial contractors have been shocked! Get the first Accepted Programme in place at contract award Soft copy Monthly routine: discuss, understand, agree prior to formal submission 29

30 Early warning (Cl 16) vital part of ECC reciprocal obligations to both notify and solve Contractor and PM give an early warning 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 30

31 Early warning (Cl 16) Early warning has teeth! Sanction if not given Cl 63.5 compensation event assessed as if Contractor had given early warning Option C and D Disallowed Cost includes those costs incurred because no early warning given 31

32 Early warnings and the Risk Register PM enters early warning matters in Risk Register new in NEC3 risk reduction meeting; those attending co-operate in making and considering proposals to avoid or reduce risk, seeking solutions, deciding actions, updating Risk Register PM revises Risk Register to record decisions and issues 32

33 So what is the Risk Register. Risk Register includes a description of the risk and a description of the actions which are to be taken to avoid or reduce the risk The Risk Register in NEC3 has caused some confusion.. 33

34 Included, after award, as the ECC Risk Register Description of the risk Likelihood Impact (time) Impact (cost) Owner A project risk register, the contract, and the ECC s Risk Register Cost allowance Expiry date Actions to avoid or reduce the risk Description of risk Likelihood (%) Impact (time) Impact (cost) Owner Cost allowance Predicted expiry date Actual expiry date Actions to avoid or reduce the risk If relevant and to be talked about in post award risk reduction meetings then include in CD1 as the following matters will be included in the Risk Register the contract Contractor required to do? If so, then in Works Information. If C s design then in WI for C s design At clients risk? Also cut and stick as additional compensation event (option Z) or possibly Employer s risk from Contract Data part one Client s risk? overall amount included in Client s contingency outside Prices Contractor s risk? overall amount included in the Prices

35 Description of the risk project risk register and Risk Register Actions to avoid or reduce the risk Some project level risks may make it to Contract Data part 1 or 2 and so to ECC Risk Register All early warnings go to ECC Risk Register but are they worth going on project risk register? 35

36 project risk register and Risk Register The ECC PM updates the Risk Register (RR) and may also be the pm who manages the project risk register (prr)! RR has a subset of the columns of the prr RR may have risks (rows) that do not merit going on the prr and prr will have higher level project risks (rows) that do not belong on the RR for the contract Can we manage this as one database / spreadsheet? Need to keep the ECC Risk Register simple and used 36

37 Risk Register project risk register award of contract ECC Risk Register feasibility, outline design, detailed design, construction time 37

38 Early warnings and the Risk Register Encourages collaboration and proactive risk management Properly managed, it will also help management of risk management of change and processing of compensation events 38

39 NEC Risk Register consideration and tips For any early warning Information phase Agree aims Generate ideas Develop action plan actions to be clear and precise Update the Risk Register What about: Technical Queries (TQs) Requests for Information (RFIs) 39

40 NEC Risk Register consideration and tips (2) PM has to beware of changes to the Works Information Works best if integrated through the supply chain with NEC3 contracts and subcontracts run by Contractor? Beware clogging up process with too many risks with low likelihood and low impact Use a projector to put on to the wall: update there and then! 40

41 It s all about change change management = compensation events And who or what likes change? poor Works Info. = stressed Project Manager 41

42 You need to actively manage compensation events from day 1 Need to agree you want to manage them and monitor progress Clear processes and timescales in contract The team needs: Accepted Programme and programming skills QSs that understand cost and risk and the Contractor s cost system An agreed format for quotations A way of working with Contractor for acceptable quotations Negotiation skills and empowerment Use Project Manager s assumptions (61.6) Roll up the little ones? 42

43 For each compensation event Agree the sub-clause Be clear on the desired outcome eg clear changes to Works Information Discuss alternatives (62.1) for alternative ways Technical alternatives Time vs cost? Discuss risks and so any possible Project Manager assumptions (61.6) Changes to Contractor s working? Change to Completion Date? Change to Defined Cost? Review before formal submission 43

44 Prices, at tender PWDD Incremental certainty? No gap here if A or B changed Prices and Completion Date due to compensation events completion date time 44

45 Cost - on a well run NEC target contract Monitoring the Defined Cost against target understand the Contractor s cost accounting system in detail get items in the Fee separately coded at source monitor cost weekly formal audit plan Disallowed Costs accounts and records ensure and record any agreement around the edges of the definition disallow as far as possible at source in Contractor s management accounting system monitor weekly 45

46 NEC health checks how well are you doing? Date of and days since last Accepted programme Monthly and cumulative number of early warnings raised and outstanding Date of and days since last update to Risk Register Cumulative number and value of CEs notified Cumulative number and value of CEs implemented 46

47 NEC - So what for my organisation? People Process Technology 47

48 Process - review internal processes Pre-award determining procurement strategy Tender docs review standard specifications and drawings develop templates and/or guidance for eg Contract Data and Works Information A real challenge here in Hong Kong Contract management appointment of staff to ECC roles and delegation of actions change management decision making standard forms for communications audit 48

49 Technology use it Pre-award better ways of storing/sharing/maintaining documents Contract management planning software Consider how ECC processes to be communicated and recorded word and excel? database? proprietary software? 49

50 50

51 It s all about people, stupid People are they right for collaboration? willing to learn and change? empowered and competent to make decisions? Training training needs assessment ECC awareness for most; specific training for specific needs planning, costing, negotiation? roll-out of organisation s templates etc joint training with supply chain project start-up workshops 51

52 Bedtime reading 52

53 Some articles of mine, I hope, may be of interest Year Title NEC3: contracts for partnering Ground Conditions and Risk Allocation: Combining the NEC Engineering and Construction Contract (ECC) and the Geotechnical Baseline Report (GBR) 6 key links in the ECC NEC contracts as an enabler to Partnering Using NEC contracts to manage risk and avoid disputes Use of NEC in legal jurisdictions other than English law NEC A real opportunity for the Clerk of Works Where published NEC Newsletter No 56, October 2011 Tunnels and Tunnelling Magazine, Dec 2010 NEC Newsletter No 51, July 2010 May 2010 edition of 'The Partner', which is the annual publication of PSL, which is a CBI and BIS initiative to promote collaborative business relationships ' ICE s Management, Procurement and Law, 2009, No 4. NEC Newsletter, No,47, July 2009 Site Recorder, Magazine of the Institute of Clerks of Works NEC and Risk Management Using NEC for multiple site, undefined contracts NEC Newsletter No 40, Oct 2007 ICE s Civil Engineering, May

54 NEC manuals NEC Managing Reality Five volumes covering all aspects of NEC (ECC) Barry Trebes (Mott MacDonald) and Bronwyn Mitchell Thomas Telford publishing 54

55 NEC3 A User s Guide NEC3 A User s Guide Jon Broome ice publishing Published March

56 Remember: NEC is not a panacea or an easy answer NEC demands good documentation NEC demands active management 56

57 Further information (0) and / or Hayman Choi here in Hong Kong hayman.choi@mottmac.com.hk

58 Mott MacDonald 58