Payment mechanisms in the NEC4 DBOC

Ross Hayes

Richard Patterson

Barry Trebes

Key points:

• The NEC4 DBOC is written to allow clients to include both price-based elements and cost-based elements. 
• The contract has a price list which is divided into part A for price-based elements and part B for cost-based elements. 
• A performance table allows the client to include separate incentives, both for the design and build and/or operation and maintenance phases. 

The NEC4 Design Build and Operate Contract (DBOC) was first published in 2017, and the authors published an introduction to the new contract back in Issue 89 of the previous iteration of the NEC newsletter. This follow-up article considers its payment mechanisms in more detail.  

Payment options

The NEC4 Engineering and Construction Contract (ECC), NEC4 Term Service Contract (TSC) and NEC4 Facilities Management Contract (FMC) all require the choice of one main option to define the payment mechanism. This is either a price-based or cost-based approach for all but the NEC4 ECC Option F (management contract), which is predominantly a cost-based contract but allows some minor price-based elements. 

Recognising the nature of the NEC4 DBOC as integrating both construction and operation phases of work, it needs to be more flexible. The contract is written to allow price-based elements (against a price list) and/or cost-based elements (against a schedule of cost components). It does not prescribe what type of work is paid against which payment mechanism – it could all be price-based, all cost-based, or the construction and operation phases of work could use different payment mechanisms. This gives the client complete flexibility in how it defines its payment method. 

To enable this, the DBOC does not have the usual main options A to E. Instead, at Clause 11.2(20) it states: ‘The Price for Service Provided to Date is: 

• for the work identified in part A of the Price List, the total of the Prices in the Price List for  

- each completed lump sum item and

- where a quantity is stated for an item in the Price List, an amount calculated by multiplying the quantity which the Contractor has completed by the rate and 

• for the work identified in part B of the Price List, the total Defined Cost which the Service Manager forecasts will have been paid by the Contractor before the next assessment date plus the Fee.’

Parts A and B of the price list

Part A of the price list is the same as a price list in the NEC4 TSC and NEC4 Engineering and Construction Short Contract (ECSC). The client can state quantities and ask for a rate for those items for which the client wants to take the risk of quantities. Logically part A of the price list will be divided into parts for ‘design and build’ and ‘operation’.  

If the client wants an option A style lump-sum payment for design and build, the price list will be very similar to the activity schedule in an NEC4 ECC Option A contract, and normally the bidder will be asked to list the items in the price list. The prices for operation are likely to be a mix of lump sums and measured items, to match the fixed and variable costs of operating the facility. For example, this could be a monthly charge for operating the facility (sometimes called the ‘availability charge’) along with a charge based on the quantity of, say, water provided by a water treatment plant. 

Items in part B are paid based on defined cost as is the case in the NEC4 ECC, TSC and FMC Option C (target) and Option E (cost-reimbursable) contracts. Defined cost is set out in the schedule of cost components. The schedule of cost components in the NEC4 DBOC is like the short schedule of cost components in the NEC4 ECC in that it provides for people and equipment based on tendered rates rather than actual costs. 

Performance table incentives

Clause 53.4 states, ‘At the dates stated in the Performance Table, the Service Manager assesses the Contractor’s share of the difference between the total of the Prices and the Price for Service Provided to Date for the work identified in part B of the Price List. If the Price for Service Provided to Date is less than the total of the Prices, the Contractor is paid the amount stated in the Performance Table. If the Price for Service Provided to Date is greater than the total of the Prices, the Contractor pays the amount stated in the Performance Table.’ 

The performance table allows for any required incentives to be included in the contract. If the client wants part of the works to be carried out on a target cost basis, this can be done via an entry in the performance table. This is likely to include share ranges and share percentages similar to those in the NEC4 ECC target cost options. 

The main benefit of a target option compared with a lump sum is that it better incentivises collaboration as both client and contractor will benefit from any savings below the target. The main downside for the target option is the need to audit the contractor’s defined cost. 

If a client wants the collaboration-inducing target cost mechanism in its contract for either the design and build phase and/or the operational and maintenance phase, it can do so. If it wants a contract that is simpler to administer and passes the ‘efficiency risk’ to the contractor via a priced option, it can do so. 

A key issue for clients is identifying and incentivising performance and productivity of the total asset. This may include the deduction of payments for poor performance and/or or additional payments for better-than-target performance. All this can be set out in the performance table in the NEC4 DBOC. 

The performance table in the NEC4 DBOC predates NEC’s Secondary Option X29, which in the NEC4 ECC, Professional Service Contract (PSC) and TSC also includes a performance table. Option X29 also introduced ‘Climate Change Requirements’ and the DBOC version of X29 does not need to have a separate performance table – it is in the core clauses of the DBOC. 

NEC4 DBOC for DBFO projects

There is talk again in the UK and internationally about the need for private investment in infrastructure projects, which will need contracts for design, build, finance and operate (DBFO). Those contracts essentially have the contractor paid at rates for its operational service only, requiring the contractor to finance the design and build stage.  

In principle that can be done with the NEC4 DBOC simply by having price list items for operation only and not for design and build in part A of the price list. It will not be quite that simple, but clients should be looking to use the NEC4 DBOC with all its standard provisions for design, build and operations as its starting point for a DBFO contract.