Alliancing Best Practice Keith Waller - NEC Contract

Alliancing Best Practice Keith Waller 27 April 2016

29/04/2016 © NEC Contracts 1

Institution of Civil Engineers

Alliancing Best Practice 27 April 2016

Institution of Civil Engineers 3


ICG Workstreams ……

• ICG Work Programme

– Procurement Best Practice (Alliancing)

– New Delivery Models (Project 13)


Alliancing Workstream ……

• A track record in Alliancing …..

• Collective experience and learning

Capture underpinning

characteristics


Business and organisational change requires collaboration…

Hierarchies/ Bureaucracies

Markets Networks

the collaborative win

the industrious win the powerful win


• Why are less that half of projects delivered to time and cost?

• Multiple reasons:

Fragmented industry, low investment in skills etc.

• traditional cost based procurement

• project by project approach • transfer of risk to contractors • limited engagement with

supply chain

UK Construction Industry ….

2010 1990


Alliancing is a form of long term partnering on a project [or programme] in which a financial incentive scheme links the rewards of each of the alliance members to agreed overall outcomes. European Construction Institute

An Alliance is…


ICG Alliancing Project Team

The best practice we saw in this review has certainly shown that alliances require hard work and a long-term commitment to change. However, it has also demonstrated that getting four basic characteristics right will go a long way to ensuring success.

The reality is that true collaboration is difficult. It requires subordinating individual goals to collective achievement; it means engaging in tough, emotional give-and-take discussions most teams find it easier to talk about… rather than do it.

Why Teams Don’t Collaborate Harvard Business Review

Alliance Characteristics


An understanding and a commitment to the behavioural change required

The capability to develop and sustain high performing integrated teams

A commercial model that aligns all partners

and creates the behaviours required

Leadership committed to alliance approach

and that will drive required change

Alliance Characteristics


Best practice through integrated teams… Contract Value (£m)

Cambridge WRC:

• £21m (35% efficiency) • 60% reduction in carbon • 12 months construction

INVOLVED

ENGAGED

CONTRACTED

Historical Interface

Company Name Pre-Project Explore Options

Project Development Construction

1 Alliance Partner 2 Alliance Partner 3 Supplier 4 Supplier 5 Supplier 6 Supplier 7 Supplier 8 Supplier 9 Supplier

10 Supplier 11 Supplier 12 Supplier 13 Supplier 14 Supplier 15 Supplier 16 Supplier 17 Supplier 18 Supplier 19 Supplier 20 Supplier 21 Supplier 22 Supplier 23 Supplier 24 Supplier 25 Supplier 26 Supplier 27 Supplier 28 Supplier 29 Supplier 30 Supplier 31 Supplier 32 Supplier 33 Supplier 34 Supplier 35 Supplier 36 Supplier


Code of Practice


Code of Practice


Next steps…

• Continued roll out of Best Practice Guide and Code of Practice

• Develop a community of practice – through ICE

• Associated workstream on NEC for Alliancing

• Reform Alliance Reference Group under IPA / ICG remit


NEC User Group Annual Seminar Infrastructure Client Group Alliance Code of Practice and NEC

27 April 2016 © NEC Contracts 1

Peter Higgins

Implementing the Code of Practice

• NEC working with Alliance Reference Group • Guidance on implementing Alliance Code of Practice using NEC

– Recommended wording for any additional conditions (Z clauses) – Advice on material to be included in contract

• Steering group of NEC plus Reference Group people • Aim to publish later this year – timetable not yet fixed


Basis of implementation

o Use NEC3 contracts cost reimbursable Options

o Individual contract with Employer for each Alliance partner

o Incorporate X 12 in each contract

o Partnering information describes joint working arrangements

o Role and contribution of each partner in Works/ Service/ Supply Information and Scope


Incentive model

o Establish budget for work

o Identify all costs to be included in incentive model

o Set targets linked to Alliance objectives

o Incentive based on achievement of objectives

o Including saving on budget

o Allocation of savings/ limit on pain


Risk allocation

o Allocate project risks and individual partners’ risks o Minimise risks carried by individual partners

o Project risks covered on a "no blame" principle

o Cost of risks included in budget


Performance measurement

o Target outcomes/ objectives for the alliance defined

o Performance measures to demonstrate level of achievement of outcomes/ objectives

o Commercial return for alliance members based on achieving alliance targets – not profit on turnover


Management of Alliance

o Establishment of core team

o Use of early warnings and common risk register

o Use of master program

o Procedure for cost forecasting

o Role of Project Manager and Supervisor

o Procedure for resolution of disagreements



Any further questions?

1

Document Classification: KPMG Confidential

© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Andrew Milner - Collaboration

— My career history

— KPMG to date

— Role as Highways England lead partner

— Collaboration in practice

— What have I learned?

2



Collaboration

— Who

— Why us

— On which projects

— How

3



My perspectives

— growth accelerator

— sparks innovation

— enhances credibility

4



But, you need to: — be pro active

— Choose carefully

— Maintain your own client relationships

— Trust your partners

Thank you


The KPMG name, logo are registered trademarks or trademarks of KPMG International.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.


KPMG LLP is multi-disciplinary practice authorised and regulated by the Solicitors Regulation Authority. For full details of our professional regulation please refer to ‘Regulatory Information’ at www.kpmg.com/uk

https://www.linkedin.com/company/kpmg-advisory

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NEC, FM, OK? Jon Hart, Partner Pinsent Masons LLP


• Unglamorous?

• Complicated?

• Low margin – but high profile and high risk?

• A range of legal issues: what has worked well and where have problems arisen? 29/04/2016 © NEC Contracts 2

FM – the eternal paradox?

FM Contract drafting

• “Bespoke” and flow-down contracts

• Difficult relationship between FM and standard forms

• Wide-ranging approaches to using NEC suite: – TSC (with/without frameworks) – PSC – (Adapted) ECCs (NB – Option C) – Complex public sector programmes


Procurement and tendering

• Procurement issues increasingly in the spot-light ? – Remedies Directive and “ineffectiveness” – Mears –v- Shoreline [2015]

• Use the benefits of the standard form approach – eg: – “how to” guides and NEC and FM documentation – choices of payment options: what is right for project? – ”best practice” – knowledge sharing within procurement team – pragmatism and common sense on Z clauses


Procurement and tendering

• Lessons learned (for procurers): – Realism in programme timescales (start with “Z” clauses drafted) – Quarts in pint pots – “additional services”…”additional

employers?” – “Simplicity is often the best approach”: evaluation criteria:

• Price Lists • Formulae • “vfm curves”

– Beware of precedents/“Don’t reinvent the wheel” – “Game playing” – eg X18 and “unmanageable risks” 29/04/2016 © NEC Contracts 5

Procurement and tendering • Lessons learned (for bidders):

– “Legal” does have a role – even for the Service Information – Beware of precedents – If in doubt… ask(?) – what does the CQ process provide for? – …but be aware of rights and remedies and “minimum”

requirements for a fair tender process. – Beware of the “incumbent” - was “old” contract NEC? (NB –

TUPE and pensions risks)


The Service Manager

• Procurement of the Services Manager – last item on the “to do” list?

• Scope of services?

• Term of appointment?

• Delegated authorities? Task Order process (X19 and variants)


The Contract form: Payment issues • Option A – best with clear set of well-defined/simple services? • Option C – “challenging” in context of uncertainty around totals and

breakdown of numbers of Task Orders/Services required • Inter-relationship with CE mechanism:

– Rules as to change in quantities – Price Lists outside Service Information and therefore will not (automatically) give rise to change to Prices

– “Underlying quality of assets” – what does the Service Information have to say (eg: latent defects and asbestos)

• Cl 50/63 assessment of payment applications and CEs: inter-relationship between Price Lists and Schedule of Cost Components?


The Contract form: change management

• Change and change management: – Use of frameworks (individual ECCs as part of call-off

arrangements) – Use of Task Orders under TSC – Compensation Event mechanisms. – When does each apply? – Terminology: changes to/by instructions of Service Manager to

Task Orders/changes to Service Information – Budgetary restrictions – annual services plan process?


Service Information • Very important part of the contract document – a “legal document”:

– Relevant to Services (and definition of “defects” in Services) – Relevant to Partnering Information and KPIs (if set up separately)

• The danger of “booklets” and the Russian doll effect. (Priority?)

• “Incorporation by reference” – use of “others” definition.

• Reactive maintenance – help desks, IT portals etc.


HR and Pensions

• A major area for “bespoking” – wide variation of approaches.

• Important part of planning for going to market – eg TUPE list, secondary TUPE, interface with Pensions Scheme and contract requirements

• HMEP – very helpful approach (so why not take advantage of this?)

• What assumptions should Contractor make? How does this fit in with

CE? Extra drafting needed? 29/04/2016 © NEC Contracts 11

KPIs and performance regime

• X20 and its variants - “simple is best”? – Objective, transparent criteria/Clarity on response times – Clarity on performance “credits” and financial sanction

• Issues around IT/reporting systems: Service Manager and others?

• Doomsday?

• Link to termination provisions “material failure to provide…”


Conclusions

• Widespread (and growing?) use

• Reflects paradox of FM

• NEC readily adaptable

• BUT….


Jon Hart D: 020 7418 7029 E: [email protected]


NEC Annual Seminar West Island Line Contract No. 713 Re-Provisioning of Kennedy Town Swimming Pool (Phase 2)


Agenda 1. Introduction - MTR WIL Project Manager, Mr. Steve Hamill

2. Project Information

3. Adoption of NEC Contract for Phase 2 swimming pool

4. Aerial Video - Paul Y General Manager, Mr. Stanley Lo

5. Experience Sharing

5.1 Early Completion Bonus

5.2 Project Completion Document

5.3 General Matters


1. Introduction

MTR WIL Project Manager, Mr. Steve Hamill


2. Project Information



West Island Line Overview

Kowloon Peninsula

Hong Kong Island

Kennedy Town Swimming Pool



7

HKU


SHW

SYP

HKU

KET

KTSP

Old KTSP


Kennedy Town Station (KET)

KET

Old Swimming Pool


Tree Wall

West Island Line

Elevations

Kennedy Town Praya Elevation

East Elevation

Sai Cheung Street North Elevation

Shing Sai Road Elevation


Project Information

Phase 1 Contract 710

Phase 2 Contract 713

Start 14 Jul 2009 1 Sep 2014

Completion 14 Mar 2011 30 Oct 2016 (3 Nov 2016 – EOT granted)

Contract Period 20 months 26 months Form of Contract MTR Lump Sum

(without quantities) NEC3 Option A

(with relevant MTR Conditions)

Contract Sum HK$ 311 million (£27.8 million)

HK$ 671 million (£60 million)

Gross Floor Area 13,494 m2 7,058 m2

Final Account Apr 2011 Nov 2016 (envisaged)


Scope of Work

1. Bored Piles and Pile Caps 2. Superstructure – RC and Structural Steel 3. Architectural Building Works and Finishes 4. Phase 1 Interfacing and Improvement Works 5. Building Services 6. Built-in Furniture 7. Landscaping



19

Phase 2 Phase 1

Multipurpose Pool 15m x 50m

Training Pool 12.5m x 25m

Jacuzzis

Changing Rooms

Family cum Disabled Changing Rooms

15 30

Leisure Park

Zone1 Zone2 Zone3


Project Information – Building Facilities

Project Information - Roof 3D Layout

PTFE Fabric

VM Zinc Roof Cladding

Sunshading Area

Structural Steel Frame


3. Adoption of NEC Contract

for Phase 2 Swimming Pool


Decision to Adopt NEC3 • Phase I swimming pool carried out under conventional MTR Form of Contract

(lump sum without quantities)

• Phase I opened on time and within budget – so why change for Phase II ?

• Success of Phase I gave good opportunity for comparison study

• MTR Partnering approach well established, therefore moving to more contractually binding form of partnering contract is a logical progression


• Hong Kong Government approach towards adopting NEC3 Contract

• MTR always looking to improve on Project Performance • Success of NEC3 will augment the existing MTR suite of contracts


Decision to Adopt NEC3

Tender Preparation • Conformed tender documents to comply with NEC3 (Option A) • Appointment of NEC Contract advisers

• Review NEC3 clauses and modify where necessary (minimal changes and

no Z Clauses)

• Extensive workshop training for both MTR and design consultants’ staff prior to tender preparation

• Workshop for tenderers to enable understanding of NEC3 tender documents


Contract Award

• Extended NEC advisers’ contract for construction phase

• Conducted start up workshops to explain requirements of NEC form of contract

• Conducted further workshops for MTR, Consultants’ and Contractors’ staff

• Established procedures, design meeting, risk reduction meeting, compensation event meeting etc. to administer NEC Contract


Early Successes • Achieved timely and equitable resolutions

– on late access to site – modified foundations technical problems

• Adopted Potential Early Warning System

• Early implementation of risk reduction measures


Early Successes (cont’d)

• Realized programme savings quickly • ‘Real time’ updating of cost and programme • High level ‘buy in’ from the full team • Developed mutual trust and respect


Current NEC Work Flow System


Via Sharepoint

by Thur noon

Risk Reduction Meeting (2 hours)

Design Meeting (2 hours)

Internal Meeting (1 hour)

Compensation Event Meeting

(1 hour)

Early Warning Register

PEW Summary

CE Register

Mon Tue Wed Thur Fri

KPI Summary

• Update EAR Register

• Add any PEW / EAR items

By email

• Review EAR Register

• Review PEW Summary

• Add any PEW from DDC

Submit EAR via ePMS

• Review quotations

• Update CE Register

Risk Reduction

& Mitigation

Cost/ Time Assessment

Prepare DamS

Update EAR/ PEW Register

Project Management

Update KPI Summary for

Weekly PM Report

Report Writing

NEC3 Work Flow – Regular Meeting Schedule


• Works / CM Meetings to be held bi-weekly on Tuesdays before Risk Reduction Meetings • Sketch/ DamS/ DIS Register is contained in PEW Summary

KPI Monitoring Summary Early Warning and Compensation Event Summary

Current status: 1) CE Event Quotations – 98% agreed. 2) Early Warnings - 90% closed out. 3) MTR response to Paul Y submissions = Average 10 days.

1st – 7th April 2016


4. Aerial Video

Paul Y General Manager, Mr. Stanley Lo


25 29/04/2016 © NEC Contracts 25


Zone 1

Zone 2

Phase 1 Swimming Pool (in use)

Phase 2 Swimming Pool

(Under Construction)

Zone 3


5.1 Early Completion Bonus



Early Completion Bonus



• The completion of foundation is 4 weeks earlier than planned programme.

• Pursuant to NEC Contract, Paul Y is entitled to a bonus if early completion is indeed achieved • Paul Y considered it an opportunity to maintain this advancement until the project completion

by increasing resources, plant and optimizing construction method / sequence. • Paul Y submitted an Early Warning on project completion to seek approvals from MTR and

Leisure and Cultural Services Department of Hong Kong Government (“LCSD”)

• Early Completion Bonus allows Paul Y to commit additional resources, plant and materials to maintain 4 weeks programme advancement through early planning and collaborative working with MTR and Government.

Risk Management - Structural Steel Roof



• Paul Y issued EAR to alert potential delay which may be caused by early inclement weather

Typical Wet Season

• Wet season is from April to August in Hong Kong.

• Recent rainy days tend to come earlier.

• Measures implemented to ensure Zones 1 & 2 welding

completed before wet season.

• Zone 3 welding activities unavoidably fall in wet season.

Risk on Remaining Structural Steel Roof (Zone 3)

1 2 3 4 5 6 7 8 9 10 11 12



• To ensure Zones 1 & 2 welding completed before wet season in

April and to minimize Zone 3 welding during wet season, the

following measures are implemented:

– To increase production rate.

– Since February, the number of welders are increased.

– To increase number of temporary platforms.

Risk Management and Control Measures Actual. Welder Nos.

Jan 5

Feb 7

Mar 8

Apr 8

Total nos. of welders employed in April



– With this production rate, we target to complete the structural steel roof by 29 April 16.

• Minimized the risk of early wet season


5.2 Project Completion Document


• Sufficient time to be allowed for document preparation for handover of Government facilities.

• Handover documents at least six months before works completion. • MTR agreed Paul Y completion document plan and jointly review the

progress on a bi-weekly basis.

Project Completion Document



5.3 General Matters


General Matters • Swimming pool project is MTR and Paul Y’s first NEC Contract. • During the first 3 months of contract, MTR and Paul Y went through some teething

issues and resulted in some heated debates. • After that, both MTR and Paul Y acknowledged that mutual trust and respect were

essential for achieving contract goals.

• MTR and Paul Y top managements’ full support.

• MTR and Paul Y invested significant management resources on contract administration at the early stage, e.g. Risk Reduction Meeting, Compensation Event etc.


• NEC Contract provides a forum to promote:

– open exchange of ideas and proposals, – cohesive working relationship between and within both teams

• Early investment of management resources will reduce engineering and QS resources to complete the final account.


General Matters

Thank You


ECI clause & How to guide April 2016


ECI clause & How to guide


ECI • What is it? • When can it be best used? • How do you use it? • What is the How to guide? • What is the additional clause? • Can this clause be used with other NEC3 contracts? • Some other thoughts • Q&A

What is it?


• What do you think it is/is not?

What is it?


• ECI allows a Contractor (using ECC) to be appointed before details of what is to be constructed have been fully developed and priced

• ECI is about creating the right circumstances to

bring high quality input from contractors and their supply chain at the earliest stage in the project’s lifecycle to bring maximum value

When can it best be used?


• ECI is well suited to contracts which involve complexity because it allows an integrated team to gain a good understanding of the requirements, develop innovative solutions, plan and mobilise resources, and manage risks to accelerate delivery and reduce costs

When can it best be used?


Particularly useful where: • need to fast-track the project • design is complex • many unknowns • significant risks exist in relation to the project

How do you use it?


• The additional clause for use with the NEC3 Engineering and Construction Contract (ECC) Options C and E – April 2016 combines Stage One and Stage Two into ONE CONTRACT contract, with a notice to proceed being required to procced to Stage Two.

NEC3 ECC

main Option C or E

Stage One

Works Information

Notice to Proceed

Or

Instruction to remove Stage Two Works

Information

Stage Two

Works Information

How do you use it?


Employer Decision

Two Approaches (Design Lead)

Employer’s Consultant

supported by the Contractor

Contractor

supported by the Employer’s Consultant


NEC3 PSC

main Option C or E

Contractor

NEC3 ECC

main Option C or E

Stage One

Stage Two


NEC3 PSC

Main Option C or E

Contractor

NEC3 ECC

main Option C or E

Stage One

Stage Two

Employer Led – Option 1

Contractor Led – Option 2

What is the How to guide?


What is the How to guide?


• Part 1 Introduction • Part 2 Special issues relevant to ECI contracts

• Eg Budget for Scheme, use of X12, Stage Two incentivisation

• Part 3 Guidance on model clause • Appendix 1 Model clause

• For use with ECC Options C & E • Additional ECC Contract Data entries

• Appendix 2 Additional material required in Works Information

What is the additional clause?


• 1.1 Definitions • 2.1 Forecasts • 3.1 Proposals for Stage Two • 4.1 Key people • 5.1 Notice to proceed to Stage Two • 6.1 Changes to the Budget • 7.1 The Parties use of material • 8.1 Incentive payment

What additional material is required in the Works Information?


• Details of what is included in the Budget • The definition of Stages One and Two • The requirements of Stage One forecasts • The submission requirements for the

Contractor’s design • How the Employer intends to use the material

provided by the Contractor, and what use the Contractor may make of such information

• And so on……

Can this clause be used with other NEC3 contracts?


• Yes, with appropriate amendments to reflect the particular contract

• Not envisaged for use with the short contracts

Some other thoughts


• Purpose is to help users implement an ECI approach using ECC

• ECI seems to be widely recognised as beneficial • Clause should be added via a z clause (may

change in the future) • The clause focuses on Option C & E – other

Options could be used (draft provisions carefully) but ECI is about collaborating through the whole project and sharing the benefits through collaboration – would eg Option A lead to a lower level of collaboration?

Some other thoughts


• Get some more thorough training on ECI…… • www.neccontract.com

http://www.neccontract.com/

ECI clause & How to guide


Q&A

Limited Liability & Insurance Workshop April 2016


Introductions

Ian specialises in the development and implementation of innovative procurement strategies with particular expertise around target cost / cost reimbursable contracts for major programmes of work. Ian has over 20 years’ experience across the industry, including oil & gas, water, aviation, rail, highways, building and ports. He has been involved with the NEC for over 18 years and has supported government departments, major clients and international contractors deliver the benefits of the NEC forms of contract. Ian regularly facilitates workshops and delivers training in contract forms and procurement & contract strategies. Ian produced the elearning modules the "International Application of the NEC3“ and “ECC as an EPC Contract” for the NEC.. Ian frequently speaks at industry events and has had numerous articles published in construction journals. Ian also acts as quantum Expert Witness.


Ian Heaphy Director Turner & Townsend Contract Services

Michael Spencer Senior Vice President Marsh Global Construction Practice

Michael trained as a Civil Engineer and worked mostly in the offshore oil industry before entering insurance as an underwriter working both as an insurer and reinsurer in France ,Hong Kong Singapore as well as the UK and has been involved in projects as diverse as the Channel Tunnel, the Hong Kong airport and metro systems, the Singapore and Kuala Lumpur metros, the Daya Bay Nuclear Power Station, the Millau Bridge in France, the San Roque Dam in the Philippines and the Bakun Dam in Borneo. He was formerly the Chairman of the International Tunnelling Insurance Group (ITIG) who worked with the British Tunnelling Society to promote a best practice guide for Risk Management a system that has largely been adopted on Crossrail, the Thames tideway Tunnels (both NEC projects) and the MTR in Hong Kong and the MRT in Singapore amongst others. Michael is now working as a consultant with Marsh in a global role

Agenda & Aims of Workshop

1. Risk and insurance 2. NEC3 provisions for insurance and liability 3. Insurance industry view of NEC3 provisions 4. Claims 5. Workshop issues 6. Summary & close

Provide an overview of the NEC3 liability and insurance provisions in the context of the insurance market and to consider some of the key decisions users need to make when considering insurance under NEC3 contracts


Risks and insurance


Risk Allocation

• One of the key functions of any contract is to allocate risk between the Parties

• NEC does this very effectively and the contract provisions clearly allocate risk

• ECC / TSC has a list of Employer’s risks – Clause 60.1 compensation events – Clause 80.1 Employer’s risks

• All other risks are the Contractor’s – sub-clause 81.1 • ECSC & PSC work on the basis of indemnities covering key risks


Risk Allocation

• Commercial allocation • The party carrying the risk has to cover the risk exposure • The contract provisions could end at this point • No need to insure – does not change risk allocation • Even if a party fails to insure they still the carry the risk

• So why have insurance, why make if a contractual requirement?


Why Insurance

• Construction Insurance did not exist until around 1930 • Construction is faster paced industry than any other. • A project can go from performing well to poorly is a matter of days • Many projects in Victorian days were never completed for years after

their start date because of unforeseen events • Availability of liquid assets to satisfy current liabilities is much lower

than for insurers

Why Insurance

• Insolvency Service • Construction Industry has the highest number of total liquidation • Year Ending 2014 • Total Number of Construction Co. Liquidations 2,317 (1739 voluntary

& 578 compulsory) • Total number of Financial & Insurance Co. Liquidations • 193(133 voluntary & 20 compulsory)

Why Insurance

• Insurance Regulated by Financial Conduct Authority and the Prudential Regulatory Authority

• FCA deals with fair treatment of customers • PRA focus on financial safety and soundness of • Insurers are used to dealing with third parties • Overall Insurance has become recognised as a good tool for risk

transfer especially of unforeseen low frequency high severity events

Introduction to Insurance

• Role of Insurance • 1887 Lord Hershell ‘The purpose of the policy is to secure an

indemnity against accidents which may happen, not against events that must happen’

• Marine Insurance Act 1906 • New Insurance Act 2016

Insurance Act 2016

• Disclosure and Misrepresentation- ‘utmost good faith’ to ‘fair representation of risk’

• Warranties – trivial breach will not automatically take the insurer off risk

• Contracting Out-possible if insurers comply with the Act’s transparency requirements

• Insurers Remedies for fraudulent claims-still not payable but only as regards the fraudulent claimant

Other Contracts which may Affect Insurance Cover

• Concession Agreements

• Project Agreements

• Legal Requirements

Construction – Core Insurances

13

Construction – Associated Construction Classes

NEC3 provisions for insurance and liability


Insurable Risk

• ECC – Clause 84.2 requires the Contractor to provide the following insurances


Insurance against Minimum amount of cover / indemnity Loss of or damage to the works, Plant and Materials

The replacement cost, including the amount stated in the Contract Data for the replacement of any Plant and Materials provided by the Employer

Loss of or damage to Equipment The replacement cost

Liability for loss of or damage to property (except the works, Plant and Materials and Equipment) and liability for bodily injury to or death of a person (not an employee of the Contractor) caused by activity in connection with this contract

The amount stated in the Contract Data for any one event with cross liability so that the insurance applies to the Parties separately

Liability for death of or bodily injury to employees of the Contractor arising out of and in the course of their employment in connection with this Contract

The greater of the amount required by the applicable law and the amount stated in the Contract Data for any one event

Insurable Risk

• TSC – Clause 83.2 requires the Contractor to provide the following insurances


Insurance against Minimum amount of cover / indemnity Loss of or damage caused by the Contractor to the Employer’s property

The amount stated in the Contract Data

Loss of or damage to Plant and Materials The replacement cost, including the amount stated in the Contract Data for the replacement of any Plant and Materials provided by the Employer

Loss of or damage to Equipment The replacement cost

The Contractor’s liability for loss of or damage to property (except the Employer’s property, Plant and Materials and Equipment) and liability for bodily injury to or death of a person (not an employee of the Contractor) arising from or in connection with the Contractor’s Providing the Service

The amount stated in the Contract Data for any one event with cross liability so that the insurance applies to the Parties Separately

Liability for death of or bodily injury to employees of the Contractor arising out of and in the course of their employment in connection with this contract

The greater of the amount required by the applicable law and the amount stated in the Contract Data for any one event

Insurable Risk

• PSC – Clause 81.1 requires the Consultant to provide the following insurances


Insurance against Minimum amount of cover Liability of the Consultant for claims made against him arising out of his failure to use the skill and care normally used by professionals providing services similar to the services

The amount stated in the Contract Data

Liability for death of or bodily injury to a person (not an employee of the Consultant) or loss of or damage to property resulting from an action or failure to take action by the Consultant

The amount stated in the Contract Data for any one Event

Liability for death of or bodily injury to employees of the Consultant arising out of and in the course of their employment in connection with this contract

The greater of the amount required by the applicable law and the amount stated in the Contract Data for any one Event

Insurable Risk

• The Contractor / Consultant only insures for their risk • Employer responsible for insuring their own risk – or self insure • Additional insurances can be requested and commonly are

– Professional Indemnity Insurance – ECC/TSC • Employer can chose to provide any or all of the insurances

• Contractor may choose to insure other elements of their risk

– Defects, losses, lack of payment etc.


Insurance Policies

• ECC / TSC – Where Contractor provides insurances they must issue for acceptance certificates which state that the insurance required by the contract are in force.

• The certificates are signed by the Contractor’s insurer or insurance broker.

• A reason for not accepting the certificates is that they do not comply with this contract.

• Insurance policies include a waiver by the insurers of their subrogation rights against directors and other employees of every insured except where there is fraud.

• The Parties comply with the terms and conditions of the insurance policies


Insurance Policies

• ECC / TSC – Where Employer provides insurances they must issue to by the Contractor for acceptance policies and certificates

• Either Party can insure a risk where the other Party has failed to do so in accordance with the contract and recover the cost

• PSC – When requested by a Party the other Party provides certificates from his insurer or broker stating that the insurances required by this contract are in force


Limitation of Liability

• ECC / TSC unlimited liability • Optional - X18 Limitation of Liability

– Limits Contractors liability in part or in whole • Indirect or consequential loss • Loss of or damage to the Employers property • Defects due to design • Total liability – less excluded matters • End date for liability

• PSC – Clause 82 Limitation of Liability • ECC Optional – X15 Limitation of the Contractor’s liability for his

design to reasonable skill and care


Indemnity

• ECC / TSC / PSC – each Party to indemnify the other for the consequences of their risk events occurring

• Liability of each Party to indemnify is reduced if they contributed to the event on a proportionate basis


Defined and Disallowed Cost

• ECC main options A & B, TSC Option A • Contractor can only claim for payment in accordance with Activity

Schedule / Price List or Bill Rates and the Prices must include the cost of providing the insurance and any excess / risk that monies won’t be recovered from insurers

• PSC all main options – insurance monies / excesses recovered through Prices / Time Charge



• ECC Options C, D & E – insurance covered in Schedule of Cost Components – The following are deducted from cost

• the cost of events for which this contract requires the Contractor to insure and

• other costs paid to the Contractor by insurers. • In effect a disallowed cost • Insurance excess - Clause 85.4

– Any amount not recovered from an insurer is borne by the Employer for events which are at his risk and by the Contractor for events which are at his risk.



• TSC Options C & E – insurance covered in Disallowed Cost • Disallowed Cost is …. the cost of

– events for which this contract requires the Contractor to insure • Insurance excess - Clause 84.4

– Any amount not recovered from an insurer is borne by the Employer for events which are at his risk and by the Contractor for events which are at his risk.



• Even under Employer provided insurances each Party bears the risk of amounts not recovered from insurers for events which are at their risk

• Contractor will have to stand the amounts not recovered under the Employer’s insurance policy for their own risk events

• Contractor risk events – everything but clause 80.1 • Contractor needs to understand the level of deductibles in the

employers policy as they will need to allow for the risk of any sums not being recovered from the Employers insurers – for their risks!


Insurance industry view of NEC3 provisions


Insurers preferred types of Construction Contracts

• Selection of pre-qualified contractors for tendering • Tender assessment • Tender risk register • Transparency • Prefer collaborative models vs aggressive contract models • Transfer of information between designers and contractors • ALARP as aim (Extremely remote risk of failure or damage to the

works or third parties from all reasonably foreseeable causes including health and safety )

• Innovation should not be discouraged


NEC

• To facilitate and encourage good management (Preface)

• Introduction of risk management and Risk Registers (16.1)

• Employer’s risks include a fault by him or his design (80.1)

• Clear attempt to provide accurate Works Information and Site Information

• Compensation Event Procedure

ITIG CODE OF PRACTICE

• To promote and secure best practice

• Hazards shall be identified and quantified by Risk assessments

• Client to take responsibility for ‘works information’

• Clear Contract documentation • Ground Reference Conditions • Procedure for Management of

Change


NEC Innovations which Reflect Insurers Preferences

Possible Additions to NEC3

• Typical Additions often added through Z clauses or by modifying contract data

• Modify table to add supplementary insurances (e.g.; PI, Environmental, Marine)

• Specify content of Insurances • Deductibles • Exclusions (especially design workmanship and materials) • Cover during defects liability period • Special clauses to deal with specific works (e.g. tunnelling, ports,

special machines) • Limits and sub limits for extra coverages(e.g. debris removal, extra

costs to expedite repairs etc.) 29/04/2016 © NEC Contracts 31

Contractual framework – Site-wide “Insurance”

• Whilst indemnity principles may be well understood, insurance provisions are seldom reviewed in detail until the end. There needs to be a recognition that insurance needs to be looked at by the specialists at an early stage to ensure the dots remain connected.

32 29 April 2016

Insured Risks

Increased costs Public Authorities’ requirements

Changes in scope Defective work

Late completion

- CAR / EAR - Personal injury / property damage - Workers’ insurance

33 29 April 2016

Insurable Versus Non Insurable Risks

• Damage Risks • Fire, Explosion • Earthquake, Flood • Tsunami, Cyclone • Water • Subsidence • Lightning • Sandstorm • Theft • Accidental damage • Strike Riot Civil Commotion • Faulty Design/Material/

Workmanship

• Non Damage Risks • Manpower shortage • Material shortage e.g. cement,

steel • Port blockage, denial of access • Supply chain management • Technology • Negligence in Design • Unforeseen ground conditions • Environmental • War or Civil War • Potable water shortage • Strike Riot Civil Commotion • Faulty

Design/Material/Workmanship

Professional Indemnity Insurance

• Liability for claims made arising out of his failure to use skill and care • The Insurance market for this type of insurance is more limited than

works insurances and will only offer the cover on a Claims Made basis (as opposed to works polices which are on an occurrence basis)

• Liability is Limited to the amount stated in the Contract Data • Liability is often aggregated for skill and case claims(in NEC for all

matters arising under or in connection with the contract) • Liability is any one event for death and bodily injury • Consultants often buy aggregated annual insurances which can be

exhausted by other projects than yours

Professional Indemnity Insurance

• Important to note this is a potential situation • Employer checks and ensures the consultant renews and maintains

adequate PI under the contract • A professional error is made resulting in a defect in the works • A dispute over costs leads to the employer making a claim against

the consultant • Successful prosecution of the claim takes 3 years to achieve • Another unrelated PI claim against the consultant exhausts the PI

limit resulting in an uninsured loss


Common Exclusions to PI Insurance

• Contractual liability, except to the extent that liability exists in the absence of a contract

• Costs Estimates Being Exceeded • Claims brought by associated companies unless they emanate

originally from an independent third party • Faulty Workmanship/Materials • Employers Liability • Pollution other than sudden and accidental events


PI Extension to the Employer

• PI Policies can be extended to provide an indemnity to the employer where third parties make claims against the employer where the source of such claim is the professional negligence of the consultant

• Example The Insurers shall indemnify the Employer for any sum that the Employer shall become legally liable to pay because of a claim emanating from an independent third party and notified to Insurers during the Period of Insurance or defects liability period against the Employer and claim expenses to the proportionate extent caused by a negligent act or negligent error or negligent omission of the Insured in their professional duties


PI Difficult Areas

• Process risks (failure to perform, consequential losses) • Prototypical risks (not tried and tested, no R&D cover) • Expanded polystyrene and polyurethane core based sandwich

panels exclusion (“EPS panels”) • Pollution (Sudden & Accidental only) • Cross liabilities between insured parties • Asbestos (inner limits for diminution in value from defective surveys) • Claims from associated companies (PFI/PPP) • Fitness for Purpose


Fitness For Purpose Design & Build

• May be covered with the following provisions • Purpose and use of the Project is well defined • There is no liability if the design/specification is in accordance with

practice accepted as appropriate at the time of execution of the works having regards to it’s size, scope and complexity

• No pollution cover • No cover for defective workmanship and materials • No cover for unforeseen ground conditions • No cover for process engineering


Typical scenarios – when things go wrong

• Lack of timing • Poor interface between contracts team and risk management

divisions or advisors • Acceptance of contract terms without expert counsel • Cut and paste theory language in the policy is not compatible with

the language in the contract Can lead to: • Poor interface between insurance policies • Incorrect pricing of contract, reduction in margin • Assumption of increased liability

Strategy for Contract Development

• Understanding project risk exposures • Appreciation of the implications of contract responsibilities • Early engagement of expert opinion prior to contract negotiation /

pricing • Drafting of Indemnity and Insurance clauses specific for the

contract • External considerations – lenders? • Analysis of the cost of risk retention and transfer • Available insurance solutions


Claims

Practical tips on getting claims paid by insurers

Make sure the policy is fit for purpose Appoint a loss adjuster at the beginning of the project Arrange a site meeting for the adjuster/broker to explain the kind of losses that are covered by the insurer When a loss occurs • Notify the existence of loss as soon as possible • Cooperate with the adjuster in terms of • Identifying the cause of loss • Determining the extent of damage • Measuring the cost of repair


Practical tips on Claims

• Proceed with repairs with adjusters knowledge and approval (this may be without prejudice)

• Deliver a proof of loss as soon as possible • Cooperation with insurers works best • Don’t abandon salvage • If you think another party is responsible cooperate with insurers in

any subrogation of counter claim • Note the adjuster is to investigate and report back to the insurer but

does not have authority to agree a claim


Workshop issues


Issue 1 – Who Should Buy the Insurance


Who Should Buy the Insurance

• EMPLOYER vs • CONTRACTOR

• NEC has facility for both OPTIONS

Standard Contracts

• Contractor buys the Insurance • Contractor carries out the work • Contractor holds most of the Insurable Risks • Contractor can differentiate and benefit from his own good loss

experience if he has good risk management • Contractor can decide his level of risk retention

49

Current Approach (Contractor Controlled Approach (CCIP))

Contractor 1 Contractor 2 Contractor 3

Employer pays each Contractor the Contract Price including Insurance costs

50

Possible Employer Controlled Insurance Approach (OCIP)

Contractor 1 Contractor 2 Contractor 3

Employer pays each Contractor the Contract Price excluding Insurance costs

Employer directly purchases insurance for all contracts covering all parties

Contract price is without insurance loading

51

Coverage

Employer Provided Policy - Cover

Coverage

Coverage

Level of Excess

Limit of Indemnity

A C

D

E

B

Contractor Policy

Excess / Deductible

Contractor Provided Insurances Vs.

Employer Controlled Insurances

Cover is inconsistent and varies in quality

Cover is consistent, and comprehensive

Gap

Overlap

Fragmented

Cover for Partial Handover Interface between contracts Consistent Design Defect Cover Taken into use provision

Employer Controlled Insurance

NEC Examples

• London Olympics • Crossrail • Thames Tideway • HS2 • Hinkley Point

Issue 2 – Insurance Values / Limits


Insurance Values

• Works and Equipment – replacement cost +xx%? • Third party – as determined in CD1 by the Employer • Employer’s liability – as determined by law or CD1 by the Employer • PII – Employer? • Limitation on liability – determined by the Employer • Are there any sub limits in the policy ?

• Who determines these and how?


Issue 3 – Changes / Improvements

• Insurance Table (more insurances) • Provisions to specify in greater detail level of cover • Exclusions • Deductibles • Additional Coverages • Sub limits • Claims handling procedure • Dispute handling procedure • Minimum financial standing of insurers


Summary & close


USERS’ GROUP

Annual Conference

April 2016

Collaboration & Z Clause Workshop

© NEC Contracts 1 April 2016 Version 1.0

Emma-Jane Houghton KPMG and Barry Trebes NEC Consultant

Workshop Subject

How do Z clauses unwind and prevent collaborative action?


NEC3 suite of contracts have been carefully constructed and written to encourage good management practice and collaboration. Any tinkering can unravel it’s carefully considered and constructed clauses and the carefully considered risk allocation between the Parties.

Agenda

• What is the purpose of a Z clause? • Z clauses – things to consider • NEC & collaborative action • The collaborative system • The collaborative environment • Some typical Zs • Interactive session

– Quick survey – Z clause & collaboration correlation

• Analyse results • How can we drive better collaborative action? © NEC Contracts 3 April 2016 Version 1.0

What is the purpose of a Z clause?

• Should be used where the Employer wishes to include additional conditions.

• Should be carefully drafted in the same style as the core and optional clauses, using the same defined terms and other terminology.

• They should be checked for consistency with other conditions.



• Use ONLY when absolutely necessary to accommodate special needs such as those peculiar to the country in which the work is being undertaken.

• The flexibility of the ECC main and secondary Options minimises the need for additional conditions.

• Should NEVER be used to limit how the Contractor is to do the work in the contract as this is part of the function of the Works Information.



• Contract specific requirements – eg Cabinet Office clauses on NEC website

• Unnecessary clauses – eg compliance with the law • Provisions which should have been in the Works

Information/Service Information/Scope • Repetition of provisions covered by existing contract

clauses, thus creating conflict/ambiguity • Change to the risk profile of the contract (source: NEC Webinar – NEC3 and Z clauses - 25 Sept 2014)



Only 8% of Z clauses are valid – the remainder are unnecessary or attempt to change the risk profile of the contract (source: Research by Emma-Jane Houghton – 11th April 2014)


Things to consider

• Drafting • Why?

– What is the mischief that necessitates a Z clause? • What

– What is the rationale for additional clause? – “clause function statement”

• How – Refer back to contract strategy – What does Employer wish to achieve – Riskss

© NEC Contracts 8

Things to consider


Notwithstanding any other provision of this contract, the Contractor is not relieved from any of his obligations or liabilities under or arising out of this contract nor are such obligations or liabilities removed, restricted, limited or qualified in any way by the presence of the Employer, the Supervisor or the Project Manager or any of their agents or representatives on the Site or the carrying out of tests on the instructions of the Employer, the Project Manager or the Supervisor, nor by any instruction, direction, admission, consent, approval, acceptance, confirmation, comment, certificate, sanction, acknowledgement, advice or inspection made or given by or on behalf of the Employer, the Supervisor or the Project Manager. 25 September 2014 Peter Higgins

NEC & Collaborative Action

• The key aim of the NEC contracts is to encourage pro-active management practice which is more likely to lead to more successful outcomes.



• Core principles of the NEC – all driving or underpinning collaboration – Clarity and simplicity – Flexibility – Stimulus to good management



• 10.1 – SHALL act as stated and in the spirit of mutual trust and co-operation

• 13 – Notifications – time/cost/quality/Key Dates • 16 – Early Warning Notifications • 17.1 &18.1 – duty to warn • 24 - Key people • 25 – co-operates and works with Others • 3 – Time • 4 – Testing and Defects…………………………..



• The NEC encourages and incentivises collaborative behaviours as much as any contract is able to.

• It has strong management practices: – Communication – Risk management – Change management – Quality management – etc


The Collaborative System


The Collaborative Environment


10 Common Zs

1. Clause 10.1 – delete “and in a spirit of mutual trust and co-operation”

2. Clause 17.1 – often amended to say that any ambiguities and inconsistencies are not considered a compensation event trying to make these Contractor risk

3. Clause 21.2 – extra subjective reasons added for not accepting design

4. Clause 31.3 – more subjective reasons added not to accept a programme or 50.3 for further programmes not accepted

5. Clause 60.1 – lots of reasons sometimes deleted making them Contractor risk e.g. (12) physical conditions, (13) weather events


10 Common Zs

6. Clause 50.3 – add further financial penalty for not having further programmes accepted

7. Clause 61.3 – last sentence amended to make every compensation event Contractor responsibility to notify and be time-barred against

8. Clause 61.4 – sometimes Employers delete the “deemed acceptance” element of this clause and 62.6 and 64.4 leaving Contractor nowhere to go if Project Manager does not respond

9. Sometimes compensation event timescales significantly altered where Contractor given less time and Project Manager more time for each part of the process

10. Option C-E: significant changes to disallowed costs which puts more risk to Contractor


Interactive Session

Let’s explore the group’s experience of working with Z clauses:

– Quick Survey (7 questions) : populate data sheet

– Correlation between Z clauses and collaboration in action : break into groups for discussion


Quick Survey - 1

• How important is collaboration to the successful implementation of NEC contracts? – 1 Minimally – 2 Fairly important – 3 Important – 4 Very important – 5 Essential


Quick Survey - 2

• In your experience, how many NEC contracts employ Z clauses? – None of them? – Between 0 to 25% – 25% to 50% – 50% to 75% – 75% to 100% – All of them?


Quick Survey - 3

• What proportion of Z clauses are tailored for the specific contract or project i.e. relevant to the particular case? – 0 to 25% – 25% to 50% – 50% to 75% – 75% to 100%


Quick Survey - 4

• What proportion of Z clauses are being used in the right way? – 0 to 25% – 25% to 50% – 50% to 75% – 75% to 100%


Quick Survey - 5

• In your opinion, what proportion of Z clauses are fully understood in terms of their impact on the contract processes and contract ‘spirit’? – 0 to 25% – 25% to 50% – 50% to 75% – 75% to 100%


Quick Survey - 6

• In your opinion, to what extent do Z clauses prevent successful collaborative action? – 1 Minimal impact – 2 Marginal impact – 3 Substantial impact – 4 Significant impact – 5 Makes collaboration difficult or impossible


Quick Survey - 7

• In your experience, what are the drivers for the use of Z clauses? – Identify the top three reasons? – ………………………………… – ………………………………… – …………………………………


Interactive Session

We will now break out into groups to explore Z clause and collaboration links

– Quick Survey – Correlation between Z clauses and

collaboration in action


Correlation between Z clauses and collaboration in action - NEC Default


Correlation between Z clauses and collaboration in action – NEC with Zs


Analyse results


Summary

• Z clauses can damage the health of your project and unravel the benefits of collaborative management that the NEC engenders.

• Thinking about Z clauses in the context of a collaborative system may make you think twice before putting them in.


How can we drive better collaborative action?

• NEC3 and Z clauses – Why, when and how webinar 25 September 2014

• Public sector Z clauses for use with NEC3 contracts • How to use BIM with NEC3 Contracts April 2013 • Early Contractor Involvement (ECI) – additional clause for

use with main Options C and E – January 2016 • The Z Factor – to what extent have Z clauses impacted

on the NEC’s success as a modern contract – 11th April 2011


Documents

Alliancing Best Practice Keith Waller - NEC Contract