Value engineering under Clause 16 of the NEC4 ECC

Peter Higgins

Ian Heaphy

Key points:

• NEC4 ECC Clause 16 ‘Contractor’s proposals’ is a value engineering clause. 
• It encourages contractors to propose changes to the clients’ scope which will reduce the amount clients pay. 
• Savings can be shared using the value engineering percentage in Options A and B and the contractor’s share in Options C and D. 

One of the updates in the NEC4 Engineering and Construction Contract (ECC) was the introduction into all main options of Clause 16 ‘Contractor’s proposals’. The intent of the clause is to encourage the contractor to propose changes to the client’s scope that will reduce the cost of construction. It is in effect a value engineering clause that has the potential to reduce the amount the client pays to the contractor for providing the works. Similar clauses are also included in other NEC4 main contracts. 

To get the best out of the clause, it is important that users understand how it works and how it can link to other provisions in the contract. 

Change to contractor’s scope

The first issue to be aware of is that the clause only applies to proposed changes to the client’s scope. It does not apply to any contractor’s scope for its design identified in Contract Data part two. If there is contractor’s scope for its design and it is changed at the request of the contractor, Clause 16 will not apply and instead Clause 60.1(1) will address this.  

A change to any contractor’s scope for its design can only be made by the project manager under Clause 14.3 and will therefore need to be agreed by the project manager, no doubt in consultation with the client. If the change in the contractor’s scope leads to a reduction in the cost of providing the works or an increase in cost, this will be the contractor’s risk and will not result in a compensation event and a change to the prices. However, the client may share in the saving created or extra cost incurred, depending on the main option selected. 

On similar basis, where the contractor is required by the scope to design a part of the works post contract award, the contractor can value engineer its design if it still meets the requirements set out in the scope and applicable law. Such value engineering will not result in a change to the prices, but again the client may share in some of the saving created dependent on the main option selected. 

Change to client’s scope

There is no requirement for the contractor to make proposals under Clause 16, as Clause 16.1 uses the term ‘may’ making it optional for the contractor.  

If the contractor does make a proposal under Clause 16.1, the project manager must consider it in consultation with the client. If the project manager and client do not wish to go ahead with the proposed change, the contractor is informed of that decision, and the matter will be closed. This decision will not result in a compensation event; this is the contractor’s risk. The project manager can give any reason as to why the proposal is not accepted. 

Before deciding whether to accept the change, the project manager may want to understand the potential saving that would be generated and can instruct the contractor to provide a quotation to show this. If the project manager instructs the contractor to quote for a proposed instruction, Clause 65 will apply. If the quotation produced by the contractor is not accepted, this will be a compensation event and may lead to change to the prices as per Clause 60.1(20).  

Instruction to change

If the project manager on behalf of the client wishes to go ahead with a proposal from the contractor under Clause 16, they will instruct a change to the scope under Clause 14.3. This will be a compensation event under Clause 60.1(1). When assessing the change to the prices due to the compensation event, specific clauses will apply.  

In NEC4 ECC Option A (priced contract with activity schedule) and Option B (priced contract with bill of quantities), the change to the prices is assessed and then the value engineering percentage is applied to the value calculated. The value engineering percentage is stated in Contract Data part one with a default of 50%, though this can be changed by the client when putting the contract together. This will have the effect of sharing the saving created between the client and contractor. For example, if the total reduction in the prices is initially calculated at £10,000, when the value engineering percentage is applied, assuming it is left at 50%, the actual change made to the prices will be £5,000, resulting in a saving of £5,000 to both parties. 

In NEC4 ECC Option C (target contract with activity schedule) and Option D (target contract with bill of quantities), the same process is followed up until the assessment of the change to the prices, which will be valued at zero. The logic is that if the change in scope will lead to a reduction in defined cost plus fee. Using the above example, the amount of £10,000 will be shared between the parties via the assessment of the contractor’s share in line with Clause 54. 

As with all compensation events, the completion date cannot be moved forward to an earlier date, even if the change in scope results in planned completion being moved forward to an earlier date. Any cost savings in terms of site running costs due an earlier planned completion should, however, form part of the assessment of defined cost resulting from the compensation event. 

It is of course possible for the project manager and contractor to consider an agreement to change the completion date using Clause 36 on acceleration, in conjunction with an agreement under Clause 16. 

Design responsibility

Another issue to consider is whether the proposed change has any impact on design. For example, the change proposed by the contractor may involve an alternative design to that contained in the client’s scope. In this case, the project manager and contractor will need to consider which party will take responsibility for this alternative design.  

The contractor as part of its proposal may allocate design responsibility to itself. If not, and the project manager changes the client’s scope based on the contractor’s proposed design, the client will become responsible for this design as it will form part of the client’s scope.  

If the client does not want to take on the design responsibility for the alternative design, the project manager will either not accept the proposed change, and the matter will be at an end, or discuss with the contractor as to whether the contractor would be willing to revise its proposal to reallocate design responsibility for the alternative design to the contractor.  

Any reallocation of design responsibly will need careful consideration, including factors such as whether Secondary Option X5 on contractor’s design has been included in the contract. 

Non-acceptance of proposal

A final point to note is that there is the potential for a project manager to inform the contractor that the proposal to change the client’s scope is not accepted but then to issue the same change of scope under Clause 14.3. This would mean the contractor would not receive any share in the saving created. Clearly this would seem contrary to the behaviours expected under Clause 10.2 and the requirement to ‘act in a spirit of mutual trust and co-operation’. However, the contract deliberately does not stop this from happening in the same way it does in Secondary Option X21 on whole life cost (Clause X21.4).  

The reason for allowing the project manager to change the same part of the client’s scope is a concern that it may have errors. If the errors require the project manager to change the scope to rectify them, this will be a compensation event, commonly resulting in an increase in the prices and/or delay to the completion date. The correction of the error could also lead to a reduction in the prices.  

If the error is identified by the contractor, which then proposes a solution to the issue under Clause 16, this would lead to any resultant saving in defined cost being shared between the parties under options A to D, even if the error was one that the project manager or client would have identified and corrected had the contractor not proposed the change. In this case, the proposal from the contractor is not a genuine value engineering proposal but the identification of an error, which would have been corrected by the project manager when discovered. On this basis, it is not appropriate for the contractor to share in a saving which it did not actually create. 

It does create a risk that a project manager could reject a genuine value engineering proposal issued by the contractor under Clause 16 and then issue it as a change in scope. However, as noted above, this would not be in keeping with Clause 10.2 and would likely result in the contractor offering no further value engineering proposals, defeating the intent of Clause 16.