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September 22, 2021

Hong Kong government review confirms performance benefits of NEC contracts

Hong Kong government review confirms performance benefits of NEC contracts

By Simon Fullalove

A review by the Hong Kong government confirms that its public-sector projects procured using NEC contracts over the past decade were on average completed significantly earlier than those let using traditional contracts, particularly if NEC target cost options were used.

Supported by The University of Hong Kong, the government’s Development Bureau compared the performance of 37 NEC3 Engineering and Construction Contracts (ECC) completed in the 10 years to 2019 with that of 280 projects of similar nature and scale let during the same period under its General Conditions of Contract (GCC) forms.

Looking at the relationship between actual contract duration and original contract duration, the mean ratio for NEC3 ECC projects was found to be around 10% less (i.e. earlier) than the average for those procured under GCC. More significantly, comparing the relationship between time to final account settlement and original contract duration, NEC contracts were on average over 30% faster than GCC.

Other performance indicators

For a subset of 12 NEC projects procured with NEC3 ECC target contracts (Options C and D), the typical improvement over comparable GCC projects was 20%, while the remaining 25 NEC projects procured with NEC3 ECC fixed-price contracts (Options A and B) were delivered 5% sooner.

Looking at the relationship between final contract sum and original contract sum, the review found the mean ratio for NEC3 ECC contracts was around 2% less (i.e. cheaper) than the mean ratio for GCC, though this is not considered to be statistically significant.

In addition to the quantitative analysis of the contracts, the review included a qualitative study of NEC users in Hong Kong carried out through a questionnaire survey, focus group interviews and a ‘way forward’ workshop. Their views will help to shape future application of NEC on public sector projects.

On the right path

Speaking at the NEC Users’ Group conference in June 2021, Development Bureau permanent secretary for development (works) Lam Sai-hung said the review reassured the government it was, ‘on the right path’. ‘Since the launch of the first NEC project in 2009, we have accumulated experience from over 300 NEC works contracts and 70 NEC consultancies. The total value of NEC contracts amounts to over HK$160 billion, or about £16 billion.’

He confirmed that the number and value of NEC contracts were growing significantly and healthily. ‘In 2020, about half of the building and civil engineering contracts awarded by the government were in NEC contract form. We expect the share of NEC contracts will continue to rise in the years to come.’

Commenting on the earlier completion of NEC contracts identified in the review, he said, ‘The results tally with our proposition since NEC has proactive mechanisms to monitor risk and initiate early mitigation actions, thus facilitating effective management of project progress. This is particularly the case for target contracts, which are mostly adopted for projects of higher risk’.

Regarding the qualitative analysis, he said, ‘The survey results conclude that NEC outperforms the conventional GCC contract forms, particularly in terms of building mutual trust and cooperation, cultivating a collaborative mindset, more effective risk and claims management, and better portfolio management, including cost and time predictability.’

(The HK$3 billion (£300 million) Tin Shui Wai hospital, completed under an NEC3 ECC Option A in 2016 – the first NEC public-sector building project in Hong Kong − was one of the contracts analysed in the government review)

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