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August 03, 2021

Price lists in NEC short contracts: how clients can simplify the process

Price lists in NEC short contracts: how clients can simplify the process

By Richard Patterson, Mott Macdonald

KEY POINTS
  • NEC4 short contracts (including ECSC, PSSC, TSSC and SSC) all use a price list, like TSC options A and C.
  • Suppliers are entitled to a compensation event for changes to any mistakes in the price list.
  • With three minor amendments, clients can put the quantity risk on the supplier, making the contract simpler.

The NEC short contracts are designed to be significantly simpler that the full-length versions. The NEC4 short family includes the Engineering and Construction Short Contract (ECSC), the Professional Service Short Contract (PSSC), the Term Service Short Contract (TSSC) and the Supply Short Contract (SSC). This article summarises how the quantity risk is allocated in the short contacts and suggests an option for simplifying the process even further.

Quantities in full-length contracts
The full-length NEC4 Engineering and Construction Contract (ECC) and NEC4 Professional Service Contract (PSC) both have a payment Option A, priced contract with activity schedule. In that option, it is clear that without compensation events the supplier (contractor in ECC, consultant in PSC) will only get paid the lump sums in the activity schedule. The supplier therefore takes the risk of the quantities of work included in the scope. Normally the client will let the bidder draft its own activity schedule to match its programme for doing the work. The client may prescribe the layout and structure of the activity schedule.

With ECC the client also has the choice of using Option B, priced contract with bill of quantities. In that option the client takes the risk of the quantities that it puts in the bill of quantities as the contractor is paid for the actual quantities in the work. There is also a requirement for a detailed method of measurement in the bill of quantities. There is a compensation event for when, ‘The Project Manager gives an instruction to correct a mistake in the Bill of Quantities which is… a departure from the rules for item descriptions and or division of the work into items in the method of measurement or… due to an ambiguity or inconsistency’ (ECC clause 60.6, bullets omitted).

In the NEC4 Term Service Contract (TSC) option A (priced contract with price list), the client can include in the price list a mix of lump sums and items with a rate and a quantity. Where the client chooses to use quantities, it takes the quantity risk. The contract also requires the price list to include, ‘a statement of method and rules used to compile it’. Like ECC Option B, there is a compensation event for correcting a mistake in the price list.

Quantities in short contracts
All the short contracts follow the same logic as TSC option A and ECC Option B. They all have:
  • a space in the price list to enter the method and rules used to compile it
  • the same clause (14.3 in ECSC, PSSC and SCC, 14.5 in TSSC) stating, ‘The Client gives an instruction to correct a mistake in the Price List which is…a departure from the method and rules stated in the Price List and used to compile it or…due to an ambiguity or inconsistency’ (bullets omitted) and
  • a compensation event for when, ‘The Client gives an instruction to correct a mistake in the Price List’.

The above is all fair on the contractor. But some clients may consider the need for ‘methods and rules’ for compiling the price list to be unduly onerous for a simple short contract, and mistakes ‘due to an ambiguity or inconsistency’ also leaves them quite exposed. For example, if it is not clearly stated in the rules that widgets required in the scope are covered in a certain pricing item, the contractor will (rightly) want the widgets to be added to the price list and paid as a compensation event.

Changing to a simpler alternative
Some clients may prefer something much simpler: do what it says in the scope and only get paid the amount for the items provided in the price list. It is true that this would put the onus on the tenderer to make sure that it has enough money in the items included in the price list to cover all its obligations in the scope (just like a bidder for ECC Option A).

In effect the client still would take the risk of the accuracy of any quantities in the price list, but the supplier would take the take the risk that the items provided will be deemed to cover all the obligations in the scope. For passing that risk to the supplier the client can expect an increase in the total of the prices, but the contract would be significantly simpler to put together and to manage. Importantly, the client will also be buying greater price certainty.

To make the change the client needs only to:
  • not include an entry for method and rules used to compile the price list
  • delete in the additional conditions of contract:
    • the clause relating to the correction of a mistake in the price list
    • the compensation event relating to instructions to change the price list.
These changes and the reason for them should be clearly explained to any prospective contractor. Of course it will still make sense for the price list to be broken down into a sensible level of detail.

Also, it may be considered appropriate to invite bidders to suggest where more detail in the price list might be useful.
POSTED BY NEC Contracts
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