Beyond the clauses - how to foster a spirit of mutual trust and co-operation between contract partners in Peru

Key Points

• NEC4 ECC requires the contractor, client, project manager and supervisor to ‘act in a spirit of mutual trust and co-operation’.
• This is a contractual requirement, which establishes a collaborative working relationship from the outset.
• This article explains how it can be achieved in Peru through effective communication, knowing each other’s objectives, compliance and leadership.

Since adopting NEC3 and NEC4 contracts on major infrastructure programmes such as the Lima 2019 Pan American Games, Reconstruction with Changes and Bicentennial Schools, Peru has embraced a collaborative philosophy which has been a radical departure from its traditional way of contracting.  Clause 10.2 in the NEC4 Engineering and Construction Contract (ECC) (clause 10.1 in NEC3 ECC) states: ‘The Parties [which means the Contractor and the Client], the Project Manager and the Supervisor act in a spirit of mutual trust and co-operation.’ There are several things to observe within this short clause.

• It is a requirement on all the four main players in an NEC4 ECC, not just the contractor or client.
• It is a contractual obligation – it does not say ‘may’ or ‘should’ so is not optional.  It is not a ‘nice-to-have’.
• It is the second clause of the contract, establishing a collaborative philosophy from the outset.
• It is separate from the clause 10.1 obligation to ‘act as stated in this contract’, emphasizing both requirements.

There are numerous other published texts available regarding the legal applicability of the clause 10.2 provision in English law (such as Davis and Cooke, 2022 and Mante, 2023). This article examines practical ways to establish ‘a spirit of mutual trust and co-operation’ in Peruvian projects. This is often not present in traditional public-sector construction contracts in Peru, which have a strong tendency to culminate in lengthy suspensions while disputes are arbitrated.  It can be no mean feat to embed new ways of working, requiring fresh behaviours and mindsets in all parties.  In Peru, there is an expression that the parties need to “change their chip”.  Here we look at four key areas that enable this to happen successfully.

Effective communication

As in so many aspects of daily life, whether on a project or at home, communication is fundamental. Trust is earned with open and honest communication; it cannot be forced. Trust can be built through face-to-face meetings, with attendance limited to only the people really needed to contribute to the meeting. 

Short, daily face-to-face communication between the project manager and the contractor’s project director will allow a relationship to develop, whereby urgent matters can be discussed and decisions taken. This kind of fluid and informal communication should not be treated with suspicion by public auditing bodies. 

Of course, some outcomes will require a formal written communication (clause 13.1), such as a change to scope or a suspension to a part of the works. But solutions can be discussed openly beforehand to avoid surprises and ensure both sides can provide their point of view and expertise to solve a problem. 

Daily, informal communication should extend to each specialism within the project teams. For example, there should be daily face-to-face or telephone communication between the planners, safety specialists and cost engineers of the project manager’s and contractor’s respective teams.

Know each other’s objectives

It is tempting to assume the other party’s objectives rather than talk to each other to really understand them: The client and project manager may assume that the contractor’s objective is solely to maximise its profit from the contract, while the contractor may assume that the client’s objective is to obtain the lowest price for the works and to complete on time. However, individual objectives may include a variety of other factors. 

For example, the contractor may wish to increase its pool of reliable suppliers, assure its cash flow or enhance its reputation for future projects of a similar nature. And the client may wish to meet spend targets within a fiscal cycle (particularly Peruvian public sector clients) or have a minimal number of defects on opening day. 

Each party should have had a frank and open conversation with their counterpart about all their goals for the project and what the priorities are. If both parties know each other’s goals, then they can take decisions that maximise the possibility of achieving those.

There are many in-built mechanisms in the NEC4 ECC, depending on the options chosen, that help to align the client’s and contractor’s objectives, achieving a win-win outcome. Examples include the following. 

• The ‘Pain/gain’ mechanism in NEC4 ECC Option C (target cost with activity schedule) and Option D (priced contract with activity schedule).
• Early contractor involvement (option X22).
• Multiparty collaboration (option X12) and key performance indicators (option X20).
• Whole-life cost (option X21) and climate change (option X29).
• Contractor’s proposals (“Value engineering”, clauses 16.1 and 16.2).

Comply mutually and with the contract

Parties should agree realistic dates to deliver information, design deliverables and instructions and comply with these. Each party can then plan around the other party’s commitments and report to their management, the Client and external stakeholders (for example communities, ministries and the press), avoiding missed deadlines which can lead to a breakdown of trust. 

Many timescales are already provided within the NEC4 ECC, with sanctions for non-compliance, and bear in mind that all players have an obligation to comply with the contract (clause 10.1). However, commitments for day-to-day actions are also made frequently within meetings and these should be realistic and complied with. 

Succinctly recording actions, responsible persons and deadline dates in simple meeting minutes should be seen as a collaborative action because in this way there can be no doubt about what the agreed action was and by when it should be taken. These actions should be ‘Smart’ – specific, measurable, achievable, relevant and timely.

Leading by example

It is easy for team members when entrenched on a project to fall into a pattern of constant battling with their counterparts. It is the job of the leaders on each side to rise above and set the collaborative tone and vision which their project teams can follow. 

In particular, the leaders of each party should demonstrate the qualities of acting in good faith and transparently. If leaders adopt an attitude of trying to make quick wins at the expense of the other party, then their team members will most likely repeat this behaviour, leading to a breakdown of trust and co-operation within every specialism and at every level of the organisation.

Conclusion

Fortunately, acting in accordance with the NEC4 ECC contract (as required by clause 10.1) should naturally lead to the generation of ‘mutual trust and co-operation’ through the contract’s many collaborative mechanisms. Examples of these include the following. 

• Project manager making decisions regarding certificates and compensation events in an impartial manner from the client.
• Early warnings to notify risks opportunely and deal with them together.
• Formal communications (e.g. instructions) in writing, avoiding ambiguity and uncertainty.
• Resolution of changes in short durations, reducing the uncertainty of both parties.
• Resolution of disputes in short durations, such as via a dispute avoidance board (in Peru, via the Dispute Adjudication Board – DAB, a far quicker alternative to arbitration).
• Maintaining an accepted programme that allows planning, timely decision making, reliable communication to external stakeholders and measurement of impacts due to compensation events.
• Progressive close-out of defined cost (clause 50.9), avoiding surprises at the back end of a project.
• Limited and clear reasons for the project manager not accepting the contractor’s deliverables.

Summary

In summary, NEC is a radically different way of contracting in Peru where the parties are required to collaborate through in-built core and optional contractual mechanisms. However, the behaviour of the people involved, “changing the chip”, is also key to generating this spirit: they must communicate openly, understand each other’s objectives, comply with commitments they make and show leadership.

References

Davis T and Cooke H (2022) What ‘trust really means in NEC and how parties can achieve it, NEC Users Group Newsletter, 120, September 2022.

Mante J (2023) Exploring the essence and extent of ‘mutual trust and co-operation’, NEC Newsletter, 127, September 2023.

Contact

Mark Griffin, Associate Director, Gleeds, Lima, Peru
mark.griffin@gleeds.com
+51 975 094 884