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January 13, 2020

Helping NEC4 ECI to work in Hong Kong

Helping NEC4 ECI to work in Hong Kong

Construction 2.0 – Time to change was published by the Hong Kong government’s Development Bureau in September 2018 (Development Bureau, 2018). It aims to maintain Hong Kong’s regional leadership in construction as well as enhance the sustainability and long-term growth of the industry. Among other things it advocates wider use of NEC in Hong Kong and greater ‘design for buildability’, including through early contractor involvement (ECI) in the design process.

The NEC4 Engineering and Construction Contract (ECC) launched in 2017 includes a new secondary option X22 for ECI, based on the NEC3 model clause for ECI published in 2016. As the Development Bureau starts transitioning from NEC3 to NEC4, it is increasingly likely ECI will be implemented via NEC4 ECC option X22 in some forthcoming public works projects. The industry therefore needs to be prepared for how X22 will operate in practice.

This article focuses on the potential challenges of adopting it in Hong Kong, where open and fair competition is recognised as a key principle underpinning government procurement policy, and how these challenges might be overcome.

Potential challenges in Hong Kong

The two key challenges I foresee to using option X22 in Hong Kong are the fact there no tendered total of the prices for stage two (generally the construction works following the ECI inputs in design in  stage one), and the provision of a budget incentive.

It may prove problematic for clients to select a stage one contractor for stage two without a tendered total of the prices submitted for tender assessment. The establishment of the total of the prices for stage two after the contract award is in effect via a single negotiation with the contractor and not under an open and competitive environment, despite the fact that the prices may have been partly or entirely obtained from open-market or competitively tendered prices. The financial risk borne by the client may prove too high without a tendered total of the prices for stage two, irrespective of the provision of a breakpoint between stages one and two.

The budget incentive in option X22 is intended to serve as a financial incentive, being independent of the standard pain/gain share under ECC Option C, for the contractor to provide its ECI inputs. Based on the standard provisions of option X22, there is no clear linkage established between the contractor’s ECI inputs and the incentive payment. The contractor could, in reality, be entitled to the budget incentive even if it failed to provide the ECI inputs with effective outcomes, yet eventually the final project cost is still lower than the budget.

The incentive mechanism under option X22 may be ideal when an established working partnership with the client already exists, and where the contractor has a proven reputation and expertise in ECI with predictable effectiveness. Indeed, the award of the construction works (i.e. stage two) could be somehow regarded as an incentive to the contractor. Further, the client and the contractor could benefit from a better performance on the pain/gain share following effective ECI inputs. However, if an extra financial incentive is provided, it should be clearly linked to the ECI inputs from the perspective of accountability for additional expenditure by the client.

Possible ways forward

Using the standard option X22 could be challenging for public-sector clients in Hong Kong. Yet I believe that with a few minor amendments it could be made more suitable for the Hong Kong environment, giving clients an easier start to  their ECI journey.

Firstly, there should be a tendered total of the prices for stage one and stage two submitted with the tender if ECC Option C is to be adopted. If there is a considerable certainty in terms of the scope of the ECI inputs in stage one, it is always feasible and desirable to require a tendered total of the prices for stage one to be submitted with the tender. And the submission of a tendered total of the prices for stage two should always be practical provided that the project has a design with a considerable maturity, yet with room for further design enhancement through the ECI process.

As such, there will be no further need for the submission and agreement of the total of the prices for stage two after the contract award. The key benefit of this approach is facilitating the client to arrive at its financial commitment in terms of a tendered total of the prices for the contract as a whole, albeit still subject to changes after the contract award (e.g. due to compensation events), by means of an open and competitive tendering exercise embedded with the requisite fairness.

Secondly, the incentivisation should be directly linked to the outcomes of the ECI inputs. For instance, the contractor could be paid with an incentive based on the cost savings obtained from its ECI inputs during stage one (e.g. cost saving proposals submitted in stage one). However, the contractor should have no entitlement to this particular incentive for cost saving, if any, as a result of the contractor’s non-ECI inputs. Further, both ECI and pain/gain share incentives should be de-activated if the contractor is not instructed to proceed to stage two.

Conclusions

The concepts of ECI are not rocket science. But there are always challenges to be overcome if people wish to implement a new idea within an existing system that has operated for quite a while. As made clear in Construction 2.0, the Hong Kong construction industry is facing a challenging future and it is time for change – not least in contract procurement. It is therefore hoped that the learning curve for ECI with NEC4 could start sooner rather than later in Hong Kong as the industry can then raise its game through more practical experience acquired.

Reference

Development Bureau (2018), Construction 2.0 – A time for change, September 2018, available at: https://www.hkc2.hk/en/.

Written by Hayman Choi, Mott MacDonald Hong Kong


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