Contract Innovation through additional clauses finalist: Development Bureau, Hong Kong SAR Government

Value: Over HK$7M (£0.7M) for each works contract

NEC3 contracts/options used: NEC3 ECC Options C and D
 
Start-finish dates: On-going

Main project team members: 
-Development Bureau, Hong Kong SAR Government 
-Steering Committee and Working Group for NEC Pilot Projects 
-Works Departments, Consultants and Contractors for NEC Pilot Projects

Project scope:
The Development Bureau (DEVB) has been promoting collaborative partnership in the implementation of works contracts so as to enhance the management efficiency and cost effectiveness of public works projects in Hong Kong.
 
Since 2009, DEVB has recommended to conduct piloting of NEC form in some public works projects so as to let the Works Departments and the construction industry stakeholders, including consultants and contractors, to build up more knowledge and experience on adoption of NEC form.  As at end 2016, NEC form has been adopted in over 60 works contracts (with project estimate about HK$18B (£2B)) of which eight already completed and in 12 consultancy agreements (with project estimate about HK$200M (£20M)).  The target cost options, namely ECC Options C and D, have been used in 15 works contracts, including mega projects Happy Valley Underground Stormwater Storage Scheme (with project estimate about HK$1B (£100M)) and Tseung Kwan O-Lam Tin Tunnel-Road P2 and Associated Works (with project estimate about HK$2.5B (£250M)).
 
Since 2016, DEVB has been promoting the wider use of NEC form in more public works projects in Hong Kong.  NEC form is now commonly used in capital works contracts for public works projects managed by the Works Departments as far as appropriate.  We will also try to adopt the target cost options (ECC Options C and D) in some larger scale and complex projects, such as those exceeding HK$1B (£100M).  We believe that NEC form will help reduce the uncertainties as perceived by the contractors and in turn risk premium allocated in tenders.  Moreover, with the target cost arrangement, this will help in creating an integrated project team’s common goal for promoting cost saving initiatives.
 
In October 2016, DEVB has published the Practice Notes for NEC ECC for public works projects in Hong Kong with a view to aligning the practice of the Works Departments and encouraging the wider adoption of NEC form in public works projects with different natures and scopes.  To streamline the legal vetting and approval processes, standard contract documents and sample templates have been provided for reference by the Works Departments and the industry stakeholders.
 
During the preparation of the Practice Notes, DEVB kept close liaison with the Works Departments and the industry stakeholders, including contractors and their trade association, to understand their concerns.  Under the default NEC3 ECC Options C and D, insurance premiums are absorbed in the Fee which depends on the Defined Cost and the fee percentage tendered.  From the feedbacks of the pilot projects, we learnt that certain insurances such as third party insurance which normally needed to be in place at the beginning of the contracts to suit the Hong Kong densely populated environment could not be recovered timely when the Defined Cost was low at the contract initial period and thus creating cashflow issue to the contractors.  Therefore, we propose an additional clause to reimburse the contractors for the listed insurances as the Defined Cost rather than the Fee in the Practice Notes promulgated in October 2016, with a view to resolving the concerned cashflow issue at the contract initial period during the implementation of NEC projects in Hong Kong.

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