NEC 3 to NEC 4 – Key Changes

Our team: Michaela Patterson

NEC 3 to NEC 4 – Key Changes

The NEC4 suite of documents were released in June 2017.  Despite being around for some two and half years some parties remain reluctant to take the leap from NEC3 to NEC4.

NEC4 is described as “significant evolution, not revolution” emphasising that NEC remains focussed on being a contract drafted in simple English which campaigns for good project management and flexibility.

Updates made in NEC4 have arisen out of direct feedback from the construction industry and how the contracts are actually being used in practice, in particular by aiming to reduce the number of Z clauses used to modify the standard form a contract.

New Contracts

NEC4 introduced 2 new forms of contract: the Design, Build, Operate (“DBO”) and the Alliance Contract (ALC).

The DBO provides an “integrated whole-life delivery solution”.

Increasingly, complex infrastructure projects are being designed, constructed, operated and maintained by one contractor.  The DBO caters for all of these operations and is drafted on the basis that the same contractor will be carrying out works and services from the pre-construction phase right the way through to facility management following practical completion.

The ALC is a “true” alliance arrangement in which the client and all key members of the supply chain are engaged under a single contract.  Each member of the alliance must equally contribute to the performance of the alliance as a whole. However, but this raises difficulties and questions such as the fact that the client cannot unilaterally issue an instruction and who retains responsibility for latent defects.

Contract Update

NEC4 has made a number of changes to the NEC3 issue including modernising the terminology used so that it is now gender neutral and being consistent in the definitions used across the suite of contracts.  Further to these stylistic changes NEC has made a number of bigger changes which users should be aware of:

1.     Communications

NEC users have always had to ensure that they strictly follow the communication and notification provisions to ensure that they do not miss any entitlement they may have under an NEC contract.  This requirement remains in NEC4 and there is now the option to specify how a communication is delivered under a contract.  This reflects that many communications are now made digitally and gives users the flexibility to agree a system which reflects how communications operate in practice.

2.     Assignment

A new clause has been inserted which enables either the contractor or the client to assign freely.  This is unlikely to be popular where funders are involved given that a client does not need to consent to an assignment by the contractor.

This clause is slightly unusual as if the client assigns the new client must “act in a spirit of mutual trust and co-operation”.  This follows the heart of NEC which encourages collaborative working throughout the supply chain although it is unclear in practice what impact this will have on a new client, other than discouraging the assignment of claims.

3.     Programme

The form of programme to be used can now be stipulated under the scope.  This can provide welcome clarity for contract administration purposes.

The timescales for submitting and accepting a programme have changed but if a project manager does not expressly accept or reject a programme within two weeks of a contractor submitting it the contractor can notify the project manager of that failure.  If that failure continues for a further week the programme is deemed accepted.

4.     Payment

Under the NEC4 payment provisions the contractor is now obliged to submit an application for payment before the assessment date.  This is consistent with other standard form contracts and with what is being carried out generally in the industry.

There is also a new final account mechanism included which provides for a final certificate to be issued when the contractor has performed his obligations under the contract or on termination.  Historically, NEC has not included this given the need for prompt assessment of costs and compensation events, however given users were often making a Z clause amendment to this effect to give finality and avoid later challenges it has now been included.

5.     Compensation Events

There are two new compensation events in NEC4; one which allows the contractor to recover the costs of preparing a quote for a proposed instruction and a second which allows agreed compensation events to be inserted into the contract data.

NEC4 has clarified when the dividing date is for the purposes of a compensation event.  If the compensation event arises out of a communication from the project manager or supervisor (such as an instruction), the dividing date is the date of that communication.  For all other compensation events the dividing date is the date the compensation event is notified.

6.     Title to Objects and Materials within the Site

All materials from excavation and demolition from the site automatically belong to the contractor (unless the scope states otherwise) other than any objects of value or historical or other interest, which belong to the client.  This reverses the position of NEC3 (where all title vested with the client) and users should be wary of the risk of a dispute over materials / objects being of “value or historical or other interest”.

7.     Liabilities and Insurance

One of the key changes between the NEC3 and NEC4 is the allocation of risk.  Under the NEC3 there were risks stipulated as client risks and all other risk lay with the contractor.  NEC4 has now issued definitive lists of risks which lie with the contractor and risks which lie with the client.  Users should be wary of risks that do not fall within either of these sets and there will be significant scope for dispute depending on what the risk is.

In addition, under NEC4 any claims, proceedings, compensation, and costs are now dealt with by way of a recovery of costs clause.  Under NEC3 this was dealt with by an indemnity.  The NEC4 position is consistent with other standard forms.

8.     Dispute Avoidance Board

A dispute avoidance board (DAB) has been introduced in NEC4 which attempts to minimise the risk of any disputes crystallising.  The DAB is appointed consensually by both parties.  The DAB becomes familiar with the project before any dispute arises and makes regular site visits as and when requested to attempt to encourage an amicable solution between the parties.  If no solution is found the DAB will make a recommendation and only when this is rejected can the formal dispute resolution process be commenced.

9.     Undertakings

The provision of collateral warranties has been replaced by undertakings.  This includes both from the contractor to third parties and sub-contractors to the client and third parties.

These undertakings are in the form of a separate document prepared by client, so in practice there is no significant legal distinction.

10.  BIM

The BIM clause in NEC4 specifies who is to contribute to, who owns, and who is liable for what risks in BIM models.  The clause does not specify a standard form BIM model and allows clients the freedom to use their own practises and incorporate them into the contract.

11.  Termination at Will

The client is now able to terminate the contract at will.

12.  Contractor’s Designs

Under the NEC4 it is the client’s responsibility to show that the contractor did not carry out the design with the requisite standard of skill and care.  This completely shifts the position under NEC3 where it is the contractor’s responsibility to show it carried out the design with requisite skill and care.  Users, specifically clients, should be aware of this change.

13.  Whole of Life Costings

The contractor is entitled to suggest changes to the scope which will reduce the cost of operating and maintaining an asset.  This is in line with NEC’s collaborative approach and recognises that the cost to run an asset is a significant part of the investment in an asset.

14.  Early Contractor Involvement

Under this provision of NEC4 a contractor is appointed in the early stages to contribute to the development of the design and tender.  The contractor can propose amendments which could amount to improvements or innovations that the client would otherwise not identify.  Further, a contractor can raise any discrepancies early on when it is easier and cheaper to rectify such issues.  Early involvement of the contractor could save the client significant costs and provide a good base for collaboration on a project.

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