The NEC4 Engineering and Construction Contract (ECC) contains a variety of provisions designed either with the intention of ensuring good performance or, where good performance is not achieved, give the client some form of recourse. From the contractor’s perspective, such provisions essentially fall into one of three categories – preventative measures, positive incentives and negative incentives.
Preventative measures
Clause 10.2 which requires the parties, the project manager and supervisor to act in, ‘a spirit of mutual trust and co-operation’ is the key underlining principle of the ECC, and indeed is replicated across the NEC4 suite. The collaborative approach required under this clause also manifests itself in clause 15, where the contractor and the project manager are required to take a proactive approach to identifying risk through the notification of early warning matters. The matters which may be notified all relate to either time, cost or quality. Early warning meetings are held to discuss such matters with the aim of identifying mitigation measures or solutions, which are then recorded by the project manager in the early warning register.
Where achieving completion on time is absolutely critical for a project, clause 36 allows both the contractor and project manager to propose acceleration to ensure completion is achieved before the completion date. Acceleration cannot however be unilaterally imposed on the contractor. Both the project manager and contractor must agree to the principle and then the project manager must accept the contractor’s quotation for the acceleration measures to come in to effect.
Quality is tightly controlled through the requirement at clause 40 for the contractor to operate a quality management system and to provide a quality policy statement and quality policy plan. Where the contractor does not comply with the quality plan, the project manager can instruct the contractor to correct such failure without the contractor being entitled to a compensation event.
Positive incentivisation
Positive incentivisation focuses on the contractor being entitled to additional payment if certain circumstances are met. Such a method of incentivisation may be a key factor for the client in selecting the relevant main option for the contract. ECC Options C and D are target cost contracts, where the contractor is paid its share of the saving when the price for work done to date is less than the total of the prices, but the contractor must also pay its share of the excess if the price for work done to date is greater than the total of the prices.
In the core clauses, clause 16 on contractor’s proposals can be used to benefit both parties by incentivising the contractor to come up with value engineering proposals in respect of the scope provided by the client. Where such proposals are accepted by the project manager, the client will benefit from a reduction in the total of the prices while the contractor is entitled to a specified proportion (the ‘value engineering percentage’) of the saving.Turning to the secondary option clauses, where option X6 on bonus for early completion is selected, the contractor is paid a specified bonus for each day from the earlier of completion or the client taking over until the completion date.
Additional payment is also available to the contractor where option X20 on key performance indicators is selected. Under this provision the contractor is entitled to amounts stated in the incentive schedule if the targets for key performance indicators are improved upon or achieved. The monitoring of key performance indicators continues until the defects certificate has been issued, so this clause can certainly be an effective way of ensuring that the contractor focuses not just on getting to completion, but on its overall performance.
Negative incentivisation
Reasons for termination R11 to R15 are available to the client and are directly linked to the contractor’s performance of both the project and its contractual obligations. Where the client terminates due to any of these reasons, the amount due to the contractor on termination includes a deduction of the forecast of the additional cost to the client of completing the whole of the works.
The secondary option clauses provide various protection measures for the client. In contrast to option X6 highlighted above, where option X7 on delay damages is selected the contractor pays delay damages at a specified rate for each day until the earlier of completion or the date the client takes over the works.
An emphasis on the overall performance of the constructed asset can be achieved through use of option X17 on low performance damages. In this case, where a defect included in the defects certificate shows low performance in respect of a stated performance level, the contractor is required to pay the specified amount of low performance damages.
The emphasis on ensuring good performance beyond completion can also be given effect to through use of option X16 on retention. Selection of this clause should incentivise the contractor to make sure that defects are corrected to procure the release of the balance of the retention held.
As an alternative to retaining from amounts due to the contractor, the client may request that the contractor provides a retention bond. This is one of a number of ancillary documents which the client may request from the contractor to provide the client with additional protection in respect of the contractor’s performance on the project, which, depending on the specific wording of the relevant document, may include protection in the event of the contractor’s insolvency.
The documents which the client may request are a guarantee from the ultimate holding company of the contractor (option X4 on ultimate holding company guarantee); undertakings such as collateral warranties from subcontractors (option X8 on undertakings to the client or others); and a performance bond from a bank or insurer which the project manager has accepted (option X13 on performance bond). The required form of these documents should be set out in the scope.
‘The NEC4 Engineering and Construction Contract (ECC) contains a variety of provisions designed either with the intention of ensuring good performance or, where good performance is not achieved, give the client some form of recourse. From the contractor’s perspective, such provisions essentially fall into one of three categories – preventative measures, positive incentives and negative incentives.’
Key points
- NEC4 ECC contains a variety of provisions and measures designed to ensure good performance for clients as well as protect them if this is not achieved.
- Preventative measures include early warning provisions to deal with and mitigate risks, an acceleration clause and the requirement for a quality management system.
- Positive incentivisation measures include target cost options, value engineering, bonus for early completion and key performance indicators.
- Negative incentivisation includes termination options for poor performance, delay damages, retentions, guarantees, collateral warranties and performance bonds.
- Author
- Chris Dickson
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