How Option X22 on early contractor involvement has been improved

Key Points

• NEC4 ECC Option X22 on early contractor involvement offers clients a two-stage approach to procurement.
• The latest amendments provide greater flexibility to agree changes during stage one before moving on to stage two construction.
• Successful early contractor involvement relies on collaboration and adherence to the entire conditions of contract.

Early contractor involvement was first introduced as a secondary Option (X22) for use with the NEC4 Engineering and Construction Contract (ECC) in 2017 (Hunter, 2019). An early contractor involvement clause for use with NEC3 ECC as a Z clause was published in January 2016.

Since 2017, Option X22 has been amended in October 2020 and January 2023. The October 2020 amendments included processes for agreeing changes to access dates, key dates and the completion date during stage one. This article examines the amendments made in January 2023.

Overview of Option X22

Option X22 is for use with the NEC4 ECC Option C (target price with activity schedule) and NEC4 ECC Option E (cost-reimbursable contract). The parties enter into a single contract with two stages. Stage one involves working together with the objective of developing and agreeing the scope, programme and prices (early contractor involvement). Stage two is the construction phase.

The client states the budget for the project and a financial incentive that is paid to the contractor if the final project cost is less than the budget. The two-stage approach provided by Option X22 can be used to implement an early supply chain involvement strategy as set out in the UK government’s Construction Playbook (HM Government, 2022).

Additional contractor scope

Clause X22.3(7) in the previous version of the contract has been deleted with the effect that additional scope provided by the contractor during the early contractor involvement period (stage two) will no longer be treated as scope provided by the contractor for its design. This means the hierarchy, established by the exceptions under clause 60.1(1), that the client’s scope takes precedence over the scope provided by the contractor for its design becomes largely redundant for an early contractor involvement contract.

The requirement to submit designs to the project manager for acceptance (core clause 21.2) means that if the contractor does not build in accordance with the accepted design, the matter will be considered a defect under the second bullet point of clause 11.2(6). Clients wishing to make a part of the contractor’s proposals made during stage one a client requirement, will need to ensure an instruction to change the scope is given by the project manager (clause 14.3). However, the parties will need to decide if such a change should be managed as a compensation event or, more pragmatically, as part of the procedure for the stage two proposals (clause X22.3).

Site Information

During stage one, changes can now be made to the site information, provided the project manager and contractor agree, see clause X22.3(7). This allows information obtained during stage one to be included in the site information, for example the results of a site investigation or ecology survey.

Site information forms the baseline against which compensation events for physical conditions (60.1(12)) are assessed. It is therefore inevitable that if the site information is changed this will have an effect on the contractor’s design, price and programme proposals for stage two. Note that a compensation event for physical conditions would be judged against the later date of the notice to proceed to stage two and not the contract date, see clause X22.5(4).

Termination

A new clause X22.3(9) provides clarity on the amounts due if termination occurs during stage one. For ECC Option C and E, the amount due under A4 will include the ‘fee percentage applied to any excess of the first forecast of Defined Cost for the work done in Stage One over the Price for Work Done to Date less the Fee’.

It is a requirement that the contractor submits forecasts of the stage one defined cost to the project manager for acceptance under clause X22.2(1). However, it seems that the forecast used in clause X22.3(9) may not need to be one that has been accepted by the project manager.

For ECC Option C, the contractor’s share (clause 54) does not apply if termination occurs during stage one. This reflects the nature of a cost reimbursable only payment regime for the work done in stage one.

If termination occurs after a notice to proceed to stage two is issued, the amount due for A4 under ECC Option C is assessed using the total of the prices (the target) as stated in the notice to proceed. For ECC Option E, the amount is assessed using the contractor’s first forecast of defined cost issued after the notice is given to proceed, see clause X22.5(4). The contractor’s obligation to submit forecasts during stage two is stated in clause 20.4.

The amount due under A4 following termination does not apply in every circumstance. Users of the contract will need to understand the reason for termination and refer to the termination table 90.2 or X11, if this Option has been included in the contract.

Notice not to proceed to stage two

In the event that the works do not proceed to stage two, the project manager is now required to issue a notice to the contractor stating as such, see clause X22.5(1). The project manager is also required to change the completion date to the date when stage one was completed. A certificate of completion would then be issued in accordance with clause 30.2.

For ECC Option C, the prices are changed to match the price for work done to date at the conclusion of stage one. This new requirement provides greater clarity for the contractor and reinforces the fact that a decision not to proceed to stage two is not the same as termination.

Compensation events in stage one

If a compensation event occurs before the project manager has issued a notice to proceed to stage two, the effects of the event are treated as included in the project manager’s notice to proceed, see clause X22.4(4). The NEC4 user guide explains that this new clause ‘removes the need for each compensation event to be addressed individually’ during stage one.

However, and more importantly, this clause could effect a time bar on the contractor’s entitlement to a change to the prices and completion date. Prompt notification of compensation events and agreement by the project manager and the contractor of the prices and programme for stage two, as required by clause X22.5(2) before the notice to proceed is issued, should alleviate this risk.

Conclusions and recommendations

Early contractor involvement using Option X22 provides for a two-stage procurement strategy within a single contract. To gain the full benefits of this approach, the client, project manager and contractor need to work collaboratively and ensure the core, main and other relevant secondary Options are also followed during stage one.

With the latest amendments, Option X22 provides an improved process for managing the transition from early contractor involvement to the construction phase. It offers greater flexibility for the project manager and contractor to agree changes to the scope, target price, programme and site information during the early contractor involvement phase. The project manager is however not authorised to agree changes to other commercial risk factors, for example the contractor’s fee percentage, delay damages and limitation of liability.

Contracting authorities in the UK bound by the Public Contract Regulations 2015 may need to consider whether allowing changes to be made in stage one would have ‘the effect of materially modifying essential aspects of the tender’ where competitive dialogue has been used’. 

References

HM Government (2022) The Construction Playbook: Government guidance on sourcing and contracting public works projects and programmes, Version 1.1, Cabinet Office, www.gov.uk/government/publications/the-construction-playbook

Hunter D (2019) Engaging suppliers early with NEC4. NEC Users’ Group Newsletter 95 (January 2019): 6−7.