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February 11, 2019

Engaging Suppliers Early with NEC4

Engaging Suppliers Early with NEC4

Early contractor involvement (ECI) is a secondary option (X22) available for use with the NEC4 Engineering and Construction Contract (ECC). The parties enter into a single contract to develop and agree the scope and prices before advancing to the construction stage.

Since being championed by Highways England almost two decades ago, engaging early with suppliers has become an essential part of the procurement strategy, particularly for complex high-value infrastructure projects where multiple stakeholders and constraints exist. Many NEC Users’ Group members now use ECI.

Use of option X22

Option X22 is drafted for use only with ECC Option C (target price with activity schedule) and ECC Option E (cost reimbursable contract). This procurement strategy reflects the openbook, two-stage approach advocated by the UK Government Construction Strategy 2011–15.

Clients wanting to engage in ECI when using the other main options may use the NEC4 Professional Service Contract (PSC) or NEC4 Professional Service Short Contract (PSSC).

Alternatively, amendments could be made to option X22 maintaining a single contract approach, but great care should be exercised when making any changes and specialist advice should be sought.

An ECI clause for use with NEC3 ECC as a Z clause was published in January 2016. The NEC3 and NEC4 versions of the ECI clause have some small, but not insignificant, differences. Clients wishing to use ECI with NEC3 may wish to adopt the wording of option X22 from NEC4, making the appropriate changes to align it with NEC3 drafting style and content.

Two-stage approach

Option X22 provides for two stages, the details of which are set out by the client in the scope. Stage one is the pre-construction ECI phase, with development of the scope, detailed design and agreement on price. Stage two is the construction phase, with completion of any remaining detailed design.

During stage one, payment follows the same rules of defined cost plus fee, as stated in the main option clause, including the contractor’s key persons identified in contract data part two. The contractor provides regular forecasts of the total defined cost for stage one. For ECC Option C, the price for work done to date during ECI is included in the activity schedule (X22.3(9)) and added to the target price.

At the end of stage one, the client makes a decision whether to proceed to stage two and, if so, the project manager notifies the contractor. The client may decide not to proceed for any reason, for example failure to gain planning approval. Not proceeding to stage two is not a compensation event or one of the reasons stated in the termination table (clause 90.2) for termination of the contractor’s obligation to provide the works.

Before the notice to proceed to stage two is issued, matters including changes to the budget and the price for the works must be agreed. If a notice to proceed is not given, the project manager issues an instruction removing the stage two works from the scope. The client may decide to have the construction work (stage two) performed by another contractor.

Budget, project cost and incentives

The budget (X22.1(1)), stated in contract data part one, is an amount declared by the client and used to compare against the project cost for assessment of the budget incentive. This means the client’s costs for delivery of the project and not just what is paid to the contractor may be included, such as land acquisition, diverting services and consultants’ fees. Certain events, such as changes to the client’s scope, may give rise to changes to the budget.

When setting parts of the budget which are not amounts payable to the contractor, the client will need to consider the accuracy of estimates and what influence the contractor may have in its out-turn cost. Involvement by the contractor at project inception will increase opportunity for the contractor to influence project costs. However, the client will need to decide when it is appropriate to enter into contract and commence ECI, taking account of how developed the client’s requirements are.

The project cost represents the total amount incurred by the client from payments made to the contractor and others for the items stated in the budget. During the ECI and construction stages, the contractor is responsible for preparing forecasts of the total project cost in consultation with the project manager (X22.2(5)).

If the project cost on completion of the whole of the works is lower than the budget, the contractor is rewarded with a budget incentive payment. If Option E has been chosen and the budget is exceeded, the contractor has no liability for the additional cost. However, other liabilities such as delay damages may apply.

ECC Option C provides an incentive to control and reduce the stage two construction costs using the share ranges and contractor’s share percentage (clause 54). This incentive is different to the budget incentive as the target price is based initially on the contractor’s commercial offer at tender and is subject to change during ECI.

The impact that the contractor share percentages and ranges may have on behaviours during the ECI phase needs careful thought. Whilst the ECI phase provides for design development and improved cost certainty, an unequitable share arrangement may disincentivise the contractor to reduce the target price during the ECI phase.

Programme and completion

The completion date for the whole of the works is agreed by the parties at contract award before starting the ECI phase. The first accepted programme will also exist before the ECI phase if it has been included in contract data part two.

However, the requirements for submission and acceptance of the programme (coreclause3) applies during the ECI phase. Any changes to the accepted programme arising from design proposals submitted by the contractor must be submitted to the project manager for acceptance (X22.3). Clients wishing to use ECI for negotiating an improved completion date will need to use acceleration (clause 36) or alternatively amend the contract.

Conclusion

ECI with NEC4 ECC can be seen as having a number of benefits. It means having a single contract to deliver ECI and construction work in separate phases, allowing the client to make an informed decision when deciding to proceed with the construction phase. Entering into a contract with ECI involves the client in commercial decisions which require careful consideration. The contractor is reimbursed its cost plus a fee for the work performed during the ECI phase but there is no obligation on the client to proceed beyond this. Collaborative working in the design and planning process provides an opportunity to manage risks associated with buildability and the client’s budget being exceeded.

For Option C contracts, there is also a reduction of risk to the target price being exceeded, improving the chances of a financial win-win scenario for the client and contractor. Procurement for design-and build target price contracts is made easier too.

Written by David Hunter


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