NEC target-cost contracts, particularly the Engineering and Construction Contract (ECC) Option C (target contract with activity schedule), are now widely established as the standard procurement route for infrastructure projects in the UK, South Africa, Hong Kong and elsewhere. However, for buildings, clients have tended to prefer lump-sum contracts, which in the case of NEC usually means ECC Option A (priced contract with activity schedule).
But the situation could soon be about to change in Hong Kong, where the government is encouraging all construction-related departments to embrace target-cost contracting. As the Development Bureau stated last year in Construction 2.0 – A time for change, ‘target cost contracts drive contractors to achieve good performance and beat the target cost and schedule by using pain/gain mechanisms that incentivise over performance and penalise under performance’ (Development Bureau 2018).
To help Hong Kong’s public-sector building clients make the switch, NEC published a 24-page white paper last month setting out the benefits of using target-cost contracts on building projects (NEC 2019). It explains the various target-cost options available in the NEC family of contracts, reviews the specific considerations for building projects and describes how to manage target-cost building contracts successfully.
In particular the white paper looks at selection of multiple subcontractors and suppliers, ensuring value for money in the supply chain, making payments for forecast defined cost, assessing the level of risk during construction, forecasting outturn cost and using the contracts on modular construction projects. It also includes case studies of buildings in Antarctica, the Netherlands, New Zealand, South Africa and the UK that were successfully delivered with NEC target contracts.
The white paper acknowledges there is a still a lack of experience in the building sector worldwide with both NEC and target-cost contracts, particularly with the regular production and acceptance of programmes, management of early warnings and compensation events, and reconciliation of actual and forecast defined costs.
As has been successfully demonstrated in the infrastructure sector in the UK, Hong Kong and elsewhere, the white paper says the way to resolve the issue is through training and upskilling of staff with the competencies they need to manage NEC contracts effectively. ‘NEC contracts are based on the principles of effective project management and so in learning the skills to use these contracts properly, you are learning the skills to be successful project managers and contractors under all types of contract.’
Development Bureau (2019), Construction 2.0 – A time for change, September 2018, available at: https://www.hkc2.hk/en/
NEC (2019) NEC White Paper: The use of target cost contracts for building works in Hong Kong, October 2019, download here.