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July 13, 2021

NEC4 clause X22: unlocking early contractor involvement in Asia

NEC4 clause X22: unlocking early contractor involvement in Asia

By Ilan Freiman and Patrick Daley, Bryan Cave Leighton Paisner LLP Hong Kong

  


KEY POINTS
  • There is no standard approach to early contractor involvement (ECI) in Asia, with a mix of two-stage tendering and bespoke pre-construction services agreements.
  • NEC’s ECI approach, which was introduced in 2015 and refined in 2020, has been widely adopted by UK clients to deliver ECI benefits.
  • NEC4 clause X22 offers clients in Asia with a tried-and-tested standard form for ECI that would avoid protracted negotiations of contract terms and ensure maximum benefit.

In October 2020, NEC issued amendments to the NEC4 contract suite which included revisions to secondary option clause X22 on early contractor involvement (ECI). In light of this refresh and the increasing use of NEC in parts of Asia, this article revisits the NEC approach to ECI and the potential applications of clause X22 in Asian jurisdictions.

ECI: a recap
ECI is a two-stage procurement process which can take various forms. The first stage involves the development of scope and design, leading to the agreement of price and key project dates. The project is then built and delivered during the second stage.

ECI has been common in the UK for some time, particularly on large and complex projects. Key benefits of ECI include closer collaboration, quicker delivery and effective design development. ECI procurement allows clients to obtain specialist input from contractors early in the project lifecycle.

Typical ECI stage activities include supply chain identification and engagement, risk reduction studies, cost planning, programme development and buildability assessments. It is sometimes said that these benefits are delivered at the expense of preserving the competitive tension available under a traditional tendering model. The contractor is ‘embedded’ at an early stage, leaving it in a strong negotiating position with respect to agreeing the prices.


NEC clause X22
An ECI clause was published for the NEC3 suite in 2015 and was integrated as clause X22 in the NEC4 suite in 2017. The clause requires the client to select a single ECI contractor to perform pre-construction services, usually following a competitive tender. During the first stage, the client pays a specified fee to the ECI contractor in addition to reimbursing pre-approved costs. Given the nature of pre-construction services, when selecting its preferred ECI contractor, clients often focus on relevant experience, the track record of innovation and the skillset of key personnel.

Clause X22 was updated in October 2020 to introduce greater flexibility in the first stage and to provide a more structured process for proceeding to the second stage. Previously completion dates and other key dates originally specified in the contract could only be modified because of a compensation event. This was not ideal as changes to these dates may become desirable or necessary as a project evolves during the ECI stage. Under the updated clause, the project manager can review and agree or reject any changes to key dates proposed by the ECI contractor.

Some other notable characteristics of the clause X22 approach include the following.
  • Procurement approaches: clause X22 can be used with the NEC4 Engineering and Construction Contract (ECC) Options C(target contract with activity schedule) and E (cost reimbursable). It can also be used with the NEC4 Alliance Contract (ALC), with the alliance board performing the review and acceptance functions performed by the ECC project manager.
  • Budget: prior to engaging the ECI contractor, the client sets the ‘Budget’. This is intended to set a maximum amount available to cover all costs for the complete delivery of the project, not limited to construction costs. Any savings will be shared between the parties in pre-agreed proportions, incentivising the ECI contractor to innovate and save costs during the ECI stage.
  • Forecasting: during the pre-construction stage, the ECI contractor is required to provide the client with regular preconstruction cost forecasts. Any costs not included in a project-manager-accepted forecast will be disallowed and not be reimbursed, giving the client a high degree of cost control. This is balanced by the fact that the ECI contractor is not required to incur any unaccepted costs.
  • ECI contractor’s proposal: at the end of the ECI stage, the ECI contractor is required to submit a proposal for the delivery of the project. The proposal is to include revised key dates, a revised programme and the contract price.
  • Client’s response: if the project manager is satisfied with the ECI contractor’s proposal, it can instruct the ECI contractor to proceed. The project manager can reject a proposal for reasons listed in clause X22, including that it will cause unnecessary delay or costs. If a proposal is not accepted, the ECI contractor will usually have to submit a revised proposal addressing the project manager’s objections. Interestingly, clause X22 does not mandate a time before which the project manager must accept or reject the ECI contractor’s proposal. This is consistent with NEC emphasis on ‘mutual trust and co-operation’, which obliges the parties to work collaboratively to resolve differences.
  • Proceeding with a different contractor: notwithstanding the NEC focus on collaboration, clause X22 recognises that the project manager and the ECI contractor may not be able to agree a proposal for the delivery of the project. The clause entitles the client to proceed using a replacement contractor where prices or key dates cannot be agreed, or where the ECI contractor fails to meet the performance requirements for the ECI stage.

ECI in Asia
No prevalent approach to ECI in Asia has emerged. Pre-construction activities such as preliminary design or engineering may sometimes be required as part of the tender stage, which is more of a two-stage tendering approach. Alternatively, a contractor or multiple contractors will enter into a bespoke preconstruction services agreement, with the main contract to be tendered or negotiated following completion of the pre-construction activities. The lack of a standard form or standardised approach to ECI can lead to protracted negotiations of contract terms. The NEC4 suite’s clause X22 offers a simple standardised approach to ECI which should allow the parties to focus on finalising the important issues such as key dates, programme and price.

Some have raised concerns that the ECI approach adopted by clause X22 reduces the competitive tension inherent in a traditional tendering model. Because the ECI contractor is embedded at an early stage, it enjoys a strong negotiating position from which to agree the prices. It has been further argued that an approach which allows for negotiation of price with a single contractor raises probity concerns, falling outside practice recommended by some competition and ant-corruption authorities.

While the ECI process may result in some prices being agreed on a negotiated basis, any risk that the ECI contractor may unfairly exploit its embedded position can be mitigated by effective oversight of the stage 1 activities, including adoption of an open-book approach to agreeing the prices. The client can also elect to proceed with a different contractor if the ECI contractor adopts unreasonable positions. Perceived pricing risk associated with a single source negotiation is also balanced by the effect of the ‘Budget’ incentivisation and the potential for ECI to deliver cost savings, innovation and efficiency measures.

The UK experience, where ECI has been frequently used − particularly on large and complex public projects, suggests that ECI’s benefits are generally viewed as outweighing the limited risk that the ECI contractor may attempt to inflate some prices. An alternative approach, requiring that stage 1 and 2 prices be determined from the beginning of the project may be suitable in circumstances where design is well progressed at time of tender. But this would also limit the opportunity for the contractor to think creatively and identify design or process opportunities.

Final thoughts
Clause X22 allows a client to benefit from the specialist planning, programming and procurement skills of contractors, including during design development, and to identify buildability issues before they manifest down the road in cost claims, delays and disputes. The NEC4 ECI model also allows for the collaborative adoption of technology early in a project, such as the joint development of a building information model or similar design tools or the deployment of prefabricated modular construction methods.

However, for the benefits to be realised, ECI requires rigorous management and adherence to the process. Clients and their project management teams need to engage with contractors proactively during the ECI stage to get the most out of the process. Nonetheless, given the potential benefits, clients in Asia and elsewhere would do well to consider whether NEC4 approach to ECI may be a good fit for their projects.
POSTED BY NEC Contracts
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