International Standard Forms of

Contracts

Dr. Joseph Chan

BSc (Hons), MSc, PhD, MHKIS, MRICS, MHKIPM

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 International Standard Forms of Contract
 FIDIC:
 FIDIC Conditions of Contract: 4th Edition of the
Red Book. Prepared by the Fédération
Internationale des Ingénieurs Conseils (the
International Federation of Consulting Engineers).
 Since its introduction in 1963, this standard form
has been used on a large number of international
civil engineering and building contracts worldwide
and most international development and financial
institutions, including the World Bank, has
endorsed its use. use FIDIC to apply funding
from World Bank
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International Standard Forms of Contract

 NEC Engineering and Construction

Contract. The New Engineering Contract
(NEC) was first published in 1993 and
republished in its second edition as the NEC
Engineering and Construction Contract
(ECC) in 1995.

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International Standard Forms of Contract

 ICE Conditions of Contract:

 6th Edition (1991) & 7th Edition (1999).
Prepared by the Institution of Civil
Engineers (ICE), the Association of Civil
Engineers (ACE), and the Civil Engineering
Contractors Association (CECA)

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 International Standard Forms of Contract
 UNIDO standard form of conditions for
construction contracts.
 Prepared by the United Nations Industrial
Development Organization is the specialist United
Nations agency, established in 1966
 ENAA Turnkey Contract Conditions.
 Prepared by the Engineering Advancement
Association of Japan.
 SAA General Conditions of Contract.
 Published by the Standards Association of Australia
There are different contract formed by
different parties. e.g. Hospital Authority 5
Main Areas Dealt with in the General
Conditions of Most cContracts
• The main areas dealt with in the general
conditions of most contracts are:
 assignment and sub-letting,
 bills of quantities, North American countries
may not have BQ

 certificates and payments,

 commencement and completion,
 contract documents,
 cost adjustment procedure,
 defects liability;

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 insurance, sureties,
 liquidated damages,
 variations,
 provisional and prime cost sums,
 sectional completion,
 superintendent (Engineer/Architect), determination,
 extension of time,
 and dispute resolution.

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Focus Today

 As it is not practicable to provide a review

of all the aforementioned conditions, FIDIC
Conditions of Contract and NEC3 are
chosen for further analysis and reference as
they are probably the most widely used of
all the contracts accepted for international
use

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FIDIC Conditions of Contracts

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FIDIC Conditions of Contract
• In 1999, FIDIC published four new forms of contract.
The forms, which are identified by their colours of the
covers of the publication, are as follows:

• Conditions of Contract for Construction (New Red

Book) – for building and engineering works designed by
the employer and built by the contractor.

• Conditions of Contract for Plant and Design-Build (New

Yellow Book) – for electrical and mechanical plant and
for building and engineering works designed by the
contractor.

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 Conditions of Contract for EPC Turnkey Projects
(Silver Book) – for situations where one entity
carries out all of the engineering, procurement and
construction to provide a facility ready for operation.
EPC is the abbreviation for Engineer Procurement
Contract.
 Short Form of Contract (Green Book) – for building
or engineering work of relatively small capital value,
of short duration or of repetitive work.
 The Test Edition of the FIDIC Form of Contract for
Dredging and Reclamation Works (Blue Book)
published in 2001, similar to the Green Book
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General Remarks for 1999 Edition

 More consistent wordings, user-friendly

format and layout
 Strong financial management: detailed
claim procedures must be followed
 Risk sharing more balanced
 Dispute resolution procedures: adjudication
-> amicable settlement -> arbitration

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 Further readings:
 Totterdill, B.W. (2006) FIDIC users’
guide: A practical guide to the 1999
red and yellow books, UK: Thomas
Telford
 Bunni, N.G. (1997). The FIDIC Form
of Contract: The Fourth Edition of
the Red Book. Blackwell Science.
 FIDIC Conditions of Contract for
Construction, UK: Thomas Telford
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New Engineering Contracts (NEC3)

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Agenda

1. Background of NEC
2. Aims and Objectives of NEC3
3. Overview of ECC – an introduction
4. Key Features of NEC3 ECC
5. Concluding Remarks

 NEC3: New Engineering Contracts 3

 ECC: Engineering and Construction Contract
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Background of NEC
 Philosophy and Background to the New Engineering
Contract (NEC)
 Originally conceived to improve the management of building
projects
 The Institution of Civil Engineers ultimately sponsored the
development of the contract and published it
 Consequently the perception has been that it was developed for
civil engineering projects, which is not the case
 The NEC now stands out as the pre-eminent 21st century
contract. Its stress on communication and co-operation, team
working and partnership are essential ingredients for innovative
thinking, flexibility, improvement and best practice
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Background to the NEC
 History of the NEC
1985 ICE commissioned a fundamental review of contract strategies
for civil engineering design and construction
1986 Specification for a new style contract commissioned
1991 Consultative version published
1993 1st edition published
1994 Professional Services and Adjudicator’s contracts published
1995 2nd edition published
1999 Engineering and Construction Short Contract and Short Sub-
Contract published
2005 3rd edition (NEC3) published
(2013 last amended)
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Background to the NEC
 Why use NEC?
 Latham Report, UK
 To bring an end to the adversarial approach that had become
prevalent in the construction industry
 To produce a single contract with a wide application
 To stimulate productive management and collaboration
 OGC (Office of Government Commerce )
 To satisfy the Achieving Excellence in Construction principles
(partnering and long term relationships, reduction in decision
making approval chains, value and risk management)
 Only standard form of contract recommended for use
 NAO (National Audit Office)
 2005: Improving Public Services Through Better Construction
Report singled out the ECC for recommendation
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 Background to the NEC

 Clients using the NEC in the UK

 Highways Agency
 Environmental Agency
 Olympics Delivery Authority
 British Airport Authority
 Health Authority Heathrow Airport T5
 Department for Environment, Food and Agriculture
 National Health Services (NHS) ProCure21 framework

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Background to the NEC
 Clients using the NEC in Hong Kong
 Highways Department
 Noise Barriers on Fanling Highway between MTR Fanling Station and
Wo Hing Road: Option C: target cost with activity schedule
 Drainage Services Department
 Improvement of Fuk Man Road Nullah in Sai Kung: Option C: target cost
with activity schedule
 Architectural Services Department
 a few pilot projects, including Tin Shui Wai Hospital:
 http://www.neccontract.com/news/article.asp?NEWS_ID=776

 CLP Power Hong Kong Ltd

 Term Services Contract for maintenance services

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 Aims and objectives of the NEC
 Drafted with 3 clear objectives to improve:-
1. Flexibility
2. Clarity
3. Project management
 Encourage trust, collaboration and early risk
identification
 Requires a change in culture from all

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Aims and objectives of the NEC

 Flexibility
 Multi-disciplinary (building/civil works)
 Design & build or traditional procurement
 Flexible risk allocation
 International application (UK, France, India,
UAE, South Africa, New Zealand etc. )

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Aims and Objectives of the NEC
 Clarity
 Ordinary language
 Present tense defines actions of parties precisely
 Minimal subjective judgments (fair, reasonable)
 Minimal legal jargon
 Difference between italicised terms and those with capital
letters
 Procedural logic backed up by flow charts

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Aims and Objectives of the NEC
 Stimulus to good project management –
two principles
 Foresight applied collaboratively mitigates problems and
reduces risk
 Clear division of function and responsibility helps
accountability and motivates people to play their part
 The role of the Project Manager (PM)
 Proactive
 PM is placed a great deal of authority under ECC

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 The NEC Family
Engineering & Construction Contract (ECC)
between an Employer and a Contractor
Engineering & Construction Subcontract
between a Contractor and a Subcontractor
Today’s focus
Professional Services Contract
between an Employer or a Contractor and a Consultant
(not just on an NEC project)
Adjudicator’s Contract
between two contracting parties and an Adjudicator
(not just on an NEC project)

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The NEC Family
Engineering & Construction Short Contract
for “simple” work
(not necessarily low value)
Engineering & Construction Short Subcontract
for use with the ECC or EC Short Contract
Term Services Contract
where the contract is for a period of time rather than a single project
Framework Contract
Guidance Notes and Procurement and Contract Strategies
Guide
(including flow charts)

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Parties named in the ECC
1. The Employer
2. The Contractor
3. The Project Manager – administers the contract
4. The Supervisor – administers testing, inspection
& defects (sim. Clerk of Works)
5. The Adjudicator (appointed jointly by the
Employer and the Contractor)
6. Others - people or organisations (e.g. design team
and cost manager) who are not the above, or any
employee, Subcontractor or supplier of the
Contractor 27
 Overview of the ECC - Main Options
 Option A - Priced Contract with Activity Schedule
 Option B - Priced Contract with Bill of Quantities
 Contracts priced by the Contractors for
undertaking the works (risk largely taken by the
Contractors)
 Option C - Target Contract with Activity Schedule
 Option D - Target Contract with Bill of Quantities
 Target cost contracts in which the out-turn
financial risk is shared by the Client and the
Contractor with a pre-agreed sharing ratio (i.e.
pain-share/gain-share approach)
 Option E - Cost Reimbursable Contract
 Option F - Management Contract
 Cost reimbursement contracts with financial risks
largely taken by the Client 28
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Selected Hong Kong Projects using NEC3 :
Contract Contract Title Contract Nature Start / Option
No. Sum Comp.

DC/2008/02 Improvement of Fuk Man Road nullah in Sai $76M Flood Aug 2009 / C
Kung (Completed) prevention May 2012
Consultant-managed / DP

HY/2009/04 Retrofitting noise barriers on Fanling Highway $138M Noise Barrier Nov 2010 / C
between MTR Fanling Station and Wo Hing End 2013
Road

HY/2010/10 Retrofitting of noise barriers on Tai Po Tai Wo $72.853M Noise Barrier Mar 2012 / C
Road Mid 2014

DC/2012/09 Pak Hok Lam trunk sewer and Sha Tau Kok $203M Village June 2012 / B
village sewerage sewerage Aug 2016
Consultant-managed / CM

DC/2012/05 Yuen Long Kau Hui and Shap Pat Heung $160M Village Sept 2012 / D
sewerage Sept 2016

DC/2012/03 Happy Valley underground stormwater storage $680M Flood Sept 2012 / C
scheme prevention Apr 2018
In-house / DP

DC/2012/07 Lam Tsuen village sewerage $173M Village Oct 2012 / B

Consultant-managed / PM sewerage Jan 2016

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Selected Hong Kong Projects using NEC3 :
Contract Contract Title Contract Nature Start / Option
No. Sum Comp.

HY/2011/13 Improvement to Pok Oi Interchange $170M Bridge Nov 2012/ C

Sep 2015

DC/2012/01 Building and Civil Maintenance and Minor TBC Maintenance TBC A
Works to DSD Plants and Facilities

ArchSD Design and Construction of Tin Shui Wai $2,968M D&B Feb 2013 / A
SSA502 Hospital May 2016

1/WSD/13 Improvement of Fresh Water Supply to $181M Waterworks July 2013 C

Cheung Chau

IS/2013/02 IS/2013/02 – Improvement Works at Mui Wo, TBC Civil July 2014 C
Phase 1

HY/2013/19 Retrofitting of Noise Barriers on Tuen Mun PTE Noise Barrier 2015 A
Road – Town Centre Section $546M

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Overview of the ECC – Core Clauses
 Core Clauses
1. General
2. The Contractor’s main responsibilities
3. Time
4. Testing and Defects
5. Payment
6. Compensation events (19 CEs: EOT + Direct Loss and
Expenses)
7. Title
8. Risks and insurance
9. Termination
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Overview of the ECC - Secondary
Optional Clauses
 Secondary Optional Clauses
 X1. Price adjustment for inflation (used only with Options
A, B, C & D) (sim. “Fluctuation Clause”)
 X2. Changes in the law
 X3. Multiple currencies (used only with Options A & B)
 X4. Parent Company Guarantee
 X5. Sectional Completion
 X6. Bonus for Early Completion
 X7. Delay Damages (sim. Liquidated and Ascertained
Damages)
 X12. Partnering
 X13. Performance bond
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Overview of the ECC - Secondary
Optional Clauses
 Secondary Optional Clauses
 X14.Advanced payment to the Contractor
 X15.Limitation of the Contractor’s liability for his design to
reasonable skill and care
 X16.Retention (not used with Option F)
 X17.Low performance damages
 X18.Limitation of liability
 X20.Key Performance Indicators (not used with
Option X12)
 Y(UK)2. The housing grants, Construction and
Regeneration Act 1996
 Y (UK)3. The Contracts (Rights of Third Parties) Act
1999
 Z. Additional Conditions of Contract (amendments)
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Overview of the ECC – Dispute
Resolution Clauses

 Dispute Resolution Clauses

 W1. Dispute resolution procedure
 W2. Dispute resolution procedure (if
HGCAR Act 1996 applies, i.e. for UK only)
 Note: HGCAR: Housing Grants, Construction
and Regeneration Acts

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 Main Option + DR Option (W1) (for HK) + Secondary Option

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Contract Formation
The contract is formed by combining :
1. Contract Data Part One (Information provided by the
Employer) (sim Appendix to Form of Tender)
2. Contract Data Part Two (Information provided by the
Contractor)
3. Articles of Agreement (incl. contract amendments – z
clauses)
4. Contract Prices (Activity Schedule/BQ)
5. Works Information including
1. Drawings
2. Works Information document (PS, GS)
6. Site Information, Programme and Risk Register 37
Key Features of NEC3 ECC – Risk
Management
 Risk Management
 Early warning procedures: The Project Manager and the
Contractor may notify each other upon becoming aware of any
matter which could have an impact on cost, time or quality .
 The Contractor may give an early warning by notifying the Project
Manager of any other matter which could increase his cost. The
Project Manager enters early warning matters in the risk register.
 Risk reduction meeting: seek solutions together to bring advantage
to all those who will be affected
 Risk register revised by the Project Manager to record the
decisions made.

Risk is owned by all parties

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Key Features of NEC3 ECC – Time
Management
 Time Management
 Programme recognized as a key time management
tool
 Programme updates/revisions at intervals no
longer than a period of time as stated in Contract
Data Part One (say one month)
 Response by the Project Manager within 2 weeks
of the Contractor submitting the programme to
him for acceptanace
 If the process is followed properly, this would reduce the
ability of the Contractor to include his own delay with
those rightfully associated with compensation events
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Key Features of NEC3 ECC – Change
Management
 Change Management
 19 Compensation Events (CEs) under Core Clause
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 The Contractor can claim both TIME and COST
for the CEs
 Note: money and EOT claims are separately

considered in many other construction

contracts
 Procedures designed in ECC to facilitate faster
settlement 40
Key Features of NEC3 ECC – Change
Management
 PM to reply the a Notification of CE within 1 week (Cl.
61.4)
 Note: No such requirements on the Engineers in GCC

 An agreement process between the PM and the Contractor

 A definite timeframe for both PM and Contractor
 Note: PM to assess claims within a reasonable time in

some other contracts

Better cooperation and faster final account settlement

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Key Features of NEC3 ECC –
Relationship Management
 Relationship Management
 Introduction of Partnering clause (Option X12)
 Contractual partnering approached adopted
 Further encourage collaboration between the Employer

and the Contractor

 Introduction of Key Performance Indicators (Option X20)
 The Contractor reports his performance against each of the
KPIs to the PM on a regular basis
 The Contractor is paid the amount stated in the Incentive
Schedule if the target stated for a KPI is improved or
achieved.
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Key Features of NEC3 ECC
 Contract combines obligations with project
management processes
 Risk Management (Early Warning and Risk
Reduction Meeting)
 Time Management (Programme)

 Change Management (Compensation Events)

 and foster a collaborative working relationship

between the Employer and the Contractor
 Relationship Management (contractual partnering,
KPIs)

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Main challenges of Application of NEC3

 Cultural change
 Adversarial relationship vs Partnering approach
 Provide more training and guidance on the contract
philosophy and mechanisms of the NEC3 to the
supply chain
 Choice of main option
 HK: traditional lump sum fixed price vs target cost,
cost reimbursement contracts in NEC3

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Main Challenges of Application of
NEC3

 Secondary Options
 Necessary to introduce additional conditions of
contract and perhaps amendments of contract to
standard form of contract to take account of
local law
 Drafting secondary options to meet the requirements
of legislations in New Zealand

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Main Challenges of Application of
NEC3

 Dispute Resolution
 W1: used in places other than UK
 W2: used in UK
 Adjudication is not commonly applied, not
supported by any form of legislation in HK
 Results of adjudication can be enforced by
mutual agreement
 If one side not accept the adjudicator’s
decision, can go for arbitration and litigation
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 Points to Note
1. The contract imposes heavy administrative burden to
parties (also with timebar provisions for CEs)
 more human resources

 PM and the Contractor have to be supported by a

resourceful team to deliver the benefits

2. Almost no law case on NEC3
 What would happen if dispute (and litigation) arises?
 Good or Bad?

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Points to Note
3. Wide range of alternatives: care should be taken
in selecting appropriate options and allocating
responsibilities
4. Clause 10.1: “The Employer, the Contractor, the
Project Manager and the Supervisor shall act as
stated in this contract and in a spirit of mutual
trust and co-operation”
 What is the remedy if breaching this clause?

 Enforceability in question

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 Drainage Services Department
 Improvement of Fuk Man Road Nullah in Sai Kung
 Commenced in 2009, Completed in 2012

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Improvement of Fuk Man Road Nullah
in Sai Kung
KPIs Target Outturn Performance
1. User Satisfactions 7 out of 10  8 out of 10 by Leisure and
Cultural Services
Department (LCSD) and
by DSD
 8 letters of commendation
2. Time 24 weeks early  Completed in 141 weeks
against an extended
contract period of 165
weeks
3. Cost 5% gain share  Agreed target cost
HK$76M less actual cost
HK$73M = gain share of
HK$3M
4. Quality No major rework  Minor defects on non
critical items. Handover to
LCSD within 10 days of
completion
5. Safety and Environment Zero accident  No recorded incidents of
safety or environmental
infringements and 4 valid
public complaints
 3 safety awards

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Performance of NEC3 vs GCC
(Chan et al., 2014)

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Performance of NEC3 vs GCC
(Chan et al., 2014)

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Concluding Remarks
 The NEC is a new kind of family of contract endorsed by
the OGC as best procurement.
 Objectives of NEC are to improve:
1. Flexibility
2. Clarity
3. Stimulus to good project management
 Growing in popularity in different places of the globe,
delivering benefits of driving proactive management and
collaborative working
 In order to deliver the real benefits, the parties concerned
must understand: NEC is a fundamentally different form
of contract, requiring intensive contract management and
a different approach by the parties in terms of
documentation and management requirements
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Thank you very much!

Dr. Joseph Chan

BSc (Hons), MSc, PhD, MHKIS, MRICS, MHKIPM

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Further Readings

 http://www.neccontract.com/
 NEC conditions of contracts
 Chan, J.H.L., Chan, D.W.M. and Clifford,
Bryan (2014). "New Engineering Contracts
(NECs) in Practice - Empirical Evidence
from a Pilot Case Study in Hong
Kong" Construction Law Journal, UK, 30(4),
June, 217-235
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