Frequently Asked Questions

We are a client on an NEC4 Engineering and Construction Contract (ECC). We are considering paying the contractor an early completion bonus for the installation of a production facility as bringing it online earlier would result in an increase in revenue. How would the ECC deal with latent defects or poor delivery of snagging rectification after the bonus payment or the agreement to pay the bonus? In particular, what if a major latent defect was identified which resulted in production having to be halted, especially if the accrued down time surpassed the original completion date? Would the bonus need to form part of any retention held, or be held as retention in its own right?
We think the two issues are separate. If there is a defect that you are aware of before completion that prevents you from using the works, you would not issue the completion certificate and this could affect the X6 early completion bonus payment. However, once completion occurs, nothing changes if later on a latent defect occurs – the contractor though has an obligation to correct the defect.

If there is a latent defect you have no idea about at completion, then completion is given and the X6 early completion bonus is payable. If sometime later and before the defects date, the defect emerges and is notified, you can then choose to accept the defect under clause 45 or get the contractor to correct it. You have to give access to the contractor for this to happen and, if the defect remains uncorrected after its defect correction period because you did or did not give access, then you follow clause 46.1/46.2 appropriately. But in this clause, there is no provision we can see that you can claim back loss of production. If access is given and the contractor corrects the defect, then we also cannot see that you can recover loss of production because the ECC does not provide for that anywhere.

We think you would have reluctant bidders if you changed the contract to say loss of production time is payable by the contractor – they have absolutely no idea what that might be, and we cannot see that the early completion bonus is linked to correcting defects after completion. Even a general damages claim may not succeed here as the loss may not be in the contemplation of the parties, although we cannot give legal advice. This is one of those client risks as we see it, and it emphasises the importance of the quality of the contractor’s performance, including testing and inspecting.

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