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This document provides guidance for users of NEC in determining the procurement and
contract strategies to achieve planned outcomes and in the application of contracts from the
NEC4 family in meeting these strategies

An NEC document
.lone t317

The Government Construction Board, Cabinet Office UK

The Government Construction Board (formerly Construction Clients' Board) recommends
that public sector organisations use the NEC contracts and in particular the NEC4 contracts
where appropriate, when procuring construction. Standardising use of this comprehensive
suite of contracts should help to deliver efficiencies across the public sector and promote
behaviours in line with the principles of the Government Construction Strategy.

The Development Bureau, HKSAR Government

The Development Bureau recommends the progressive transition from NEC3 to NEC4 in public
works projects in Hong Kong. With suitable amendments to adapt to the Hong Kong local
environment, NEC4 is expected to further enhance collaborative partnering, unlock innovations
and achieve better cost management and value for money in public works projects.
NEC is a division of Thomas Telford Ltd, which is a wholly owned subsidiary of the Institution
of Civil Engineers (ICE), the owner and developer of the NEC.

The NEC is a family of standard contracts, each of which has these characteristics:

Its use stimulates good management of the relationship between the two parties to the
contract and, hence, of the work included in the contract.

It can be used in a wide variety of commercial situations, for a wide variety of types of
work and in any location.

It is a clear and simple document —using language and a structure which are
straightforward and easily understood.

ISBN (complete box set) 978-0-7277-6303-7

ISBN (this document)978-0-7277-6223-8

First edition June 2017

British Library Cataloguing in Publication Data for this publication is available from the
British Library.

O Copyright nec 2017

All rights, including translation, reserved. The owner of this document may reproduce the
Contract Data and forms for the purpose of obtaining tenders, awarding and administering
contracts. Except as permitted by the Copyright, Designs and Patents Act 1988, no part of
this publication may be otherwise reproduced, stored in a retrieval system or transmitted in
any form or by any means, electronic, mechanical, photocopying, recording or otherwise,
without the prior written permission of the NEC Director, Thomas Telford Ltd, One Great
George Street, Westminster, London SW1P 3AA.

Typeset by Manila Typesetting Company

Printed and bound in Great Britain by Bell &Bain Limited, Glasgow, UK

 -nec~ _~;~~,~~~

Foreword

Preface

Acknowledgements

How to use the NEC4 user guides

Chapter 1 Brief guide to NEC

1.1 Introduction
1.2 Background
1.3 Objectives

Chapter 2 NEC4 contracts

2.1 Choosing a NEC contract
2.2 Subcontracts

Chapter 3 Procurement strategy 7

3.1 Overview 7
3.2 Traditional approaches 7
3.3 Design and build 9
3.4 Prime contracting 10
3.5 Management contracts 10
3.6 Publio-private partnership (PPP) 11
3.7 Summary 1Z

Chapter 4 Key procurement considerations 13

4.1 Multiparty collaboration 13
4.2 Incentivisation 15
4.3 Key Performance Indicators (KPIs) 15
4.4 Risk management 17
4.5 Supply chain management 19
4.6 Operating, maintenance and compliance periods 19
4.7 Framework contracts ZO
4.8 Eariy contractor involvement(ECI) 20
4.9 Information modelling 21
4.10 Novation 22
4.11 Sustainability 22

Chapter 5 Roles and duties 23

5.1 The Project Manager 23
5.2 The Supervisor 24
5.3 Designers 25
5.4 The Client 25
5.5 The Contractor 26
5.6 The Adjudicator 26
5.7 Project organisation 26

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 5.8 Selecting a Project Manager 27

Chapter 6 Contract s#rategy 29

6.1 Overview 25
6.2 Choosing a main Option 29
6.3 Choosing an Option for resolving and avoiding disputes and secondary Optiors 32

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 Continuous improvement in project delivery is required to build confidence in the UK
construction sector so that we can attract more investment.-The Infrastructure and Projects
Authority (IPA) is the governments centre of expertise for infrastructure and major projects.
We sit at the heart of government, reporting to the Cabinet Office and HM Treasury.

The application of the right contract is central to the success of the overall project delivery
system. The NEC suite of contracts has been in existence for over the 20 years and has linked
the projects, people and processes together to create the correct environment for successful
delivery.

This new and updated NEC4 contract embraces the digital changes that are happening in the
construction industry, especially around BIM, which I believe will be central to creating a step
change in performance. Whilst looking forward it also builds on the fundamentals required
for an effective contract.

The use of NEC4 on public sector projects will help to deliver the Government Construction
Strategy as we seek to improve central government's capability as a construction client to
deliver further savings in the order of f1.7bn across the Government estate. The IPA looks
forward to collaborating with industry to make the delivery of projects more efficient and
effective.

Tony Meggs, Chief Executive, Infrastructure and Projects Authority

Infrastructure
and Projects
Authority
Reporting to Cabinet Office
and HM Treasury

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 .~.
~nec

NEC was first published as a new and innovative way of managing construction contracts in
1993 —some 24 years ago: It was designed to facilita4e and encourage good management of
risks and uncertainties, using dear and simple language..
The NEC approach to managing contracts was endorsed in "Constructing.the txcm —The
Latham Report", which was agovernment/industry review of procurement and contractual.
arrangements in the UK construction industry. This led to a second edition in 1995
incorporating the further recommendations of that review. This contract was used increasingly
in the UK and overseas, and a major revision was made with the third edition in 2005.
NEC has played a part in helping the industry do things differently and better. It has done
so by introducing effective project management procedures into the contract itself. These
require pro-active management of risk and change, and the day-to-day use of an up-to-date
programme. The range of pricing options has given Clients flexibility in the allocation of risk
and the ability to share risk and manage it, collaboratively.
The NEC suite has evolved over three decades, embedding consultation responses and user
feedback, and reflecting industry development, including new procurement approaches and
management techniques such as alliances, management of information (BIM) and supply
chain engagement. This feedback and the new procurement approaches formed the driver
for the development of the next generation contracts and the launch of NEC4.
There were three key objectives in drafting NEC4:
provide greater stimulus to good management
support new approaches to procurement which improve contract management and
g inspire increased use of NEC in new markets and sectors.
It was to be evolution, not revolution.
Some features of NEC4 include:
anew design build and operate contract to allow flexibility between construction and
operational requirements in timing and extent
anew multi-party alliance contract based upon an integrated risk and reward model
new forms of subcontract to improve integration of the supply chain.
Further enhancements include:
finalising cost elements during the contract
incorporating aparty-led dispute avoidance process into the adjudication process
increasing standardisation between contracts and
providing enhanced guidance to give greater practical advice to users.
NEC has always been known for its innovative approach to contract management, and this
revision continues that approach. No other contract suite has had such a transformative effect
on the built environment industry as NEC. It has put the collaborative sharing of risk and
reward at the heart of modern procurement. It is also unique in providing a complete, back-to-
back procurement solution for all works, services and supplies in any sector and any country.
NEC4 continues to set the benchmark for best practice procurement worldwide.

Peter Higgins BSc (Hoes), CEng, FICE

Chair of NEC4 Contract Board

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 ~.
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The original NEC was designed and drafted by Dr Martin Barnes then of Coopers and
Lybrand with the assistance of Professor J. G. Perry then of the University of Birmingham,
T. W. Weddell then of Travers Morgan Management, T. H. Nicholson, Consultant to the
Institution of Civil Engineers, A. Norman then of the University of Manchester Institute of
Science and Technology and P. A. Baird, then Corporate Contracts Consultant, Eskom, South
Africa. .

This fourth edition of the NEC suite was produced by the Institution of Civil Engineers
through its NEC4 Contract Board.

The NEC4 Contract Board is:

P. Higgins, BSc (lions), CEng, FICE (Chair)

P. T. Cousins, BEng (Tech), DipArb, CEng, MICE, FCIArb
I. Heaphy, BSc (lions), FRICS, FCIArb, MCInstCES, MACostE
1. N. Hughes-D'Aeth, BA (lions), MA (Cantab)
S. Rowsell, BSc, CEng, FCIHT, FICE, MCIPS

The NEC4 drafting team consisted of:

M. Garratt, BSc (lions), MRICS, FCIArb

R. Gerrard, BSc (lions), FRICS, FCIArb, FCInstCES
R. Hayes, BSc (lions), MEng, CEng, MICE, MAPM
S. Kings, BSc (lions), MRICS, MCIPS, PhD
T. Knee-Robinson, BEng (lions), CEng, MICE, MAPM, MCIHT
J. J. Lofty, MRICS
R. Patterson, BA, MBA, CEng, MICE
B. Trebes, BSc (lions), MSc, FRICS, FlnstCES, FAPM
B. Walker, BSc (lions), GMICE, ACIArb

Proofreading by:

P. Waterhouse, BEng (lions), MBA, CEng, FICE, FCIArb, FCInstCES, FCMI

The Institution of civil Engineers acknowledges the help in preparing the fourth edition
given by the NEC4 Contract Board and NEC4 drafting team and the support of the following
organisations in releasing their staff:

Anthony Collins Solicitors LLP

Berwin Leighton Paisner LLP
CEMAR
Costain plc
Mott MacDonald Ltd

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 The NEC4 User Guides have been designed to support users as they select the most
appropriate NEC contract strategy, prepare the contract, select a supplier and manage the
contract to deliver the Client's or Purchaser's objectives. The guides and the corresponding
flow charts are not contract documents. They should not be used for legal interpretation of
the meaning of the contracts.

They include astep-by-step process for setting up an NEC contract and managing it through
to completion. The starting point assumes that the Client has resolved the following:

the business case and project objectives,

the risk profile has been analysed and an overall management strategy established
including, in broad terms, decisions made with regard who is best placed to manage the
risks and

a decision has been made to use the NEC, but the contract strategy has not been
determined.

Users should work through the following sections of guidance in the logical sequence
provided.

Volume 1 — Establishing a Procurement and Contract Strategy: guides users in

identifying the best way of achieving the Client's or Purchaser's objectives through the
selection of the most appropriate procurement route, NEC contract and main and secondary
Options. This document applies across all contracts.

Volume 2 —Preparing an NEC Contract: guides users in preparing the particular NEC
contract including Contract Data and other the documents required, ready for supplier
selection to commence. There is a version of this document for each contract, except the
subcontracts. For the subcontracts, the guidance is included in the relevant main contract
version of the document.

Volume 3 — Selecting a Supplier: guides users through the supplier selection process
including, where necessary, tendering, issuing an invitation to tender and subsequent
evaluation and assessment. This document applies across all contracts.

Volume 4 —Managing an NEC Contract: guides users in managing the relevant contract
correctly after it comes into existence. Detailed guidance is provided which explains the
content of each NEC contract and its Options and how to operate them to achieve a
successful outcome. There is a version of this document for each contract, except the
subcontracts. For the subcontracts, the guidance is included in the relevant main contract
version of the document.

Due to their size, Volume 2 and 4 have been combined into one book for both the Dispute
Resolution Service Contract and the Framework Contract.

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 M '~'` ~ ~ ''Mu

The convention of using italics for terms which are identified in Contract Data and capital
initials for defined terms has been used in this user guide.

The term "supplier" is used in this guide for collective reference to the provider of works,
services or supply of goods under the particular NEC contract. That is the Contractor, the
Consultant the Supplier, the Subcontractor or the Dispute Resolver as the case may be. The
term "Client" is used in this guide in referencing the Client or Purchaser.

NEC (New Engineering Contract) is a modern day family of contracts that facilitates
the implementation of sound project management principles and practices as well as
defining legal relationships. Key to the successful use of NEC is users adopting the desired
cultural transition. The main aspect of this transition is moving away from a reactive and
hindsight-based decision-making management approach to one that is for foresight based,
encouraging a creative environment with pro-active and collaborative relationships.

NEC has matured from being a revolutionary contract in the early 1990s with some interest
and use from forward thinking organisations seeking change in how they go about engaging
suppliers in anon-adversarial manner. NEC2 was published in 1995 and was increasingly
the contract of choice of many organisations in the United Kingdom. NEC3 was published in
2005 as a result of feedback from industry on many years of successful use and was the first
time that the complete integrated set of NEC documents was launched at the same time.
In NEC3 the family was expanded to provide a Term Service Contract, a Term Service Short
Contract, a Professional Services Short Contract, a Supply Contract, a Supply Short Contract
and Framework Contract, all complemented with the standard NEC approach of including
guidance notes and flow charts.

In NEC4, as a result of further feedback from industry, the suite has been expanded to
include a Design Build and Operate Contract(DBOC), additional subcontracts and new
options to better support the use of design and build contracting. New options for the
use of information modeling (also known as BIM), early contractor involvement, providing
undertakings to others (also known as collateral warranties), retention bonds, value
engineering proposals and dispute resolution boards, have been included in NEC4. The
guidance notes have also been updated and improved to provide a complete set across NEC
contracts.

NEC is an integrated set of contract documents that are designed to provide Client's
and their suppliers with processes focused on achieving desired, planned outcomes.
The intention is that use of NEC will lead more frequently to achievement of Clients'
objectives in terms of its ultimate quality, performance, cost and time aspects. It
should also be possible to set more rigorous targets for these objectives with greater
confidence in achieving them.

NEC is intended for global application and is effectively drafted on a neutral

jurisdiction basis to achieve this goal. Some United Kingdom amendments are included
in secondary Options to meet particular governing legislation and a similar process
can be followed where necessary to suit other jurisdictions.

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The objectives for the design of the NEC were to make improvements to more traditional
forms of contract under three main headings.

1 Flexibilit

The NEC contracts can be used in a wide variety of commercial situations, for procuring a
diverse range of works, services and supply and in any location. For example, the Engineering
and Construction Contract(ECC) can be used:

for engineering and construction work containing any or all of the traditional disciplines
such as civil, electrical, mechanical and building work,

whether the Contractor has full design responsibility, some design responsibility or no
design responsibility,

to provide all the current options for types of contract such as competitive tender (where
the Contractor is committed to its offered prices), target contracts, cost reimbursable
contracts and management contracts and

in any domestic or international jurisdiction.

2) Clarity and simplicity

Although they are legal documents, NEC contracts are written in ordinary language. As
far as possible, they use only words which are in common use. This makes them easier to
understand by people who are not used to using formal contracts and by people whose first
language is not English. It also makes them easier to translate into other languages. However,
in the areas of insurance, disputes and termination, some phrases or terms which have a
specific legal meaning have been retained.

As further_aid~t~sim~zlisiiy_and clarity,~reat deal of effort has been taken to reduce

the content of the contract conditions to the minimum needed. This has resulted in the
following.

The number of clauses used and the amount of text in each are less than in many
standard forms.

Sentences are kept as short as possible.

Sentences have been subdivided using bullet points to make them easier to understand.

The various Option clauses are designed so that they only add to the core clauses rather
than alter or delete them.

There is no cross-referencing between clauses.

To a person used to using more traditional forms of contract, the simplicity and clarity of
the ECC may not be immediately apparent. This is because it uses words and grammar that,
although common in everyday speech and writing, are not usually found informal contract
documents or other legal papers.

NEC contracts are arranged and organised in a structure which helps the user to gain
familiarity with the contents. More importantly, the actions by the parties which follow from
use of the contracts are defined precisely so that there should be few disputes about who is
to do what and how.

The design of each particular NEC contract is based upon flow charts of the procedures
to be followed by the parties named in the contract. One of the benefits of this approach
to drafting has been that opportunities could be taken for simplifying the structure of the
contract as well as ensuring that the procedures were not open-ended or conflicting. For
example, almost all circumstances which may give rise to additional payment to the supplier
are identified as compensation events. The procedure for dealing with these events is mainly
set out in the core clauses and includes review of both the cost and time implications. This

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contrasts with traditional forms of contract in which the procedure for compensation is
different depending upon the nature of each event.

A fundamental objective of NEC contracts is that its use should minimise the incidence of
disputes. Thus words like 'fair', 'reasonable' and 'opinion' have been used as little as possible.

315timulus to good manaaement

This is perhaps the most important characteristic of NEC. Every procedure has been designed
so that its implementation should contribute to, rather than detract from, the effectiveness
of management of the work. This aspect of NEC is founded upon the proposition that
foresighted, co-operative management of the interactions between the parties can reduce
the risks inherent in construction and engineering works, services and supply. Developments
in project management techniques and their implementation over the past 20 years have
moved faster than the evolution of forms of contract. With NEC, it is now possible to build
arrangements for the different parties to contribute to the management of a project upon
improved practices and to motivate all parties, by means of the particular NEC contract, to
apply such practices to their work.

NEC is therefore intended to provide a modern method for clients, designers, contractors,
suppliers, service providers and project managers to work collaboratively. It also enables
them to achieve their own objectives more consistently than has been possible using more
traditional forms of contract. Use of NEC is intended to lead to a much reduced risk to the
Client of cost and time overruns and of poor performance of the works, services or goods it
has procured. It should also lead to an increased likelihood of achieving a good commercial
outcome for all.

The two principles on which NEC are based and which impact upon the objective of
stimulating good management are:

foresight applied collaboratively mitigates problems and shrinks risk, and

clear division of function and responsibility helps accountability and motivates people to
play their part.

A secondary but important theme is that people will be motivated to play their part in
collaborative management if it is in their commercial and professional interest to do so.
Reliance need not be placed upon exhortation, either within the contract or outside it.

Inevitably on any construction or engineering project there will be uncertainty and risks
involved in carrying out the works, services or supply. NEC contracts allocate the risks
between the parties clearly and simply. But they also help to reduce the likelihood of
those risks occurring and their subsequent impact, if they do occur, by the application of
collaborative foresight and risk reduction procedures. In this way, they aim to improve the
outcome of projects and services generally for parties whose interests might seem to be
opposed.

A prominent example of the way that the procedures in NEC contracts are designed to
stimulate good management is the early warning procedure. This is designed to ensure that
the parties are made aware as soon as possible of any event which may

increase the amount that the Client has to pay,

cause a delay or affect the timing of the works or service,

impair the performance of the works or service or

affect the work of others.

The parties are then required to meet, to seek mutually beneficial solutions to overcome a
these problems, and to operate a formal Early Warning Register of notified events.
u
A further example is the management of compensation events which is explained in the
context of the ECC, however it also applies, in principle, to all other NEC contracts.

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Compensation events are events which are at the risk of the Client, and ~n~hich may lead to
the payment to the supplier changing or the Completion Date, i.e. the date by which they
are required to complete the works, being extended, A principle of NEC contracts is that,
when such an event occurs, the Project Manager or equivalent, ar_ting on behalf of the Client
and in communication with them, should, whenever possible, he presented with options
for dealing with the problem from which the Project Manager or equivalent can choose,
directed by the interests of the Client.

The contract is designed to ensure that the supplier is unaffected financially by the choice
that the Project Manager or equivalent makes. To achieve this, the supplier prepares a
quotation for the valuation of compensation events that is based upon a forecast of tM~e
impact which the change or problem will have upon the cost of carrying out the works,
services or supply of goods — as forecast by the supplier at the time the event is assessed.
Where, as is often the case, alternative ways of dealing with the problem are possible, the
supplier prepares quotations for different ways of tackling the problem. The Project Manager
or equivalent selects one on the basis of which will best serve the interests of the Client.
Criteria for such selection can include lowest cost, least delay or best finished quality, or any
combination of these.

In main Options A and B the change to the amount that the supplier is paid for the work
is based on the quotation. The supplier carries the potential risk or reward if his forecast
of the cost impact is wrong, and the Client has a firm commitment. The supplier's risk or
reward is conceptually similar to the risk taken when pricing a tender, but they will have
better information on which to base their estimate. In main Options C and D the quotation
is used to vary the target, and so the Parties will share the risk and reward under the share
mechanism.

This arrangement is intended to

stimulate foresight,

enable the Client to make rational decisions about changes to the work with reasonable
certainty of their cost and time implications, and

put a risk on the supplier which is tolerable and which provides motivation him to
manage the new situation efficiently.

An important by-product is that few issues relating to valuation of the work or extensions of
time are left to be settled after the event.

This approach has pervaded the drafting of the NEC and is the basis for most of the
procedures which it contains. In designing the NEC, the motivation of each party in each
action it is to take has been considered against good management criteria. Because this is
motivation-driven, it does not appear in the words of the contract itself but it is intended to
result directly from the way in which the procedures are operated.

A typical aspect of this characteristic, using the ECC as an example, is the way in which NEC
makes use of the programme for design, construction and installation. Many of the detailed
procedures rely upon the fact that an up-to-date and realistic programme maintained by the
supplier is used in joint decision-making between it and the Project Manager or equivalent.
The use of the programme is defined in some detail and in such a way that, again, the
supplier is motivated to keep it up-to-date and realistic. The supplier is not simply exhorted to
do so but rather it is in its, and the Client's, best interests to do so.

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The current list of published NEC4 contracts and a brief guidance on when each can be used
is stated in the table below.

NEC4 Engineering and ECC for the appointment of a contractor for engineering and construction work,
Construction Contract including any level of design responsibility.

NECq Engineering and ECS As a subcontract to the ECC, for the appointment o(a subcontractor (or
Construction Subcontract engineering'and construction work.

NEC4 Engineering and ECSC As an alternative to the ECC, for the appointment of a contractor for
''`':Construction Short straightforward engineering and construction work which does not require
Contract sophisticated management techniques and imposes only low risk on both
client and contractor.

NEC~I Engineering and ECSS As a subcontract to the ECC or ECSC,for the a~~pontment of a subcontractor
Construction Short for straightforward engineering andconstruction work which does not require
Subcontract sophisticated management,techniques and imposes only low risk on both
contractor and subcontractor.
t~lEr4 Professional PSC for the appointment of a supplier to provide professional services. Its use is °
Service Contract not limited to projects where other NEC contracts are being used.
NEC4 Professional PSS Typically as a'subcontratt to the PSC, ECC or TSC, for the appointment of a
Service Subcontract subcontractoe to pYovide professional services.
NEC4 Professional PSSC As an alternative to the PSC, for the appointment of a supplier for providing
Service Short ConVad straightforward professional services which do not require sophisticated
management techniques and impose only low risk on both client and supplier.

NEC4 Term Service TSC For the appointment of a supplier for a defined period of time to manage ''
Contract ancJ provide a service. It is designed for use in a wide variety of situations
including-.providing a service to a dienYs existing asset such as a building
or some infrastructure such as highway maintenance or providing'services
within an existing asset such as planned and unplanned maintenance, facilities
management or catering: The TSC is used to maintain an asset with only
a modest amount of improvement or "betterment" through renewal and
replacement either as'part of the service or the task order provision:
NEC4 Term Service TSS As a subcontract to the TSC, for the appointment of a subcontractor for a
Subcontract defined period of time to manage and provide a service.
w
h
NEC4 Term Service Short TSSC' As an alternative to the TSC, for the appointment of a supplier for a ciehned
' Contract period of time to manage and provide a straightforward service which does v
.not require sophisticated management techniques and imposes only low risk
on both client and supplier:.
NEC4 Supply Contract SC For local and international procurement of high value goods and related
services including design.

EC4 Supply Short SSC For local and international procurement of goods under a single order or oii a
ontrad batch order basis whidi do not7equire sophisticated management techniques
and imposes only low risk on botVi client and supplier.

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 NEC4 Design Build and DBOC For the appointment of a contractor to design, build and operate or maintain
Operate Contract an asset over a defined period of time.
a
w
d NEC4Framework FC typically forthe appointment of a supplier or suppliers to carry out work
Contract (using either the ECC or ECSC), to provide aservice (using the PSC, PSSC, TSB,
TSSC or DRSC)or supply goods and services (using the SC or SSC) on an 'as
instructed' or "completed" basis oaer a set term.

NEC4 Dispute Resolution DRSC For the appointment of a dispute resolver (adjudicator or dispute avoidance
Service Contract board member)to decide disputes under any NEC contract except the FC. It
may also bz used for the appointment of a dispute resolver under other forms
of contract.

As noted above the NEC includes several contracts that can be used for subcontracting. They
are:

- Engineering and Construction Subcontract (ECS),

Engineering and Construction Short Subcontract (ECSS),

Professional Services Subcontract (PSS) and

Term Service Subcontract (TSS).

These are all based upon similar principles to the NEC main contracts and use common
names and definitions. They have a small number of different provisions designed specifically
for the different circumstances for which they should be used.

Use of the same text in the main contract and the subcontract provides back-to-back
protection for main contractors using one of tl-~e above subcontracts. It also has the
convenience that the Contractors' and Subcontractors' staff do not have to become familiar
with two different sets of text and procedure. There is nothing to prevent a subcontract
using a different Option from that used in the main contract. An obvious example of this
is where the main contract uses a cost reimbursable or target Option (C, D or E) whilst the
subcontract uses a priced Option (A or B).

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 w

CN~PT~

~roc~re ~n~ srat~g

Sustainable procurement of works, services and supply relies upon making value for money
decisions over the life of the asset and not solely on capital costs. A value for money solution
to meet user requirements relies upon the optimum combination of whole-life costs and
quality.

Any procurement strategy should identify the best way of achieving the project objectives,
taking into account factors such as key objectives, constraints, funding, risk and asset
ownership. The procurement strategy should aim to achieve the optimum balance of these
factors that one strives for.

The procurement route is the means of achieving the procurement strategy. This will include
the contract strategy that best meets the Client's needs.

The contract strategy will determine the level of integration of design, construction and
maintenance for a project. This should support the main project objectives in terms of factors
such as risk allocation, incentivisation and delivery.

There are many procurement routes available including traditional, design and build, prime
contracting, management contracts, design build operate and public—private partnership.
The NEC is designed to be flexible enough to work in most currently available procurement
routes.

The traditional approach with many projects, particularly in the construction industry, has
been to have design as a separate function from construction.

This is less common for the supply of goods or plant where it is usually the supplier who
carries out product design.

Figure 1 shows a simple relationship between a Client and a Consultant or Contractor for
pre-construction or construction related services. The Client could be one of public or
private standing and the Consultant or Contractor can in turn subcontract services to suit.
The contract could be for services such as design, project management, cost consultancy,
environmental, audit, facilitation, management consultancy or architectural services. The NEC
contracts that could be used are the PSC, PSSC, TSC or TSSC and this approach can be used
on a one-off project or a series of projects.

Client

Consultant or
Contactor
PSC, PSSC, TSC or
TSSC

€yore L S r;q'e xupointineni nor ~,re- onstriiction or crnstruc.iicm-reldtP.(~ SP.I"VICP.S

..J 1?rl" ?~)''/ ~ ??E:::~:)niCBii.CO!Yi E;'.h~14!!Ift;~ 3 I~1"OCii!('Rlt?tli 3!lii t.. ...~ t.t )ili'n<J~! ~ ~
 4
11~~M~ >>~i~;c!.ii,i::P.;i~iN'f ~'if?Ar~::c:;~,

Figure 2 shows a simple relationship between a Client and a Supplier for the local and
international procurement of goods. The Client could be one of public or private standing
and could also be a Consultant or Contractor. The Supplier can in turn subcontract the supply
- of goods to suit. The NEC contracts that could be used are the SC or SSC and this approach
can be used on a one-off project or a series of projects.

u The SC could be for goods such as purchasing transformers, turbine rotors, rolling stock,
loading bridges, marine vessels, transmission plant and cable mining machinery; the SSC could
be for goods such as purchasing stationery, printer supplies, laboratory chemicals, tools, desks,
chairs, portable test equipment, raw materials, pre-manufactured materials or plant.

Ciien~
~l
N

d :S CI~~~IPI
~
V SC Of SSA

Fic~~~r~ 2. Sir~gie ~ippointrner~t (or s:a~ply of youds

Figure 3 shows another simple contractual relationship this time for construction works to
be carried out for a Client by a Contractor. Again, the Client could be one of public or private
standing and the Contractor can in turn subcontract works to suit. The contract could be for
constructing any construction or engineering works. The NEC contracts that should be used
are the ECC, ECSC, TSC or TSSC and this approach can be used on a one-off project or a
series of projects.

Uient

Contrartnr
LCC, ECSC, TSC or
TSSC

~igtrra~ 3. Siriyle appaintrnent f~~r construction ~•vorks

The classic traditional procurement route in the construction industry is with a consultant
designing works on behalf of a Client who engages a Contractor to construct them, as shown
in Figure 4. Under ECC, ECSC, TSC or TSSC, the Contractor is responsible for the quality of
their workmanship, however under ECC, the Client has the safeguard of engaging a Supervisor
whose role is to check that the materials and workrrianship meet the contracted quality levels.

Clreni

Consultant designer Supervisor

PSC orPSSC PSC orl'SSC

Contractor
ECC, ECSC, TSC or
TSSC

E~ict~r~ xz. Sirrple RlEC ~onfract arranyernenf (or a tr~~itor,al ,^.;or!..s cor:.ract

~,._....g ,~ .....:;ar~:ir:.er, :~ ~ ....;ntr,~;:,. tr:.. •~Y i,~c.,rtractc:or, ~ ~7:>c ~~,,R'

-nec~ ~~rzc7c::urf::r~19~::r~r ~r~;ar;:.c;Y

More realistically, there will be many organisations involved in even a simple construction
project and Figure 5 below demonstrates the cascading' NEC contracts in such a relationship.

Client

Project Manager ~ Supervisor

PSC or PSSC PSC or PSSC

Su!~Plien Contractor Consultant deskJ ner

SC or SSC FCC or ECSC PSC or PSSC

Subcontractor Subcontractor Supplier Sulxoniractor

ECS or ECSS ECS or ECSS SC or SSC designer
PSS ol" PSSC
Supplier _..--.---..._.__._._....._...._.......
Supplier
SC or SSC SC ar SSC

Figure S. Cascadiny NEC contracts for a traditional works project

There are a number of variants of design and build contracting, including just design and
build, design, build and operate and design, build, finance and operate which is considered
under private-public partnership below.

In design and build a single Contractor acts as the sole point of responsibility to a Client
for the design, management and delivery of a project, on time, within budget and usually
in accordance with a performance specification. Figure 6 shows a typical design and build
project organisation for a single project. If a Client requires the ContracTor to self-certify the
quality of the works, then the Supervisor instead becomes a function of the Contractor.

C(reni

Project Manager Supervisor

PSC orPSSC PSC orPSSC

Contractor
ECC or ECSC

h
Subcontractor Subcontractor Supplier ~ Consultant designer a
a
ECS or ECSS ECS or ECSS SC or SSC ('SC or PSSC
v
Supplier Supplier
SC orSSC SC or SSC

4'€€~€a~~:. t~. Typical deign and h ilcl project organisation

In design, build and operate the Contractor is employed to design, build and operate
or maintain the asset over a defined period, usually based upon an output or outcome
specification for asset performance and use of life cycle pricing. The Contractor's obligations
with regard to the operation of the asset can range from planned preventative maintenance
and reactive services, to specialist services which are more integral to the Client's business

..,ant E~tabisn;nga'r~rurc~ma~n:anr! -:~,trac;>tr<~+regY ~ 9

 ...
-~nec~
operations. The Contractor does not fund the construction under design, build and operate.
NEC4 suite of contracts now includes a DBOC to support this procurement route.

d C7ie~at
t
x
v
Service Manager
PSC ar PSSC

Contractor
bB0

Subcontractor Subcontractor SU~?~IIPf Consz~ltant designer

ECS or ECSS TSC or T55C SC or SSC PSC or PSSC
a
x Supplier
v
SC or 55C

~i-~ i~al clesig~i, bu ll and operate ure cc ;fan ~ t c~

Prime contracting is conceptually very similar to design and build and is where a single
Contractor again acts as the sole point of responsibility to a Client for the management and
delivery of a construction project, on time, within budget (this time defined over the lifetime
of a project) and in accordance with (usually) a performance specification. Often clients will
use this model where they require the Contractor to demonstrate, during the initial operating
period, that the operating cost and performance parameters can be met in accordance with
a pre-agreed cost model.

The contractual relationships for prime contracting are as those for design and build or
design, build and operate as applicable. A distinguishing feature of prime contracting in
the United Kingdom from design and build is that often the design requirements are to
deliver the performance requirement for which the asset was intended, whereas the level of
reasonable skill and care is often the chosen norm under the design and buildvariants. The
level of design responsibility can be chosen easily whichever NEC contract is used, however,
the risk profile of these are in reality quite different.

Management type contracts include management contracting and construction

t-
management; both are catered for in NEC. in reality a management contract structure
2
v
is similar to a traditional contract, where the Contractor subcontracts works out. The
ContracTor can carry out as much design and/or construction of the works as it desires,
but this should be listed in Contract Data part two as a lump sum total. This stated
total, together with the Subcontractor's costs, are added together and the management
ConTractor's Fee is applied to this amount. This total is the price that the Client pays. Figure 8
illustrates this management contracting relationship.

14l ~ ~~.~~ ;i~s~,i~~g :~ Peocu!eirer t ;~^d i'antra:? ;teat;cay rn~c::ontra~:t.c.om ( :c^. n>>c ;~.'7
 -nec 2.i:;.::UI'iF.ftv1f:{t~J, < , F...;t:i.

Clrent

', Project Manager Supervisor

PSC or PSSC PSC or PSSC

Contractor Consultant designer

ECC Option F PSC orPSSC

Subcaitractor Supplier Consultant Subcontracror

ECS or FCSS SC or SSC designer designer
PSC or PSSC PSC orPSSC
Suppli~ar
SC or SSC

€r~€~ef~ Cf, Tyriical n,~sra~emerit cn~it~ac:tirig rer+ticinship

Construction management can be organised under NEC as demonstrated in Figure 9.

Here, the construction manager joins the professional team alongside the Project Manager,
Supervisor and a designer. Direct contracts are entered into between the Client and specialist
trade contractors, who in turn may subcontract works.

Clien F

Projert M~7nager Supervisor

PSC or PSSC PSC or PSSC

ConstrucCionManager Ca~st~ftanTdesigner
PSC or P55C PSC or PSSC

ConUacta ~onhactor Su~plie~ Consultant Contractor

ECC or ECSC ECC or ECSC SC or SSC designer ECC or ECSC
PSC or
Subcontractor Supplier PSSC Subcontractor
ECS or [CSS SC or S5C designer
__.................................-----
PSS

figure ~< 7ypic~l construction managernerit relationship

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.:7. G5

PPP is where a public sector client enters into a long term contract, typically 25 years or
more, with a private sector company, to provide a public asset or service. This involves
maintaining or constructing and maintaining the asset, and the supplier is incentivised
in this model to have the highest regard to whole-life costing as they have the risk of
operation and maintenance for a substantial period of time. In some cases, for example the
United Kingdom Private Finance Initiative the private sector company provides finance for
construction and obtains a long term return on investment during the operational phase. This
is also known as a design, build, finance and operate.

~r^ rec: ~0i7 ~ ;,:>;r..;;ntrt:;:'. crrr~ F: i::'r~lis'rir::: ~'roc~,rc>m:~,,::and c..r... ,;;: 1?

 In most PPP arrangements, NFC can be used for works and services within the supply
chain but not for the head PPP contract itself. Traditionally the head contract is a bespoke
agreement designed to reflect the specific project,

The extent of types of works, services and supply, and the contractual relations to deliver
them, are diverse, but NEC has sufficient flexibility to provide Clients and their suppliers with
successful outcomes. Although the use of the entire NEC suite of contracts is in noway a
mandatory requirement, having suppliers engaged on similar and consistent terms, which
promote partnering, team working, the principles of lean thinking, a focus on time, cost and
quality with a process for dispute avoidance and efficient dispute resolution should disputes
arise, will increase the likelihood of mutually satisfactory outcomes for all concerned. NEC
terms are a radical departure from traditional drafting approaches and are drafted on a
relational contracting basis that embodies efficient management processes.

`~~ ~.C'1't:!I'i7t ilt~ 1 `~t'C)CU(FI71('.!t';311. :'1t?'8i'~t?~i3tC~Y t1.:Ci.i.~~ii.(3C?.C.i)t?i .~t:: ,

 i

lle✓C ~ii•Y P(Z;i::l1(~tF.N1fF.ti~~~~ i::C)N51C7t:R<lllt)NS;

~NAf'T~ 4

Some clients have moved away from reliance upon traditional contracts to include various
collaborative and partnering arrangements which provide better integration of the design,'
construction and operation functions, across a single project or a programme of works.

NEC contracts are bi-party contracts for works which are sufficiently defined to permit a
conventional lump sum, bill of quantities or target cost contract to be agreed. Where the
content is not so well defined, a cost reimbursable or time-based contract may be used in
the early stages.

On some projects or programmes, clients prefer to include multiparty collaboration or

partnering arrangements. Suppliers can be collectively incentivised to achieve project
objectives by use of Option X12 (Multiparty collaboration). This may be applied to any
contract let under the project or programme. It is the parties who have this Option included
in their contracts that become the Partners which make up the collaborative team known
as the Core Group. An important distinction between Option X12 and other forms of
collaborative contract is that the Option does not create a multiparty contract, only an
arrangement.

By linking Option X12 to the appropriate bi-party contracts, as shown in Figure 10, it is
intended that the NEC contracts can be used:

+ for collaboration across any number of contracts or projects (i.e. single project or multi-
project),

domestically and internationally,

• for projects of any technical composition and

as far down the supply chain as required.

~`igure ~C~, Fossit~!e C,~~icn ,v,17_ rnultiparty collaboration relationsr;ips ,,~

.. ._...... _.......... .............. .... .......... ........... ...... .................... ......... ......... a

0
4
S
Figure 11 shows by use of a star to signify 0 p t i o n X12, within a single project
arrangement for TSC work. Key Partners in any NEC contractual relationship can be
drawn out to create the multiparty arrangement. This can of course be extended in a
multi-project arrangement.

C~:~ tlE`(' ?t)1 r'' t1f?i:CQtltYBi:`..C:)171 FS'3k!lishir:c; :: i'rcxurarnP^: and {.Qlttt'~l.'.t Si!<~tCCIY ~ ~~
 ~t~:~ ~~tiac.ra.F::.~~ c:c;NSlf.7f?(i~'irl(7NS

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V

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Fir{~arf: 11. Example of use of Option X17.

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z The common link is Option X12, which can be used in any combination of NEC contracts,
u as shown, except the DBOC and short contracts. A Core Group is selected from the
Partners. The Partners arise at the point when each Partner's own contract, including
the Option X12, comes into existence. Not every Partner is necessarily a member of the
Core Group. The ~~ole of the Core Group is to partner the project to achieve the Client's
objectives.

One needs to have regard to the optimum number of. Core Group members. Too many
members will slow down decision-making. It may be, therefore, that certain groups are
represented by one member. For example, there may be five designers on a partnered
project but they elect one member to represent them in the Core Group meetings. Clearly,
communication between the Partners will be vital.

The model allows essentially the Core Group to work together to achieve the Client's
objectives, which are captured in Option X12. It is the integration of all those suppliers who
are able to contribute value to a project that gives the best chance of a successful outcome.

Option X12 allows for collective or individual incentivisation through the provision of Key
Performance Indicators (KPI's). A Partner is paid the amount stated if the performance target
stated is achieved or improved upon. This is made as part of the amount due in the Partner's
own contract. It is not the intention to use negative KPIs in this approach. If collective
incentivisation is chosen, if one Partner lets the others down for a particular target by poor
performance, then all lose their bonus for that target.

There can be more than one KPI for each Partner. KPis may apply to one Partner, to several
Partners or to all Partners. There is no single answer to what KPIs should or should not be
used; NEC through secondary Option X12 creates a framework for Clients and their Partners
to be as creative as they can in incentivising the delivery of the Client's objectives.

The Partners must recognise that by entering into a contract which includes Option X12 they
will be undertaking responsibilities additional to those in tf~e basic NEC contract. They are
required to work together as stated in the Partnering Information,

Any dispute (or difference) between Partners who do not have a contract between
themselves is resolved by the Core Group. There are no direct remedies between the non-
contracting Partners for recovering losses suffered by one of them caused by a failure of

14 ( E.ct.Bi;i:.;..':~ d ...,..ife?I11("'. 8nQ;ontrat :t~arc9Y

 ~t./C ~' ';i:)i::1.i.!:.~ ~{1',':_ONSIOf:.'i?fili:)P~`.i

another. These remedies remain available in each Partner's own contract. Their existence
should, however, encourage the parties to resolve any differences that arise.

. -

NEC offers a range of measures from which the Client can select to give best value for any
.particular project or programme of work. These exist at a bi-party level and there can be
common incentives across a number of partners when Option X12 is used. The range of NEC
incentives includes matters that affect the likes of time, cost and quality and include:

Target cost(Options C and D)—provides for apain /gain share mechanism related
to a target cost where, if the supplier delivers the out-turn cost below the level of the
final target, the savings are shared according to apre-agreed formula. A similar sharing
arrangement of over-run reciprocates this arrangement.

Bonus for early Completion (Option X6) — introduces a bonus for each day the
supplier completes the works or services ahead of the contractual Completion Date.

KPIs (Option X12 or X20)—can be introduced through either secondary Option for
any matter related to the works, services or supply of goods the parties care to agree
upon. Examples include the number of Defects, the whole project costs to the Client,
the rate of progress of certain works, whether Client satisfaction levels were reached,
sustainability or environmental targets, whether the asset is cheaper to operate and
maintain than expected, and so on.

Value engineering proposals (clause 16)— incentivizes the supplier to make

proposals to reduce the cost of Providing the Works(ECC and ECS), Service (TSC and
T55) or Goods and Services (SC). The parties both benefit if a proposal is accepted.
Under the priced contracts (main Options A and B) the reduction in cost is shared
according to apre-agreed formula. Under the target contracts (main Options C and D)
the reduction is shared according to the same pre-agreed formula used to assess any
gain share against the target cost.

Whole life cost (Option X21) —provides an incentive to the supplier to make proposals
which reduce the cost of operating and maintaining an asset. The Parties both benefit if
a proposal is accepted.

Not all NEC contracts include all of the above incentives. Under the DBOC, incentivisation is
dealt with through the Performance Table, which provides for deductions for failing to meet
performance targets but allows an incentive payment for meeting or exceeding a target.
These could be targets for quality, cost or time.

Major incentives should also be a job done well, reputation and repeat work. It is argued
that partnering on one-off projects is difficult as there is no chance of repeat work. The
counter argument is that the single most important asset of most organisations is people
and that partnering is really just a way of working. If people are encouraged to flourish and
achieve the highest standards they can in a constructive and enjoyable environment, then
the wasteful sideshow of dispute resolution goes away,job satisfaction increases and the
likelihood is that the end product is better than would otherwise have been the case.

The NEC structure provides for a whole range of incentives if the Parties believe they will
enhance the prospects of improving upon the levels of performance expected.

~~s
w
NEC provides for KPIs through either Option X12 or Option X20. The NEC contracts provide
for the use of one or the other, but not both at the same time. The NEC approach with KPIs
u
is to promote the concept of continuous improvement. They are therefore not intended to be
used as a negative financial adjustment if the targets set are not achieved or bettered. The
basic payment structure of each party's NEC contract should provide for where the stipulated
performance is not achieved.

_')'7 ~ ~;e::~:mtract.;:cxr, E=i::rlis'r:inq ~-ro~treri~,nt and r;,>act ~trategY

 s

~/~~
1 KffY f'f~t;C:t.liti~h-iti'.Ni C:C;N.'.:11:11~::i~Fa'1"10~'~iS

It is recommended that the performance of the supplier and its supply chain is monitored
and measured against KPIs. This monitoring is especially important on the cost reimbursable
Options where achievement and improving upon KPIs will have a direct relationship with,
and impact on, cost.

It is necessary to identify and describe the KPis, including achievement criteria, at the outset
and include this information within the tender documents.

Continuous improvement and innovation are the objectives of KPIs with the ultimate aims
of reducing costs and improving quality (both in the product at completion and in long-term
usage). If the monitoring of the KPIs shows poor performance, the Client and its advisers
should use every endeavour to ensure that proper attention and rectifiication is implemented.
However, in the event of continuous failure by the supplier or the supply chain to meet the
KPIs, and in the event of quality and performance being severely compromised, the Client
may wish to terminate.

There are many KPIs for suppliers that have been put in place as industry standards. NEC
does not include a list of possible KPIs. NEC provides the means by which the parties can
introduce KPIs and promote continuous improvement. This can lead to higher payment to
suppliers and a better product for the Client.

Example

Considering the previous comments on multiparty collaboration, incentivisation and KPIs,

~~ how can a Client and its suppliers create an environment where, through incentives, its
nc
;~ project objectives have the best chance of being realised?
u_
Assume that the Client is building a new hospital and is adopting a prime contracting
procurement route. Figure 12 indicates the relationships involved in such a project, although
in reality there would be many more suppliers than shown.

Clien t

Project Manager Supervisor

PSC Option E PSC Option A

Contractor
ECC Option C

Subcontractor 1 Suhcontractor 2 Consultant(designer)

ECS Option C ECSS PSS

`~ Supplier 1 Supplier 2 Supplier 3

SSC ECS Option A SC

1'ic~~ate 1;'.: f >r~r~cr:e ~,f :,';~t or} Xi2

w The main contract is between the Client and the Contractor, which is an ECC Option C This
is a target cost contract. The Client also enters into a contract with a Project Manager to
~'' administer the ECC on the Client' behalf. A PSC Option E is selected due to the uncertainty
of definition of duties the Project Manager will provide. The Client also uses the PSC to
,' engage the services of a Supervisor who will check that the materials and workmanship
provided by the Contractor accords with the levels specified in the ECC.

2,:i ~ Ectai; ; a ^.,..;u=emc^' anc i nt~at t~atr:gy r~~cc.....raci.ct~r:? ~ ;~ i:~c ~?v??

~~/Cx Kt~iY F'Ri::i::t.1RF.{NtEiN'; C:C)NSII)l'•:Ft/Cl'IC?Nf

The Contractor in turn subcontracts the works. The Contractor engages Subcontractor 1
on a similar basis to the main contract with the Client, namely Option C. Subcontractor 1
subsubcontracts part of its works to a supplier for some off-the-shelf items of goods and
uses SSC for its contract with Supplier 1. Subcontractor 2 has a fairly straightforward low
risk scope of works and so the Contractor uses the ECSS, which gives a lump sum for these
works. Again, Subcontractor 2 subsubcontracts the works and but using ECS Option A. The
Contractor also engages the services of a local designer and for this uses the PSS. Finally, the
Contractor uses the SC to procure some high-value bespoke goods from Supplier 3, which
the Contraciorwill install.

In the ECC or ECS contracts, a bonus for early Completion can be included. In the PSC
and ECC Option C contracts, there is a financial incentive incorporated byway of the pain
/gain share formula, based on the final out-turn costs when compared with the final
target costs. In Figure 12 the stars again represent the use of Option X12 Partners and in
this case they comprise the Core Group. This group therefore includes the Client, Project
Manager, Contractor, Subcontractor 1, Supplier 2 and Supplier 3. Supplier 3 is supplying a
key mechanical and electrical component, which is why it is selected to be a Partner. Using
Option X12, the Client and its Partners decide upon a series of collective and individual
incentives to optimise supplier performance. These could include the following.

Example incentivisations (using Option X12):

F If the total cost of the project including all Client costs is less than £3,000,000, 75°/a of
the difference is split between the Partners as follows:

20% to the Contractor

15% to Supplier 3, and so on.

If the number of notified Defects is less than 100 each Partner receives £5,000.

For Supplier 3, if its mechanical and electrical component achieves the following
performance levels for 98°/a of the time during athree-month period after Completion,
it receives £10,000.

For the Project Manager, if 95% of all compensation events are assessed within the ECC
timescales it receives £5,000.

Clearly, an optimum number of incentives should be strived for, enough to make a difference
and not too many or of an amount that could potentially compromise the Client' objectives
in any way.

Option X20 would be used in bi-party contracts where incentivisation is desired but not by
involving multiple parties.

NEC anticipates and encourages active risk management. Best practice demands of any
well managed project that it has an up-to-date risk register at the heart of its management
procedures. NEC seeks to ensure:

people use active risk management,

the risk is allocated to the party best able to manage it and

the Parties have a financial impact of managing the risk successfully.

At the earliest opportunity the project team (whoever it consists of at the time) should
prepare a risk register, which is reflective of all risks surrounding the project. Construction
risks will be a part of this, but they will certainly not be the only consideration. As the
team develops and grows in knowledge, and perhaps also in size, then one would expect
the risk register to develop accordingly. The team should consider the likelihood of a risk's
occurrence and the impact should it occur. As best the team can, it should look to avoid,

~ ncrc:c~ntrac} ccrn F>tablishing d PloCut'(~mer and cantr~act ?ra?cgY ~ 9~

 reduce or mitigate certainly the key risks, and have regard to those other risks of far less
„~'' likelihood or severity. The team should also consider risk ownership. Much is said of shared
~ ~:;
~~n ,g risks and they are sometimes lased to include in a target contract, for example, an allowance
'~~ for the occurrence of a shared risk. If it does not arise the difference is split according to
apre-determined amount. This can be seen as the equivalent of a contingency for an
~~~= unknown risk or amount of that risk. NEC does not provide for contingencies in any of its
~ ~{ contracts and instead categorises risks in each bi-party contract only as Client or supplier risk.
Financial provision should be made for both parties' risks, be it in the price if it is supplier risk
~`~'~ or a separate contingency fund if Client risk.
~~;Y,4
`"`
~3 When preparing the particular NEC contract, the project team needs to ensure that the risk
~€ allocation provided in the chosen NEC contract matches that provided for in the risk register.
The contractual risks embedded within each NEC contract can be altered to suit the risk
Z < ~i
~,~~~~~ register, if required as follows:
'~
Main contracts — if the Client is to contractually own risks beyond those in the standard
NEC contract, then additional compensation events or additional Client' liabilities can
£ ~' be included in the Contract Data part one. If the supplier is to contractually own risks
', ~,~~ that are as standard allocated to the Client, this can be achieved by amending the base
~ !~`' NEC contractual risk allocation through the use of Option Z (additional conditions of
~; contract).

~~ 4 Short contracts — if the Client or supplier are to contractually own risks beyond those in
i ~~~. ~
the standard NEC contract this can be achieved by amending the base NEC contractual
~;; , risk allocation through the use of additional conditions in Contract Data.

As an example of both scenarios, assume a Client has engaged a Contractor to design and
build a community centre. The Client has chosen a site which is prone to flooding. After
due consideration of the Client' requirements by the project team, which involves the
construction of permanent flood barriers, if the adjacent river level during construction
rises above a certain level this would flood the site. The likelihood is low but the impact of
this event would be high. As this risk sits with the Client in any case for the lifetime of the
asset, even after defences are in place, the team members agree that this risk best sits with
the Client and this is recorded on the risk register. The ECC is used for this project and this
new threshold in contractual risk allocation could be administered by adding an additional
compensation event in Contract Data part one to record the level at which the event
becomes a compensation event. The river level below this threshold does not give grounds
for a compensation event, whereas above this threshold it does.

On the same project, the team highlight physical conditions within the site that are a risk and
agree a mitigation plan through extensive ground investigation to minimise both likelihood
and impact. The works are design and build and the team considers the risk of physical
conditions to be encountered being beyond those expected after such ground investigation
should sit with the Contractor. If such risk transfer is desired and agreed then this can be
effected by deleting the corresponding compensation event in the ECC, which would be
done in Option Z (additional conditions of contract).

Each NEC contract has been drafted with an appropriate and carefully considered risk
allocation between the parties to reflect a typical project. This risk allocation should be
compared pre-contract to the risk register. If working in an integrated environment where
the parties negotiate risks and price, it is reasonable to assume that agreement will be
reached when both parties are happy with the risk allocation and the price. In a competitive
environment without early supplier involvement, it rests on the Client and its advisers to
decide the risk allocation, and suppliers must have due regard to this when tendering. In
the vast majority of contracts it is recommended that the core risk allocation should not be
changed, except to the extent allowed by the choice of main and secondary Options and the
parameters in the Contract Data.

Post-contract, the risk register should continue to be updated by the project team, some risks
will expire and new ones may appear. As the contract is already in existence at this time, new
risks will fall into the ownership of the Client or supplier, as determined by the risk allocation
in the contract. This does not mean that either party has no further regard for the other
panty's risks, as demonstrated by the NEC's early warning process.

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Where target cost contracts are used under NEC, the target cost itself is deemed to be inclusive
not only of the anticipated costs of providing the works together with returns for overheads
and profit, but also of the supplier's risks as provided for in the contract. The occurrence
of supplier's risks does not itself result in a change in the target cost. In terms of payment,
however, it is quite a different proposition. The Client pays the supplier's Defined Cost less
Disallowed Costs plus the Fee and therefore the Client will be paying the Defined Cost of
certain supplier's risks. This means the Client is effectively sharing the cost effects of supplier's
risks by means of paying for most of those that occur. This at least has the effect that the
target is likely to be a lesser figure than would have been the case under a lump sum contract
and both parties care about the occurrence of supplier's risk as they both have a stake in it.

Supply chain management has many definitions. One definition is the strategic co-ordination
of all parties that are involved in delivering the combination of inputs, outputs or outcomes
that will meet a specified requirement. It is about bringing to bear the skill and expertise of
suppliers to achieve solutions to Client needs. How the suppliers are integrated is important
for ensuring that this combined and co-ordinated expertise is offered up to assist in achieving
the Client objectives.

Many clients actively promote an integrated team approach under a partnering or

collaboration arrangement. Suppliers are expected to bring to the project the benefits
of swell-managed supply chain. Supply chains can be fully integrated with common
management processes, long term with strategic sets of relationships between a number of
organisations or short term with ad hoc structures to deliver one-off projects.

NEC provides an integrated set of contract forms to engage properly the supply chain on
common terms with an emphasis on efficient management processes. It is not possible, in
the conditions of contract, to address every requirement of every ClienT on every project or
programme in terms of supply chain management. Where this is an essential aspect of a
Client' award criteria at tender stage, this should be expressly provided for in the invitation
to tender usually by inclusion of appropriate requirements in the 'Information' or 'Scope'
sections of the documents.

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On some projects the Client will require that for an extended period after Completion the
Contractor is to demonstrate that the asset is designed and/or built to meet the required
standards. This is also often the case in prime contracting where compliance periods are
required and the costs of operating and maintaining the asset are checked.

Different industries and forms of contracts use a variety of wording to cover Defects,
operating, maintenance and compliance periods. What NEC means by these definitions and
how they are catered for is as follows.

Defect —broadly defined in each NEC contract as something the supplier has done that
does not accord with the stated requirements set out in the Scope or accepted design
if applicable. For example, in its simplest form, the work done by the Contractor under
ECC does not conform with the line, level, tolerance, etc., as stated. The principle the
ECC adopts with Defects (similar with other NEC contracts) is the Contractor is given
the opportunity to correct the Defect within prescribed timescales. This is unless a
proposal to leave the Defect in place with appropriate whole-life consideration is given
and accepted. If the Defect is not corrected, then an adjustment is made to the price
the Contractor receives. This reflects the cost to the Client of having to engage another ,~,
contractor to put the work right. ~-
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Operating period —this is where a supplier operates the Client's asset for a prescribed
period of time, sometimes many years. The contract strategy for the operating period
could either be through sectional completion under ECC if the operating period is not
too long, or under the DBOC if the supplier is to be responsible for the operational

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performance. Under either approach if any works failed the stipulated criteria in
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terms of construction or operation then this would be classified as a Uefect, with the
~~~ responsibility resting with the Contractor to remedy the problem.

w ~ Maintenance period —this is traditionally the period of, say, one year after a Contractor
has completed the works during which it is responsible for correcting latent Defects
,~, that arise. Most problems will probably arise in this first year of use. This is covered in
the ECC by prescribing a period from Completion until the defects date. Alternatively,
if the Contractor is to be responsible for maintaining the asset in a certain condition for
an extended period this would be provided under the DBU, where asset performance,
operating levels etc, are prescribed and with monies not due to the supplier where
performance levels are not reached.

Compliance period —this is a period of time where, for example, under ECC, the
~.' Contractor demonstrates through the likes of take over and performance tests that the
a`` asset is performing in accordance with the contracted target levels. If ECC is used for this
r compliance period then sectional completion could be utilised as before or alternatively
u this can be part of the period from Completion until the defects date. On balance,
the former is preferred as the works are not said to be complete until the Contractor
demonstrates the asset complies with the required performance levels. Whichever
route is preferred by the clients, any such non-compliance would be classified a Defect
and the procedure associated with this commences. Option X17(Low performance
damages) provides for where the supplier has provided something not to the upper
level of performance required but above the lower level of performance required. The
~, damages reflect the whole-life consequence to the Client of the loss of performance
from the required level. The introduction of the damages clause saves the Parties from
the expense of resolving such a problem through the Courts.
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Many public and private clients set up framework contracts for the supply of works,
services or supply of goods. These are often based upon long term (more than three-year)
relationships that involve extensive selection requirements to determine the desired supplier
or suppliers for that period and means that unsuccessful suppliers have to sit and wait for the
next opportunity to bid, possibly years later. Because of this, selection of the right suppliers)
is vital and the principles of best practice are adopted to ensure continuous improvement is
achieved.

NEC provides a FC for clients to use as a head contract in this type of relationship. As
drafted, each job is an "order" that sits within and is carried out under the FC. The TSC
and TSSC are term contracts which are often used to maintain an asset in a certain state.

For a Client, the FC can be used in conjunction with any NEC contract, albeit it is unlikely
to be used with the DBOC. The FC does not promise the suppliers) any work, it effectively
says 'as and when I need some work doing, this is how we will manage the process of
defining the scope, agreeing the price, what the conditions will be and how the work will
be executed'. The FC will also likely include regular supplier meetings, statements that in a
multiple supplier framework more work may go to the better performing suppliers and the
inclusion of KPIs to determine who the better performing suppliers are.

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in the first place. ECI started life as an unpaid way of bringing contractors' expertise to
the table, and in turn the contractor hoped this would help secure them the construction
works. This was an unsatisfactory approach and de-valued the contribution that a contractor
provides. Most clients are now happy to pay for that early advice, as they would for a
consultant, and this creates the right circumstances to bring high quality input at the earliest
stage in the project's life cycle to bring maximum value.

ECI is typically used in a two- or three-stage model. It can be used on a minimalist basis
by bidding a job then bringing the successful Contractor on board to see if any value
engineering ideas can be brought to the project, albeit late in the day..On the other. extreme,
it can be used to help create a sound business case for a project, to jointly appraise risk,
value, buiidability issues, design and whole-life solutions, to negotiate a price for the works
and then to execute the construction works. The early work can be initiated over one, two
or more stages, with construction being the final stage (unless of course the project also
involves operation and/or maintenance). If at the end of any of the early stages the project's
business case is not sound or the price is too high, the Client is able to stop the project
without facing a claim for losses by the Contractor who was anticipating taking the project
through construction.

Clients can use NEC contracts in a number of different ways to achieve the same goal, but at
all times Clients need to have regard to any procurement rules particular to their jurisdiction.
Typically the following ECI approaches can be used:

Use ECC Option C or E with Option X~2 (early Contractor involvement). This provides
flexibility in terms of defining when construction can start.

Place two or more contracts in sequence. For example use the PSC for the early
stages of work and, when a negotiated price is acceptable, place the construction
contract under the ECC, usually on a target cost or lump sum basis.

Opportunity/cost curves demonstrate the later a supplier is brought in using this process, the
lower will be the benefits that may be attained. How NEC is implemented is usually down to
Client preference and procurement rules. The NEC is flexible enough to be used in a number
of combinations to achieve the desired outcome.

ECI has many benefits, including early involvement of contractors and suppliers in the design,
encouraging innovation, collaboration, design for off-site manufacture, whole life solutions,
jointly reducing risk, planning resources, negotiation of price and creating a sound business
case.

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Information modelling is a process for creating a 'model' which represents all the details
of an asset in digital form. It can be applied to all forms of assets, not just buildings, and
the model is intended to be created and used in the design and construction phases, and
further used during the maintenance and management of the asset following construction.
Information modelling is designed to improve collaborative working for project teams
throughout the lifecycle of the asset. Its ultimate aim is to reduce the time and waste taken
to build and manage the asset as well as ultimately reducing the cost.

The use of information modelling not only brings specialist technical requirements into the
contract, but also raises issues of rights and liabilities of the various parties involved. The
liability of each party for the work they have carried out in creating the model, and control
over the use of material created by the various parties involved are different from those in
contracts which do not use this process. The NEC provides for this in Option X10.

Information modelling can be used by all parties to a contract and several parties are likely
to contribute towards the preparation of the model. Various suppliers may all have to create ~
their material in digital form suitable for incorporation into the model of the asset. The model, '~
is normally prepared during the design and construction stages.

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All NEC contracts, except short contracts provide flexibility to incorporate the requirements
for information modelling through the use of Option X10. The short contracts will not
normally be suitable for use by those responsible for creating the model because of the
additional risks and complexities that creating the model adds to the process. Suppliers
appointed using short forms may, however, be required to provide information in a
~ digital format such that it can be readily added into the model. Such requirements will be
u covered by the requirements set out in the Scope. The short contracts could be used where
appropriate for the appointment of suppliers who are using the model as a tool in their
construction work or future design tasks.

A Client may need to employ a designer, for example to provide drawings for the purposes
of obtaining planning permission, before a construction Contractor can be appointed. If
the contract strategy is for a design and build arrangement, with the Contractor to have full
~ responsibility for the design, it may be necessary to transfer the benefit of the designer's
contract from the Client to the Contractor. The legal process for doing this is known as
novation, and is usually achieved by the parties executing a short deed in which they agree
to the transfer. The process may cause problems, for example arguments over design errors,
unknown to one or both .parties, which exist at the time of transfer.

NEC does not expressly provide for novation as this process is not straight forward and
requires very careful planning to deal with the risk of errors in the transferred design. If this
is not achieved the end product of novation, which is effectively no different to the designer
entering into a contract with the new Client from the outset will not be achieved. For this
reason, there is no shortcut handover NEC document as each contract placed under NEC
should be thoroughly understood by both parties, regardless of how or why the two parties
finished up together in contract.

Complex issues such as the imposition of sustainability, or the other socially desirable
outcomes, is a matter for detailed definition in the Scope. These outcomes are mostly the
subject of developing and specifying technical requirements, the definition of which will
be project specific. Given they are predominantly technical they are best included in the
technical specification included as part of the Scope, and drafted to suit the nature of the
project. The proven management processes of the chosen NEC contract would then help to
ensure the planned outcomes were achieved.

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Each NEC contract sets out the responsibilities and roles of the following parties. Based on
the ECC the table below identifies the equivalent roles under other NEC contracts:

x x
PSC x x
(Service Manager) (Consultant)

X
TSC, DBOC X X X
(Service Manager)

X X X
SC /:1
(Supply Manager) (Purchaser) (Supplier)
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(Contractor) (Subcontractor)

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(Client's Agent)

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Whilst reference is made to the Project Manager in this section, the guidance also applies, in
principle, to the roles of the Service Manager, Supply Manager, Client's Agent and Client's
Representative.

The Project Manager is appointed by the Client for a particular contract. The Project
Manager is a named individual, not a named organisation. Typically the Project Manager will
be a person from an organization that is different to the Client's organization, for example,
a consultant. One reason for this is that, in some jurisdictions, the Project Manager needs to
act independently of the Client when certifying payment or assessing compensation events.

The Client will normally appoint a project manger in the feasibility study stage of a project.
The project manager's duties may then also include acting on behalf of the Client and
advising on the procurement of design, on estimates of costs and time, on the merits of
alternative schemes and on choosing the most appropriate contract strategy.

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As contracts are placed for various works, services or the supply of goods, it is preferable to
appoint the person already appointed for the whole project to act as the Project Manager or
equivalent on each particular contract. However, it is essential that the Project Manager for
a particular contract is sufficiently close to the work, service or supply of goods and has the
time and authority to carry out its duties effectively. Un very large projects, especially those
involving several contracts, it may be necessary to appoint a different Project Manager for
each contract or to delegate actions and decisions or both.

NEC contracts place considerable authority in the hands of tP~e Project Manager to carry out
the actions and make the decisions required by the contract. The obligation of the Project
Manager to make rapid decisions means that the Client must give the Protect Manager
considerable authority. An understanding of the Client's internal procedures is also an
advantage. If Project Manager's contract with the Client constrains the Project Manager in
any way, as for example in the case of a limit on the amount which the Project Manager may
authorise as a compensation event assessment, it is the responsibility of the Project Manager
to ensure that all the approvals are given in time to comply with the time periods in the
contract, if such approvals by the Client are not given, the supplier has the right to raise the
matter with the Adjudicator (if Options W1 or W2 are used) or Dispute Avoidance Board (if
Option W3 is used). It is not advisable to state limits on the Project Manager's authority in
additional conditions of contract as this will make settlement of disputes difficult.

The Project Manager is free to seek the Client's views as much or as little as its relationship
and contract with the Client requires. The Project Manager will normally maintain close
contact with the Client so that its decisions reflect the Client's objectives. The Project
Manager has authority to change the Scope, to instruct the supplier and generally to
apply its managerial and engineering judgement. Positive management from both sides is
encouraged.

The contractual role of the Project Manager is defined in terms of the actions and decisions
stated in the contract and include, but are certainly not limited to, the duties traditionally
undertaken by a quantity surveyor. The Project Manager is constrained from acting
unreasonably in this role by statements of the basis on which it is to make each type of
decision but not what decisions it is to make. If the supplier believes that any of the Project
Manager's actions or decisions is not in accordance with the contract, the supplier may refer
it to the Adjudicator or Dispute Avoidance Board where applicable.

The Project Manager's role includes the control of design and the skills and experience
required will largely depend upon the technical nature of the works included in the contract.
Typically the named Project Manager, in fulfilling its role under the particular contract,
may need to delegate actions and decisions to designers covering the range of technical
disciplines appropriate to the works included in the contract. Refer to section 6.7 below for
further guidance on project organisation.

The duties of the Project Manager can be considerable, particularly where the contract
involves significant and complex works. The Project Manager is involved in and is responsible
for virtually every aspect of the contract, except termination, making a payment and the
duties of the Supervisor. Consequently it is likely that the Project Manager will need to
delegate actions and decisions to other people to one extent or another.

The role of the Supervisor only exists in the ECC and is appointed by the Client for a
particular contract. As with the Project Manager, the Supervisor is a named individual, not a
named organisation. The Supervisor can be person from within the Client's organization or
,~ ; from a different organization, for example, a consultant.
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~' The Supervisor's role is defined in terms of the actions and decisions stated in the contract.
~,', Essentially, the Supervisor's role is to check that the works are constructed in accordance
with the Scope, the applicable law and, where necessary, the Contractor's design which the
Project Manager has accepted. It is similar to that of a resident engineer or architect who
may be assisted by one or more inspectors or clerks of works. The role of the Supervisor
includes:

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 receiving samples from the Contractor and notifying its acceptance or the reason for not
accepting such samples,

watching tests and inspections,

carrying out tests and inspections,

notifying Defects (although the Supervisor does not accept a. Defect as this is for the
Project Manager to decide) and

issuing the Defects Certificate, which ends most of the obligations of the Parties under
the contract.

The Supervisor's role is therefore more directly technical and the skills and experience
required will largely depend upon the technical nature of the works included in the contract.
Typically the named Supervisor, in fulfilling its role under the particular contract, may need to
delegate actions and decisions to a team of people covering the range of technical disciplines
appropriate to the works included in the contract. For contracts involving a limited scope of
works it may be appropriate for a clerk of works or similar to undertake the Supervisor's role.
Refer to section 6.7 below for further guidance on project organisation.

A disputed action by the Supervisor, like that of the Project Manager, can be referred by the
Contractor to the AdjudicaTor or Dispute Avoidance Board where applicable.

The Client may appoint designers to prepare its design. If several designers are appointed,
possibly covering different disciplines, good practice requires that a lead designer be
appointed.

If the design of the works depends on a process technology, for which the Client has a
licence, the Client will need to provide appropriate access to it as part of its contract with
the designer or the Contractor(and also for management purposes in the Project Manager's
contract).

The Client's designer's role is to develop the design to meet the Client's objectives to the
point where tenders for the works are to be invited. If suppliers are required to do the
majority of the design, the Client's designer's role will be restricted largely to providing a
performance specification together with standards for design and materials which the Clrent
wishes to include in the contract (i.e. in the Client's Scope).

The role of the Client's designer (or Contractor's designer) is assumed in a number of NEC
contracts but not directly referred to. However, the Client should ensure that the Project
Manager's brief includes management of the Client's designer's activities. The Project
Manager should have ready access to the designer, as actions such as revising the design
when changes occur or accepting the Contractor's designs, are part of the Project Manager's
role.

Since design often provides a large potential for compensation events, this process needs to be
carefully managed by the Project Manager. For example, on projects involving work at or below
ground level, it is important that the assumptions made by the designer are reviewed against
the conditions actually encountered during construction. This is essential in high-risk operations
such as tunnelling contracts. On such projects the role of the designer should not end when
the Scope is complete but should continue during construction in some capacity. This principle
applies whether the design has been prepared by the Client or by the supplier.

This guidance also applies to the Purchaser.

The Client is a Party to the contract but plays very little part in the contract. The Client
appoints agents in the form of the Project Manager or equivalent (and the Supervisor in the

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case of-the ECC) to carry out the actions required under the contract. The Client may become
involved for elements of the contract such as termination and, of course, the Client pays the
ConTractor.

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This guidance also applies to the Consultant, Supplier, Subcontractor and Dispute Resolver.

The Contractor is the other Party to the contract and is responsible for all the duties
attributed to the Contractor under the contract.

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The Adjudicator's role, under Option W1 or W2, is to settle any disputes that arise between
the parties quickly and efficiently. The intention is that disputes are dealt with quickly and
not left to cause ill will amongst the parties.

The Parties should therefore not look upon adjudication under the contract as just another
form of litigation but rather as an efficient method for referring honestly held differences,
between parties working together in a spirit of mutual trust and co-operation, to an
independent third party to decide. The Adjudicator's decision is binding upon the Parties. If
either party does not accept that decision they have only a limited period to notify the other
party of their intention to refer the matter to the tribunal, after which it becomes final as well
as binding.

It should also be noted that all disputes have first to be referred to the Adjudicator for its
decision before they are referred to the tribunal.

The Adjudicator becomes involved only when a dispute is referred to it. As a person
independent of the contracting parties, the Adjudicator is required by the NEC Adjudicator's
contract to give a decision on the dispute within stated time limits. Payment of the
Adjudicator's fee is shared equally by the parties, unless otherwise agreed by the Parties.

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The Project Manager and the Supervisor are independent of each other. They do not report
one to the other, although communications should be copied to each other; for example,
the Supervisor copies Defect notifications to the Project Manager. In other words, there is
no line reporting from the Supervisor to the Project Manager and the Supervisor carries out
its duties independently of the Project Manager. Even if there is line reporting between the
person named as the Project Manager and the person named as the Supervisor as part of
their job outwith the contract, this relationship cannot be mirrored in the duties carried out
under the contract.

On small projects it may be more efficient, and better serve the Client's objectives, for the
role of Project Manager and Supervisor to be undertaken by the same individual; however,
both roles must be undertaken separately. The individual needs to be very aware of the role
that is being undertaken when carrying out certain actions. In other words, the individual
should be aware which of the duties are to be undertaken in the role of Supervisor and
which of the duties are to be undertaken in the role of the Project Manager.

The composition of the project team and the contract's organisational requirements need
to be carefully considered, in particular, with regard to the control of design and quality. In
certain cases, where special arrangements are made (for example delegation), the Contractor
should be made aware of the C/ienT's approach within the Scope. Given the separate duties
u of the Project Manager and Supervisor with respect to controlling design and quality that are
described above, there are a number of approaches that can be considered:

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 The original designer is appointed as Project Manager. This would enable the Project
Manager to fulfil its duties without further assistance and may include a requirement to
undertake design reviews and such other activities as the Client wishes the designer to
undertake during the contract to provide assurance that the design requirements were
being met during construction. The duties would include the need to ensure that any
necessary design changes are properly considered and incorporated into the revised
Scope when instructing the Contractor. Typically this approach is only suitable where the
works included in the contract involve one design discipline.

The original designer is appointed as Supervisor. The Supervisor could either be tasked
with advising and assisting the Project Manager when accepting the Contractor's design
or the Project Manager could delegate design acceptance duties to the Supervisor, In
the latter case, the Supervisor would still need to be aware of and be able to advise
on how potential changes to the Scope could affect design requirements. The Project
Manager's contract would need to recognise the role of the Supervisor in this respect,
and require consultation with the Supervisor before making any changes which could
have an impact on design. The Supervisor's contract may also include the requirements
for design reviews and preparing any necessary changes to the Scope for the Project
Manager to instruct the Contractor. If the design acceptance role is delegated to the
Supervisor, the Contractor would need to be notified of that delegation. Typically this
approach is only suitable where the works included in the contract involve one design
discipline.

The Project Manager and Supervisor are appointed separately to the designer(s). The
designers) could either be tasked with advising and assisting the Project Manager and
Supervisor in respect to their duties in controlling design and quality or the Project
Manager and Supervisor could delegate such duties to best suit the nature of the works
included in the contract. The designer's contract would include requirements to provide
support to the Project Manager on design submissions and potential changes during the
contract, including providing or reviewing changes to the Scope to check compliance
with design requirements and to provide support to the Supervisor with respect to
quality control. The Project Manager's contract would include requirements to consult
with the designers) before accepting any design submissions from the Contractor and
include the requirement to consult with the designers) before making any changes
which could have an impact on design. Similarly the Supervisor's contract would include
requirements to consult with the designers) in respect to quality issues. If duties are
delegated to the designers) by either the Project Manager or Supervisor or both, the
Contractor would need to be notified of such delegations. Typically this approach
is suitable where the works included in the contract involve more than one design
discipline.

These arrangements would apply irrespective of the boundary between the Client's design
and the Contractor's design. It is essential that a design capability is retained by the Client for
the duration of the contract.

A NEC contract is a management tool that is designed to be used throughout the duration
of a contract by the project team. Its effectiveness depends on how well it is used by the
project team and the Project Manager or the equivalent is pivotal to this. Consequently,
when selecting and appointing a Project Manager, Clients must ensure the proposed
individual has the requisite skills and culture to undertake the role.

When selecting the Project Manager, the Client's evaluation should include consideration of
whether the individual has the following skills, experience and capabilities:
w
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A complete and thorough understanding of the operation of the particular NEC a
contract. x
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Understands the NEC objectives and is able to effectively promote the NEC culture and
ethos including the benefits of collaborative working.

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 Proven project management skills and ability to manage projects and recognise, where
necessary, the need to obtain specialist advice.

Has a disciplined approach to management and the adherence to the time-scales and
rr procedures in the contract..
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Proven leadership and personal effectiveness skills

Planning and programming capability

Effective project controls skills including the assessment of the time and cost effects of
compensation events

Appropriate experience of managing similar works, services or supply of goods that are
included in the particular contract.

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Factors that should be considered when deciding the contract strategy and in particular the
NEC contract and main Option, if applicable, include:

Who has the necessary design expertise?

Is there particular pressure to complete quickly?

How important is performance of the completed works?

Is certainty of final cost more important than lowest final cost?

Where can a risk be best managed?

What total risk is tolerable for contractors?

• How important is cross-contract co-ordination to achievement of project objectives?

• Does the Client have good reasons for the selection of suppliers for parts of the works
based on the optimal combination of quality and price?

Chapter 4 of this guide explains the choice of procurement routes and use of associated NEC
contracts. This will help users select the particular NEC contracts) to deliver their contract
strategy.

Chapter 5 of this guide explains a number of key procurement considerations to help users
refine their choice of main and certain secondary Options.

The result of these considerations should be a statement of the chosen contract strategy
comprising the following:

a schedule of the parts of the project which will be let as separate contracts together
with responsibilities for the management of interface risks,

for each contract — a statement of the stages of work which it will include covering
management, design, manufacture, erection, construction, installation, testing and
commissioning as appropriate, and

a statement of the NEC contract which will be used for each contract, and, where
relevant, which main and secondary Options will be used.

An advantage of using NEC is that, whatever variations in strategy are adopted, and
whatever NEC contracts are used, the procedures will be common to all contracts.

For a particular contract, one main Option is chosen. The optional clauses are combined
with the core clauses to provide a complete contract. The core clauses cannot be used on
their own. They are clauses which are common to the types of contract covered by the main
Options.

The main Option determines the payment mechanism and associated basic allocation
of financial risk between the parties. There are up to six main Options to choose from,
depending upon the particular NEC contract that is used:

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A Priced contract wifhactivityseliedule X (with X (with X (with

X X X X
price list) price list) price list)
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B Priced contract will bill of quantities X X
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v C Tzrget contract with activity schedule X (with X (with X (with
X X X X
~~rice list) price list) price list)
U Target contract with bill of quantities X X
E Cost reimbursable contract X (time X (dine
X X eased) X X X
based)
F Management contract X

All the main Options can be used with the boundary between the Client's design and the
Contractor's design set to suit the chosen strategy. Under the ECC and ECSC, if the Client's
Scope is only a performance specification, most of the design will be done by the Contractor
(effectively a 'design and build' contract). If the Scope includes detailed drawings and
specifications, little design remains for the Contractor to complete.

Risk alloeatian

Each Option uses different arrangements for payment as each Option allocates risk
differently between the Parties. The extreme cases of risk allocation are the priced Options A
and B on the one hand and the cost reimbursable Option E on the other hand.

In the priced Options, the supplier is paid at tendered prices (and rates with Option B) for
the work it has done. The supplier carries all risks other than the Client's risks stated in the
contract and the financial and time effects of compensation events.

In a cost reimbursable Option, the supplier is paid the Defined Cost, as defined in the chosen
main Option.

The target Options C and D permit the cost risk to be shared between the Client and the
supplier in pre-agreed proportions.

The management Option F is essentially cost reimbursable but risk allocation can be varied by
choosing appropriate main Options in the subcontracts.

Key characteristics of each main t)pt"ran

Option A: Priced contract with activity schedule or price list

An activity schedule is a list of activities prepared by the supplier which they expect to carry
out in providing the works or service. The lump sum price for each activity is the Price to be
paid by the Client for that activity. The total of these Prices is the supplier's price for providing
the whole of the works or service, including for all matters which are at the supplier's risk.

For contracts using a price list, it can be used in two ways. The supplier is paid either:

the lump sum price for each item once it is complete or

the actual measurement of those items with quantities (which can include units of time).

Option B: Priced contract with bill of quantities (ECC and ECS only
A bill of quantities comprises a list of work items and quantities. It is prepared by or for the
Client. Standard methods of measurement are published which state the items to be included
and how the quantities are to be measured and calculated. The supplier prices the items,
taking account of the Scope and including for all matters which are at the supplier's risk. The
Client pays for work done on the basis of actual measurement of those items with quantities.

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motions C and D: Target contract(with activity schedule. bill of quantities or

rice list
Target contracts are typically used where the extent of work to be done is not fully defined
or where the level of uncertainty and risk is greater. The financial risk is shared between the
Client and the supplier in the following way:

The supplier tenders a target price in the form of the Prices using the activity schedule, a
bill of quantities (ECC and ECS Option D only) or price list. The target price includes the
supplier's estimate of Defined Cost plus other costs, overheads and profit to be covered
by the Fee.

The supplier tenders the Fee in terms of fee percentage to be applied to Defined Cost.

-~ During the course of the contract, the supplier is paid Defined Cost plus the Fee. This is
defined as the Price for Work Done to Date (PWDD).

The Prices are adjusted for the effects of compensation events, and for inflation if secondary
Option X1 is used; for Option D the Prices are also adjusted as the work completed by the
supplier is measured.

At the end of the contract, the supplier is paid (or pays) their share of the difference between
the final total of the Prices and the final PWDD according to apre-agreed formula stated in
the Contract Data. If the final PWDD is greater than the final total of the Prices, the supplier
pays its share of the difference. The supplier's share is paid provisionally at Completion and
is corrected in the final assessment. The purpose of the pre-agreed formula is to encourage
effective management control of the final PWDD relative to the final total of the Prices. n?
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Option E: Cost reimbursable contract a
A cost reimbursable contract should be used when the definition of the work to be done is v
inadequate even as a basis for a target price and yet an early start to construction is required.
In such circumstances, the supplier cannot be expected to take cost risks other than those
which entail control of its employees and other resources. The supplier carries minimum risk
and is paid Defined Cost plus the tendered Fee, subject only to a small number of constraints
designed to motivate efficient working.

Option F: Manaaement contract (ECC only

The Contractor's responsibilities for construction work are the same as those of a Contractor
working under one of the other Options. However, they do only the limited amount of
construction work stated in the Contract Data. The Project Manager has no authority to
instruct the Contractor to carry out further construction work beyond that stated in Contract
Data.

All subcontracts are direct contracts with the Contractor, who acts as a management
contractor. If the Client wishes to be a party to the construction subcontracts, a management
contract is not appropriate. The Client should instead appoint a construction manager as
the Project Manager and use the ECC with appropriate main Options for the contracts with
package contractors.

The Contractor tenders the Fee and the estimated total of the Prices of the subcontracts.
The subcontract prices are paid to the Contractor as part of Defined Cost. The Contractor
is responsible for supplying management services, including the management of design if
required. If the Contractor wishes to be responsible for doing work other than management
it must state the extent of that work in the Contract Data.

The Contractor's Fee will increase if Subcontractors' prices (part of Defined Cost to the
Contractor) increase due to compensation events. However, the ContracTorwill not receive
separate payment for its work in dealing with compensation events and it will not receive
any additional Fee for work on compensation events which does not lead to an increase in
Subcontractors' prices.

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The SC and short contracts de not have a choice of main Options. These contracts all use a
price list which can be used in two ways. The supplier is paid either:
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F the lump sum price for each item once it is complete or
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tl.e actual meas~~rement of those items with quantities (which can include units of time).

The exception is the PSSC, which in addition to the above includes a provision for paying the
Consultant on a time charge basis using tendered rates.

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After deciding the main Option, the user identifies one of the following Options for resolving
~ and avoiding disputes:

W1 Used where Adjudication is the method of dispute

resolution and the United Kingdom Housing Grants, X X X X X X X
Construction and Regeneration Act 1996 does not apply

M W2 Used where Adjudication is the method of dispute

resolution and the United Kingdom Housing Grants; X X X X X X X
d Construction and Regeneration A<t 1996'applies
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W3 Used where a Dispute Avoidance Board is the method
of dispute resolution and the United Kingdom Housing X
Grants, Construction and Regeneration Act 1996 does not
app~Y

The user may choose any of the secondary Options that are available for the chosen main Option.
It is not necessary to use any of them. The chosen secondary Options, together with the chosen
~ main Option, and Option for resolving and avoiding disputes, must be identified in the first entry
W in Contract Uata part one. The secondary Options available in NEC contracts are as follows:

X1 Price adjustment for inflation (used only with

Options A, B, C and D)'
X X X X X X X
X1 transfers the risk of inflation to the Client.

X2 Changes in the law

X X X X X X X
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x X2 transfers the risk of a change in law after the Contract
F Date to the Client:
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~ X3 Multiple currencies (used only with Options A and B)'
X X X X X X X X
X3 transfers the risk of a currency exchange for items and
activities identified in Contract Data to the Client.

X4 Ultimate holding company guarantee X X X X X X X X

X5 Sectional Completion

XS enables the Client to identify parts of the works that X X X X

are to be completed before the whole of the works.

X6 Bonus for early Completion

X X X X
The purpose of X6 is explained in section 4.2.

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X7 Delay damages

X7 requires the supplier to pay liquidated damages if it fails X X X X X W

to complete the works or service by the Completion Date. Q
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XS Undertakings to the Client or Others2 `-'
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X8 requires the supplier to provide undertakings (often
referred to as 'collateral warranties') to the ClienT (from X X X X X X
a subcontractor) or another party identified in Contract
Data. i
X9 Transfer of rights

X9 transfers the rights to material prepared for design of X X X X X w

the works to the Clien[ except as stated otherwise in the a
Scope. ~
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X10 Information modelling
X X X X X X X X
Further guidance on the use of X10 is in section 4.9.

X11 Termination by the Client3

X X X X X X X X „ham
X11 enables the Client to terminate for any reason.
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X12 Multiparty collaboration (not used with X20) ~
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Further guidance on the use of X12 is in section 4.1 and X X X X X X X Q
4.2. v
X13 Performance bond X X X X X X X X ~
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X14 Advance payment to the ContractoY' ~ ~ t~„'
X14 enables an advance payment to be made to tli`e ~ ~'" X ~" "' X ~~ ~~ ~ X X
supplier and includes the optional requirement for the
supplier to provide a bond as security.

X15 The Contractor's design

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X15 limits the Contractor's liability to skill and care
normally use by professionals designing works similar X X X
to the works. It also includes the requirements for
professional indemnity insurance, use of material and the
retention of documents.

X16 Retention (not used with Option F)5

X16 enables the Client to retain a proportion of the X X

PWDD as security and as an additional motivation for the
Contractor to complete the works.
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X17 Low performance damages ~
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X17 requires the Coniiactor to pay liquidated damages
if the performance of the works in use fails to reach X X X X X
a specified level due to a design or other fault of the
Contractor and the Defect is not corrected so that it is
listed on the Defects Certificate.

X18 Limitation of liability

X18 limits various liabilities that the supplier may have to X X X X X X X X

the Client arising or in connection with the contract. ;~
X19 Termination by either Party (not used with Option X11)

X19 enables the Clrent or supplier to terminate for any X X

reason.

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 Notes:

~, 1. Main Options B and D are only used in the ECC and ECS. Main Options are not used in the SC or DBOC

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a 2. Undertakings to the Clrent are not provided for in the PSC and PSS.
a
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~ 3. TSC and TSS Option X11 is not used with Option X19. SC Option X11 refers to Purchaser instead of Client. Subcontract Option X11's
refers to Contractor instead of Client.

4. SC Option X14 refers to Supplier instead of Contractor.

5. Main Option F is only used in the ECC.

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Secondary Options are not used in the short contracts. However, certain features which
are provided within the secondary Options are included as optional entries in the particular
Contract Data as follows:

Price adjustment for inflation X

Delay damages X X X X

Retention X X

The United Kingdom Housing Grants, Construction and

Regeneration Act (1996) does apply, including the use X X X X
of adjudication

Additional conditions X X X X X

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