Using key performance indicators to improve how NEC contracts are used

Using key performance indicators to improve how NEC contracts are used

Key Points

  • Key performance indicators (KPIs) are quantifiable measures that compare performance against objectives.
  • In NEC contracts KPIs can be used to incentivise contractors through option X20 as well as multiple contractors on the same project through option X12.
  • A standard set of ‘contract-health-check’ KPIs is proposed for to improve how all NEC contracts are used.


The construction industry needs to continually improve the way it delivers capital projects, ensuring the intended benefits of the investment at the same time as meeting ever-more-demanding social and environmental targets. In NEC4 contracts one of the most effective ways to ensure continually improving project outcomes is through key performance indicators (KPIs).

What is a KPI?

KPIs are a set of quantifiable measures that compare performance against objectives. In NEC4 contracts they can used by the client to incentivise a contractor to implement positive behaviours and cultures by measuring actual performance as required by the contract. Examples include efficiency, productivity, health and safety, quality, stakeholder management, and sustainability.

KPIs are also an effective tool for collaboratively driving innovation and transformation. However, NEC clients often do not use KPIs as drivers of meaningful change. They are commonly used as metrics for measuring contract compliance by the contractor, but not how well the team is using the contract to manage the contract, and so the project.

Using KPIs to improve NEC management

If NEC clients wish to promote a contracting environment that delivers a more effective, rewarding and transformative relationship between all parties, they need a greater focus on promoting positive behaviours and sustainable outcomes. KPIs can be designed to ensure that the NEC obligation to, ‘act in a spirit of mutual trust and co-operation,’ is a realisation and not just an aspiration.

NEC project teams must significantly reduce the problems associated with: not having the first accepted programme in place on time (and all subsequent programmes); repeatable time and cost over-runs; and unsighted and untreated risk. They also need to increase innovative and data-led efficiencies to achieve more valuable, sustainable outcomes.

A desired project environment is borne out of proactive preparation, planning, monitoring and control. The development of a contract therefore needs to be collaboratively defined and agreed at a very early stage, including KPIs if they are to be used. KPIs have proved effective for informing and incentivising the right behaviours and outcomes throughout project delivery.

Options for using KPIs in NEC4

NEC4 provides for KPIs in secondary option X20. This is done via an ‘Incentive Schedule’, in which the client can set out targets and include amounts to be paid to the contractor if specific targets are met or exceeded. It also establishes the process for performance monitoring and reporting as measured by the KPIs. Prevention is more effective than cure and therefore this should be at the heart of the KPI approach.

Option X20 only allows for positive payments to a contractor. An additional condition (Z clause) is required if a client wishes to impose ‘damages’ on a contractor for failing to achieve them. Option X20 also allows KPIs to be added after award, which is OK as long as only positive payments are involved. Outside X20, the project manager and contractor are importantly not prevented from agreeing to KPIs (or further KPIs) for the benefit of either party, or importantly the project.

Option X20 focuses on ‘result’ KPIs, which are predominantly end-state data in nature, but can be adapted to focus on ‘enabler’ KPIs, which facilitate key data for the full project lifecycle. The latter provide a more insightful platform for performance measurement and data analytics for benchmarking.

If KPIs are to be used with option X20, it is essential they are identified by the client at tender and supported by unambiguous assessment criteria. With the right intent, they should inform stronger contractor responses and − by being incorporated into scoping, planning and estimating from the outset − they should lay the foundations for incentivising and rewarding performance and outcomes. Another consideration is the provision of subcontractor information where performance on specific work packages is to be measured.

Option X12 on multiparty collaboration should be considered for driving collaboration between two or more suppliers on the same project. X12.1(7) requires the KPIs and performance targets to be stated in the ‘Schedule of Partners’, which is included in all the affected contracts. It is possible to have separate X20 KPIs applying only to specific contracts, but it is recommended to have just the X12 KPIs applicable to all those involved.

Contract-health-check KPIs

Clause X20.1 states, ‘A Key Performance Indicator is an aspect of performance by the Contractor for which a target is stated in the Incentive Schedule’. But there is no reason why X20 cannot include measures that are essentially a health check on how the contract is being used.

Table 1 shows an incentive schedule with a proposed set of contract-health-check KPIs. The project data required to conduct the measurements should be readily available. It would clearly be beneficial for all NEC users if such a standard set of contract-health-check KPIs could be developed, and this schedule is intended as a starting point for discussion.

Note that for many of the contract-health-check KPIs, the amount the contractor is paid is stated as ‘nil’ as the attainment of the target is very much the result of actions and collaboration between the project manager and contractor. The values of the contract-health-check KPIs over time are nevertheless valuable indicators of how well the contract is being constructively applied by all involved.

Conclusion

NEC users would benefit from a straightforward, agreed set of contract-health-check KPIs that could be used across all contracts.

Subject to conditions of definition and deployment, KPIs have proved to help achieve objectives set under incentivised environments. Definition is key, for it is not uncommon for KPIs to realise a dissimilar outcome to that which they were designed for.

With a focus on value-driven objectives, early engagement, realistic and attainable targets, and clear assessment methods, contract-health-check KPIs should help to drive improvements in project delivery for the benefit of all NEC users.

Acknowledgements

This article was prepared with Richard Patterson, technical principal and NEC procurement specialist at Mott MacDonald. Richard has been working with the Mott MacDonald and external NEC communities collaboratively to develop the X20 incentive schedule and welcomes input for its continued development.
 

Table 1.
Key Performance Indicator Number Aspect of performance Key performance indicator description Target performance Amount the contractor is payed if the target stated is improved upon or achieved
KPI-1.1 Programme acceptance Number of days since last acceptance by the project manager of a revised programme. Maximum 31 days  £ nil
KPI-1.2 Programme acceptance For the last accepted programme, the number of days between submission of the revised programme and acceptance of the programme by the project manager. Maximum 7 days £ nil
KPI-1.3 Time (terminal float) Number of weeks that planned completion is in advance of the completion date. Remains constant or increases £ nil
KPI-1.4 Time (progress) Price for work done to date as a fraction of expected price at current date based on first accepted programme (this is designed as a simple measure and does not try to allow for compensation events). More than one day £ nil
KPI-2.1 Early warnings Number of days since last early warning meeting (target to be set based on the period stated in the contract data). Maximum 28 days £ nil
KPI-2.2 Early warnings Number of early warnings notified in the period. - £ nil
KPI-2.3 Early warnings Cumulative number of early warnings notified. - £ nil
KPI-3.1 Compensation events Number of compensation events notified in the period. - £ nil
KPI-3.2 Compensation events Cumulative number of compensation events notified. - £ nil
KPI-3.3 Compensation events Cumulative value of delay to completion date in quotations for compensation events that have not been implemented. - £ nil
KPI-3.4 Compensation events Cumulative value of change to the prices in quotations for compensation events that have not been implemented. - £ nil
KPI-3.5 Compensation events Average time between original notification of quotation and implementation of the compensation event. Maximum 14 days. £ nil
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