CONTRACTS • BOOKS AND GUIDES • TRAINING • USERS’ GROUPS • PROJECT SUPPORT SERVICES • CONFERENCES • RECRUITMENT • SOFTWARE

ISSUE No.64 OCTOBER 2013 www.neccontract.com

2013: CELEBRATING 20 YEARS OF THE NEC

NEWSLETTER

Thames Water has invited bids for around £2 billion of NEC3 contracts to deliver the 25 km long Thames Tideway tunnel project under the River Thames in London. It will be the biggest tunnelling project ever undertaken by the UK water industry.

A contract notice was published in the Official Journal of the European Union on 29 July 2013 followed by an industry day in London on 20 August, attended by more than 230 representatives of potential tier 1 contractors.

Connecting to Lee tunnelThe project involves building a 6.5–7.2 m

diameter sewer up to 66 m under the Thames between storm tanks in Acton, west London to Abbey Mills pumping station in the east. It will pick up 34 combined sewer overflows (CSO) along the way.

The 39 Mt annual storm discharges from the overflows – which currently go straight into the river – will be transferred from Abbey Mills to Beckton sewage works via the £635 million Lee tunnel, which is already being built using NEC3 contracts (see issue 59).

Three ECC option C contractsThe Thames Tideway tunnel has been

geographically split into three similar-sized main contracts: west, central and east, with a total estimated value of between £1.4 billion and £2.25 billion.

All three contracts will be let under the NEC3 Engineering and Construction Contract option C (target contract with activity schedule) with 50/50 pain/gain share arrangements. However, the contracts will actually be with an independent ‘infrastructure provider’, procurement for which starts next year.

Pre-qualification questionnaires for the main works contracts have been issued and shortlisted contractors – five for the west and east sections and four for the central section – will be invited to tender between November 2013 and April 2014. Preferred bidders will be announced in early 2015.

Completion by 2021Work is due to start in 2015 and take six years

to complete. It will involve 24 construction sites across London. CH2M Hill was appointed programme manager for both tunnel projects in 2008.

According to project managing director Mike Gerrard, ‘It will be the biggest tunnelling project ever undertaken in the UK’s water industry. We want contractors with the right expertise and experience, who will deliver the best value for money for our customers.

‘We are following a rigorous tender process to ensure the successful tenderers are capable of delivering the project.’ ●

Thames Water invites £2 billion NEC3 tenders for Thames Tideway tunnel

SIMON FULLALOVE EDITORCONTENTS

Strategy, Z clauses and resources: changing perceptions 2

NEC gathers momentum in Hong Kong 2

Over 50 attend New Zealand conference 3

Doosan gains wide NEC3 experience under Magnox frameworks 3

Activity schedules – demystifying common perceptions 4

NEC3 for engineering, procurement and construction management contracts 5

FAQs 6

NEC supports industry events 8

Diary 8Route map of the £2 billion NEC3-procured Thames Tideway tunnel project, showing the three main works sections and work sites.

2 NEC USERS’ GROUP NEWSLETTER•No.64•OCTOBER 2013 TELEPHONE: +44 20 7665 2446 EMAIL: nec@neccontract.com WEB: neccontract.com

NEC3 gathers momentum in Hong KongThe use of NEC3 contracts in Hong Kong continues to gather momentum, with the Engineering and Construction Contract (ECC), Term Service Contract (TSC), Engineering and Construction Subcontract (ECS), Professional Services Contract (PSC) and Framework Contract (FC) all now being used.

So far over 30 projects have adopted NEC3 forms, with 10–15 at the planning and design stage, many already at the construction stage and

some nearing completion. There will be more in the pipeline as the Hong Kong government continues to gather more data to monitor the overall effectiveness of NEC3-procured projects.

First water supply projectFollowing in the footsteps of the Drainage

Services Department, Highways Department and Architectural Services Department, the Water Supplies Department plans to award its first NEC3 contract based on ECC option C (target contract with activity schedule) in October 2013.

The Civil Engineering Development Department too is tendering its first ECC contract, also based on option C. In addition the Electrical and Mechanical Services Department is investigating adoption of NEC3 contracts, primarily the TSC and Term Service Short Contract for maintenance works.

The Drainage Services Department is currently trialling ECS option B (priced contract with bill of quantities) on a box culvert construction package at the HK$678 million (£54 million) Happy Valley underground storm-water storage project, which itself is being procured under ECC option C.

PSC trials following workshopFollowing the Asia-Pacific Users’ Group’s

one-day PSC workshop in Hong Kong in June 2013, attended by around 50 people, the Hong Kong government is to trial PSC options C (target contract) and G (term contract) on two forthcoming engineering consultancy appointments. Expression of interest will be invited later this year.

The next regional event is the Asia-Pacific Users’ Group annual conference in Hong Kong on 25 November 2013. ●

For further information or if you have a case study you would like to share please contact Cheryl French on +44 20 7665 2445 or email usersgroup@neccontract.com.

IVAN CHEUNG ASIA-PACIFC USERS’ GROUP SECRETARY

Hong Kong’s Drainage Services Department is trialling the NEC3 Engineering and Construction Subcontract option B at the £54 million, ECC-procured Happy Valley underground storm-water storage project

Strategy, Z clauses and resources: changing perceptionsI have now had the pleasure of serving as chairman of the NEC Users’ Group for nearly 3 years.

I have been looking back at some of the key issues that we have identified over that period. It is clear to me that there is still further work to be done in relation to these issues – particularly with regard to changing perceptions.

I set out below what I consider to be my top three.

Strategy before contractThere has been considerable focus by UK

government over the last 3 years on the need for efficiencies in the delivery of major projects and for cost savings in taking forward new infrastructure investments. The government has indicated that NEC3 contracts will play a key role in the delivery of its future plans, which is very encouraging for us. It needs to be recognised, however, that the NEC3 suite on its own is not a panacea to the challenges associated with major project delivery.

The contracts need to be considered as part of overall procurement and delivery strategies that ensure requirements are clear; the right relationships are established; incentives are aligned with objectives; and risks are effectively identified and managed. NEC3 should be every client’s contract suite of choice because it supports these key delivery requirements better than any other contracts.

Aim for zero Z clausesThe NEC3 contracts have been carefully

developed to address the problems that have previously faced the industry. The standard forms are based on lessons learnt and recognised best practice. They support the successful delivery of a wide range of projects without the need for amendment. It is a matter of concern therefore, that many clients still see the need to amend the standard NEC3 forms using Z clauses. In some cases the changes are very extensive and the final contract may bear little resemblance to the standard form.

It is time for clients to review seriously the need for their Z clauses and to consider whether they are essential and are delivering value for money. Non-standard and inconsistent contracts incur a significant cost on companies bidding for and delivering the contracts. Clients pay high costs for the review of Z clauses by legal advisers and by those of the supply chain. They also pay a risk premium for unnecessary transfer of risks. At the end of contracts clients should review the Z clauses which were applied at the outset and consider whether the clauses were really necessary.

Resources: not an issue Clients which are new to NEC3 contracts often

raise the issue of contract management resources. It is commonly, but incorrectly, said NEC3 projects require a higher level of contract management

resource than other forms of contract. It is important that the project-control processes built into the NEC3 contract are properly resourced to support the efficient delivery of successful contract outcomes.

The delivery of projects using the NEC3 forms is, however, no different from the use of any other form of contract – project-control procedures are essential whether or not they are built into the contracts. With other forms of contract, experience has shown that there is much higher risk of additional resources being required for substantial periods after completion to settle claims, disputes and final accounts. In my experience, NEC3 contracts are more efficient than any other forms in terms of the overall contract management resources required to deliver and conclude projects.

Keep sharing experiencesIt is in all of our interests to continue to

ensure we share our experiences of using the NEC3 suite. This will help to ensure that potential new users are able to take decisions based on robust information, correct perceptions and with the full benefit the lessons we have all learnt along the way. ●

For further information please contact the author on +44 7930 323749 or email steve.rowsell@rowsell.wright.com.

STEVE ROWSELL NEC USERS’ GROUP CHAIRMAN

The second Australasia Users’ Group conference was held in Christchurch, New Zealand on 27 August 2013. The event was hosted by chairman Warwick Fergusson and attended by over 50 delegates.

There was representation across all construction sectors, with the building industry showing strongly – reflecting the increasing local construction activity as Christchurch recovers from the devastation caused by earthquakes in 2010 and 2011.

Continued commitment to NEC3However, the infrastructure sector was the

largest grouping, demonstrating the continued commitment to NEC3 contracts of large public bodies such as utilities Meridian Energy and Watercare, and the councils of Christchurch City, Manawatu, Queenstown Lakes, Waimakariri

and Hurunui. The conference was generously supported

to by sponsors Conject, PBA and the Royal Institution of Chartered Surveyors.

Delegates enjoyed an entertaining and thought-provoking mix of speakers. The keynote speaker, commercial barrister John Walton, talked about how following the basic principles of NEC3 contracts, particularly active risk management, would avoid disputes and deliver great results for the parties.

Malcolm Park of Christchurch City Council gave an insight into to the challenges of introducing NEC3 contracts during a time of massive upheaval, both organisationally as well as geologically. His key message was of optimism for the future of Christchurch and the part that NEC3 contracts will play in the city’s recovery; all delivered with a healthy dose of good humour.

Delivering a win-winRaine Selles of CMG had a commercial

manager’s perspective on the use of NEC3 contracts. Her extensive experience as a project quantity surveyor in the UK construction industry was the backdrop to her presentation. She talked of how the NEC philosophy can deliver a win-win financial outcome for all involved.

Our final presenter of the morning was Jon Marshall of sponsor Conject. He gave a well-informed presentation on benefits of using technology for administration and communication on NEC3 projects.

There was a change of pace in the afternoon. Representatives of employers – Meridian, Christchurch City, Manawatu and Waimakariri – gave a series of short briefings on their current NEC3 projects and their key best advice for those who were considering adopting NEC3 forms.

A panel session was then hosted by NEC consultant Matthew Freeman. A lively and informed debate ensued on a number of topics – notably on the pros and cons of using target-cost contracts, which engaged both panel and delegates. Matthew also gathered some valuable feedback on what delegates would like to see and hear at the next conference.

Support from NEC’s creatorThe day concluded with an unexpected yet

expertly timed email message of support from NEC creator Martin Barnes – a great talking point to lead us into the drinks reception. Looking forward to next year already! ●

For further information please email usersgroup@neccontract.com.

Over 50 attend New Zealand conference

MARC PALMER AUSTRALASIAN USERS’ GROUP SECRETARY

Doosan gains wide NEC3 experience under Magnox frameworks As reported in issue 62, NEC3 contracts are being widely used on the UK Nuclear Decommissioning Authority’s (NDA) £50 billion programme to clean up the UK’s 19 older nuclear sites over the next 100 years.

Ten of the sites are operated for NDA by Magnox Limited, which is aiming to achieve ‘care and maintenance’ status for all ‘Magnox’ reactors by 2028. Doosan Babcock is involved in two long-term NEC3 Framework Contracts under Magnox’s plant and structures decommissioning programme, namely

■ mechanical engineering core support services – a £55 million single-supplier framework which Doosan won competitively in 2010

■ deplant, demolition and bulk asbestos – a £304 million multiple-supplier framework launched in 2012, for which Doosan formed a consortium with Keltbray, a leading demolition and asbestos company.

Under the mechanical engineering framework, several types of work packages are undertaken, from year-round maintenance and outages to

decommissioning and deplanting. The second framework solely focuses on deplanting, demolition and asbestos removal.

One of Magnox’s key undertakings is to accelerate its Bradwell and Trawsfynydd sites into early care and maintenance status by 2015 and 2016 respectively. Doosan’s frameworks have been used extensively to facilitate those projects.

Experience with ECC options E and AUnder the mechanical engineering framework,

Magnox’s intent was to procure work packages predominantly using the NEC3 Engineering and Construction Contract (ECC) option C (target contract with activity schedule) to incentivise performance.

However, constraints upon fully scoping work prior to issuing contract information – particularly on unplanned maintenance work and radiologically controlled projects – has led to a higher use of ECC option E (cost-reimbursable contract) than expected.

The advantages of ECC option E are

■ it enables the client to progress work while

scope is in development■ it allows for a fully flexible approach when

conditions change■ it eliminates commercial issues allowing the

teams to focus on making progress.

However, long-term use of option E could lead to complacency as it is more difficult to align team incentivisation with better-than-planned performance.

ECC option A (priced contract with activity schedule) can be appropriate where there is robust scope definition and minimal technical risk. However, from a client perspective, for projects that require focused delivery such as an outage, ECC option A can shift the focus towards commercial implications of change rather than project completion.

Option C incentivises performanceThe use of ECC option C for outage and project

works certainly inspired good performance, driven by the need to return plant to generation on time.

Its application was supported by detailed

PETER MCNAUGHTON DOOSAN BABCOCK

3CONTRACTS • BOOKS AND GUIDES • TRAINING • USERS’ GROUPS • PROJECT SUPPORT SERVICES • CONFERENCES • RECRUITMENT • SOFTWARE

Christchurch City is introducing NEC3 contracts to deliver its post-earthquake recovery programme.

>>

4 NEC USERS’ GROUP NEWSLETTER•No.64•OCTOBER 2013 TELEPHONE: +44 20 7665 2446 EMAIL: nec@neccontract.com WEB: neccontract.com

There is a lot of confusion in practice about the purpose, use and significance of activity schedules in NEC3 contracts. Under the Engineering and Construction Contract (ECC) the activity schedules are only relevant under options A (priced contract) and C (target contract).

Activity schedules also appear in the Professional Services Contract and Engineering and Construction Subcontract. The focus of this article is the ECC. Although the same term ‘activity schedule’ is used, they have very different roles in options A and C.

I often hear that contractors believe they can change the option A activity schedule at their discretion (to improve cash flow) or that project managers are refusing payment under option C because the activity schedule does not meet with their expectations. Both are incorrect.

Defined termsLet us start by looking at the defined terms.

ECC clause 11.2 (20) states, ‘The Activity Schedule is the activity schedule unless later changed in accordance with this contract.’

Both options A and C share the same defined term as above but this is largely where the similarity stops. Interpreted, this clause means that the contractual activity schedule is the one contained within contract data part two by the

contractor, by virtue of the italics. The bit we need to explore is, ‘unless changed

in accordance with this contract’.

Tender stageOption A (priced contract with activity

schedule) is effectively a lump sum contract. The contractor prices activities on the activity schedule at tender stage and submits both the activity schedule and its total – the total of the prices.

Under option A the activity schedule cannot be just expanded after tender stage to create a better cash flow. It can only be changed ‘in accordance with this contract’. The aim of option A is that it is a low-administration contract and payment for an activity should be a straightforward decision. Is the activity 100% complete, as per clause 11.2(27), or not? If yes, pay; if no, no payment is due for that activity.

Option C is a different story. Again the activity schedule is submitted at tender stage, and employers usually use this to compare and contrast, but it is not used for the purposes of payment before completion. The contractor is paid on defined cost plus fee, as set out in clause 11.2(29).

Need to updateUnder both options A and C, clause 54.2

requires the activity schedule to be updated, and submitted for acceptance, if the contractor has changed a planned method of working so that the activities on the activity schedule no longer relate to the operations on the accepted programme.

If, for example, the contractor has erection of scaffolding as an activity on the activity schedule and it decides to use cherry pickers instead, then the scaffolding will no longer be on the accepted programme. In that case the contractor has changed its method of working and it can change the activity schedule.

The other element of ‘changed in accordance with this contract’ is for compensation events. I used to maintain an ‘omit’ and ‘add’ schedule from the contract sum on other forms of contract. This is effectively what we do under the ECC but via the activity schedule.

ECC clause 63.12 states, ‘Assessments for changed Prices for compensation events are in the form of changes to the Activity Schedule.’ So, the activity schedule should be updated for compensation events; it is a dynamic document that will change pretty much every month on most projects.

Effectively, the activity schedule gives a running total of the value, or ‘Prices’ under the ECC. This is further supported by a regularly updated forecast of the total defined cost for

Activity schedules – demystifying common perceptions

STUART KINGS NEC CONSULTANT

>> continued from page 3

planning, use of well-known and regularly performed operations, use of lessons learnt and the creation of clearly defined collaborative working arrangements – including team incentives resulting from savings.

The benefits of ECC option C can be summarised as

■ drives early resolution of problems■ supports a mutually beneficial approach■ minimises contractual claims■ allows for meaningful key performance

indicators.

From Doosan’s experience on the Magnox frameworks and lessons learned, the company’s preference is to use ECC option C wherever possible. The deplant, demolition and asbestos framework has encouraged contract release predominantly under ECC option C.

Lessons learnedUnderpinning all ECC options is the correct

and timely administration of the contract. A key lesson was the realisation that not all parties applied NEC3 forms in the same way. Joint training was held in various venues and sites around the UK with cross-site/office attendance. These forums allowed an element of self-realisation, alignment of local actions and common understanding of NEC3 implementation.

The key learnings of embedding a long-term alliance approach have been to

■ focus on common team behaviours■ communicate through a joint

communications plan■ pursue continuous improvement through

joint workshops ■ run joint training programmes to embrace

the NEC3 contracts■ share information on lessons learnt openly

and honestly■ pursue integration and value.

The approach encourages both client and contractor to understand each other and to develop and agree solutions jointly, requiring sustained management effort from both sides.

Operated correctly, NEC3 contracts align extremely well with the alliance principles and facilitating openness, encouraging fairness and honesty, and promoting collaboration. ●

For further information please contact the author on + 44 191 4916638 or email peter.mcnaughton@doosan.com.

Magnox is using ECC option A, C and E contracts under its NEC3 Framework Contracts with Doosan to get Bradwell power station in Essex into a ‘care and maintenance’ phase by 2015

5

IAN HEAPHY TURNER AND TOWNSEND

NEC3 for engineering, procurement and construction management contractsMost people in the construction industry are familiar with engineering, procurement and construction (EPC) contracts, also known as ‘turnkey’ contracts, where a contractor takes responsibility for the full design, procurement and construction of a project and hands over the key to the door of the facility at completion.

However, fewer people are familiar with the concept of engineering, procurement and construction management (EPCM) arrangements, under which an employer engages an experienced contractor to manage the entire project on its behalf. The contractor does not undertake any construction works and is engaged for its ability to manage the subcontractors and consultants required to design and undertake the construction and commissioning of the works.

Usually the employer engages an EPCM contractor under a professional services contract. Then, with the direction and support of the EPCM contractor, the employer directly engages

a series of suppliers, consultants and contractors to undertake the work required, all of which are managed by the EPCM contractor.

Traditionally EPC has been the default approach for employers when constructing large infrastructure projects in the energy, utilities and oil and gas markets, particularly when the project is externally financed. The employer is able to transfer a high degree of risk to the contractor and is better able to manage to a fixed budget. The employer also has a single point of responsibility for the project and does not need a large team of its own.

Benefits of EPCM contractsHowever, due to the increasing scale and

complexity of major infrastructure projects and the associated risk, many contractors are no longer willing or able to enter into such arrangements or will only do so when different risk allocations are adopted – such as the use

of target cost or cost-reimbursable payment models. This has led to an increasing use of EPCM arrangements as under this model the risk is spread over a number of different suppliers, which are better able to accept and mange the risk allocated to them.

EPCM arrangements also bring additional benefits to the employer such as providing a greater degree of flexibility to define or change their requirements as the project is developed. It also provides the employer with a greater level of control over quality and compliance, which can be a real benefit on complex and safety-critical installations.

A quicker start on site can be achieved by overlapping design and construction as packages for later trades can be let after construction has started. This also provides flexibility for the employer to introduce changes in later packages, which minimises the need for variations and compensation events – and the difficulties >>

the whole of the works under option C. This provides an excellent projection of the share ranges.

At completionAt completion of the whole of the works

under option C, the project manager makes a preliminary assessment of the contractors’ share by comparing the previously mentioned forecast of defined cost against the updated activity schedule. If the activity schedule is not up to date then this will not work accurately.

Under option A, the same incentive is there to keep the activity schedule updated as payment is made upon competed activities on the activity schedule.

In essence, the activity schedule is maintaining a final account value. Under option A this is how

the contractor is paid throughout, while under option C it is used to derive the share ranges at the end. As the contractor under option C is paid defined cost plus fee during the works, the critical stage when the activity schedule is used is at completion of the whole of the works.

Maintenance of the activity schedule requires some professional rigour. It also needs to show the interrelationship with the programme (clause 31.4) – not a one-to-one but how each activity relates to the operations on each programme submitted. For example, the contractor says that operation 27 of the accepted programme is part of activity 12 in the activity schedule, and so on.

SummaryTo summarise, the purpose of the activity

schedule in option A is to calculate how much

the contractor is paid each month. Under option C it is used to calculate the share. In either case we update the activity schedule to achieve that purpose.

Furthermore, option C contains a requirement to forecast defined cost (a constant projection of the ‘Prices’ reconciled against a forecast total ‘Defined Cost’). The main points are summarised in the table below.

As teams get more and more used to the ECC, activity schedules are getting better. The NEC office has been exploring the idea of providing more guidance to users on activity schedules and would be interested to know your thoughts. ●

For further information please contact the author on +44 20 7665 2446 or email stuart.kings@neccontract.com.

Option Tender stage Payment Updating Reporting

A The contractor states where the activity schedule is (which document) and inserts the tendered total of the prices. The activity schedule can only be changed, ‘in accordance with this contract’ (clause 11.2(20)).

Payment is made based upon completed activities within the activity schedule.

Clause 54.2 requires the activity schedule to be updated if it is effected by a changed method of working. The activity schedule is also updated for compensation events.

Clause 31.4 requires information which shows how each activity on the activity schedule relates to the operations on the programme.

C The contractor states where the activity schedule is (which document) and inserts the tendered total of the prices. The activity schedule can only be changed, ‘in accordance with this contract’ (clause 11.2(20)).

The activity schedule is not used for payment purposes. The contractor is paid based on defined cost plus fee (clause 11.2(29)).

Clause 54.2 requires the activity schedule to be updated if it is effected by a changed method of working. The activity schedule is also updated for compensation events.

Option C requires the above but also requires (under clause 20.4) a regular forecast of the total defined cost for the whole of the works.

Summary Under option A the activity schedule effects interim payment so getting this right at tender stage is critical.

The activity schedule is used for payment purposes under option A. Under option C it is defined cost plus fee.

Both options require the activity schedules to be updated if it is effected by a changed method of working and for compensation events.

In addition, the activity schedule should include information which shows how each activity on the activity schedule relates to the operations on the programme. Under option C a forecast of defined cost is required.

CONTRACTS • BOOKS AND GUIDES • TRAINING • USERS’ GROUPS • PROJECT SUPPORT SERVICES • CONFERENCES • RECRUITMENT • SOFTWARE

6 NEC USERS’ GROUP NEWSLETTER•No.64•OCTOBER 2013 TELEPHONE: +44 20 7665 2446 EMAIL: nec@neccontract.com WEB: neccontract.com

This is a selection of recent questions to the NEC Users’ Group helpline and answers given. In all cases it is assumed there are no amendments that materially affect the standard NEC3 contract referred to.

Period for replyQuestion

Where does one find the time stated for the

period for reply in communications in NEC3 contracts? Is it 1 week, 2 weeks or some other period?

AnswerThe period for reply is stated in italics and it is

therefore an identified term. Identified terms are shown in the contract data (for example see clause 11.1 of the NEC3 Engineering and Construction

Contract (ECC)), which has to be completed at the tender stage by the employer (part one) and the contractor (part two). In this case it has to be filled out by the employer in contract data part one, so the answer to your question will depend upon the period selected by the employer.

Replies required by the ECC have to be made within the period for reply, unless another period is stated in the contract (see clause 13.3).

Out-of-date accepted programmesQuestion

We are using an ECC option A contract (priced contract with activity schedule). If the programme for remaining work is altered by a compensation event, does the contractor have to bring the accepted programme, which is current at the time the compensation event arises, up to date to reflect reality – in terms of progress at the time the project manager instructed the submission of the quotation – before demonstrating the impact of the effect of the compensation event? Our contract requires revised programmes to be submitted every 4 weeks. We note that under clause 62.2 if the programme for remaining work is altered by a compensation event, the contractor includes the alterations to the accepted programme inits quotation.

and claims that can stem from these.Overall cost under EPCM contracts should be

lower than under EPC. This is because under typical EPC arrangements the contractor takes the majority of the design and construction risk and will therefore have to include sums to cover this risk in its tendered price and will be paid this sum whether or not the risk occurs.

In EPCM arrangements, the contractor is responsible for delivering the project to time and budget while achieving the required output specification. However, it is the employer which ultimately carries the risk of performance of the individual suppliers, contractors and consultants as it is the employer which has the direct contractual risk with them. The EPCM contractor’s liability is limited to that that of professional services provider.

NEC3 is perfect fit for EPCMThe use of EPCM arrangements is not

unknown in the UK and in reality there are many major infrastructure projects that have been or are being delivered using similar models, but perhaps without the title EPCM.

Due to the historic popularity of EPC arrangements, standard forms of contract have been developed for the delivery model such as those for produced by FIDIC. The NEC3 Engineering and Construction Contract (ECC) is also ideally suited for use in EPC delivery models due to its flexibility to allocate all design work to the contractor and its modular choice of main pricing and secondary options. However, there are no standard published forms specifically for EPCM arrangements. That is except for the NEC3 suite, which provides all the required contracts to create a fully integrated EPCM procurement system.

Under EPCM arrangements the employer would engage the EPCM contractor under a NEC3 Professional Services Contract (PSC) which has the degree of flexibility and yet the detailed content necessary to allow such an arrangement to be created and managed effectively. The contactor can be engaged under a time-reimbursable form or on a lump-sum basis and perhaps most suitably under a target

cost arrangement.The PSC contract also provides though its

secondary options the ability to incentivise the contractor to complete early (option X6) and to provide a remedy to the employer if they do not (option X7).

The employer, supported by the EPCM contractor, would then be able to use the NEC3 suite of contracts to engage the wider supply chain including

■ ECC and Engineering and Construction Subcontract (ECS) for complex / higher risk contractors

■ Engineering and Construction Short Contract and Engineering and Construction Short Subcontract for simpler / lower risk contractors and subcontractors

■ Supply Contract / Supply Short Contract for suppliers

■ PSC for consultants.

This allows the employer to engage the entire supply chain on back-to-back contract forms.

Effective risk managementThe modular form of the NEC3 suite allows

the employer to select within each of the contracts the main and secondary options they require, allowing them to tailor their delivery structure to suit their needs and the allocation risk they require.

The employer will be able to engage contractors on anything from lump-sum to cost-reimbursable arrangements, depending on the nature of the works to be undertaken, the level of design and the risk profile. Design responsibility for specialist works can also be allocated to the contractors through the inherent flexibility in ECC and ECS to flex design allocation.

As EPCM arrangements are used for large and complex projects, they tend to be inherently risky. The risk identification and mitigation measures in the NEC3 suite are therefore particularly applicable. Effective use of the risk register and the early warning mechanism enables the employer and EPCM contractor to anticipate and effectively manage

risk throughout the supply chain.One of the key risks under an EPCM

arrangement is the need to coordinate the work of the individual contractors and suppliers. This is another issue the NEC3 suite is able to address. The entire premise of the NEC3 suite to be a project management tool as well as a contract form plays to this issue, proving a host of tools that can be used to address it.

In particular the requirements in NEC3 contracts for comprehensive programmes to be produced which show the work of other trades and how they interrelate to each other provides the EPCM contractor with access to the relevant information necessary to co-ordinate the works overall. The ECC and ECS also provide the additional mechanism of key dates for ensuring that contractors complete their works in the required timescales and providing a remedy for the employer if they do not.

The range of secondary options available under NEC3 contracts also plays to their use for EPCM arrangements, in particular the use of option X12 on partnering, with its ability to link all members of the supply chain together. This ability to link the parties and encourage them to work together on a collaborative basis for a shared benefit, coupled with the mutual trust and cooperation tenants of clause 10.1, should create an ideal delivery environment to deliver EPCM contracts successfully.

SummaryNEC3 offers a complete suite of contracts to

cover all elements of the supply chain required under EPCM delivery routes. The suite’s key strengths of flexibility, clarity and simplicity and most importantly its ability to drive proactive project management underpinned by its partnering ethos means it is the ideal choice for use for EPCM contracts. As their use increases, users have a readymade contract forms in the NEC3 suite. ●

For further information please contact the author on +44 7946 168185 or email ian.heaphy@turntown.co.uk.

FAQsFAQsROBERT GERRARDNEC USERS’GROUP SECRETARY

>> continued from page 5

7

AnswerThe accepted programme should already

be reasonably up to date. Assuming you have a requirement for 4-weekly submissions then it should be no more than 4 weeks old.

If the contractor fails to submit programmes for acceptance when it should, or if the project manager has rejected its latest programme for a reason set out in the contract, then the project manager is required to make his or her own assessment of the compensation event (see clause 64.1, third and fourth bullets). In that case the project manager can use his or her own assessment of what the programme should be (clause 64.2).

It is different if the accepted programme is out of date because the project manager has not done what he or she should do, for example if the project manager has not replied to a programme submitted for acceptance (clause 31.3), or if the project manager has rejected a programme submitted for acceptance for a reason not stated in the contract. In either of those cases you use the out-of-date accepted programme, which is not satisfactory and certainly the project manager must strive to avoid this.

The project manager can instruct the contractor to provide a revised programme as soon as he or she is aware that the previous one is out of date (see clause 32.2, first bullet). On the other hand, the contractor may think that unfair if it does not take into account some time saving that has occurred in the meantime. The contractor can alleviate that by producing a new programme as soon as it is aware that the previous one is out of date (see clause 32.2, second bullet). It works both ways.

The 4 weeks is supposed to be a maximum not the norm. The contract encourages people to make sure they have an up-to-date and realistic programme, which is simply good management.

Inadequate activity schedule itemsQuestion

A contractor submitted its tender under ECC option A but, not being familiar with the payment mechanism, only allowed for a handful of lump-sum activities on the activity schedule. In this schedule, preliminaries was only one activity, and the procurement and installation of sheet piling over the course of 2–3 months was also just one activity. These two activities amounted to approximately a third of the overall contract sum. The tender was accepted and, at the start of the project, the contractor was advised that it would only be paid upon completion of each activity. Realising that this may create problems with cash flow, the contractor submitted a revised activity schedule with the activities broken down over the course of the programme.

The employer is concerned about the closure of one of the contractor’s regional offices, although this is a major contractor and a parent company guarantee is in place. The employer does not believe that it is under any obligation to allow the activity schedule to be revised and therefore rejected the contractor’s proposal. Is the employer in breach of clause 10.1 in that it is not acting in the spirit of mutual trust and co-operation?

AnswerFirstly, it is the project manager and not the

employer that makes such decisions. The contract does not allow for the changing of the activity schedule, unless it is changed in accordance with the contract – see clause 11.2(20). The primary ways it can be changed in option A is set out in clauses 54.2 and 63.12, neither of which covers your circumstance. The spirit of mutual trust and co-operation cannot be used to change a contract the parties have agreed to and so there

is no contractual obligation to change this activity schedule.

Cost of a security guardQuestion

For the purpose of pricing a compensation event using an ECC option D contract (target contract with bill of quantities), does the cost of a subcontractor security guard employed on an hourly rate contract fall under the people component item 1 in the schedule of cost components, or is such cost deemed to be included within charges item 44, which refers to security?

AnswerIf the contractor pays for the security guard

on an hourly basis, then the guard is not a subcontractor as defined in the contract. The guard is a person that is indirectly employed by the contractor and is therefore paid for at item 14 in the schedule of cost components. The guard is not included in the item 44 percentage for working areas overhead because that only covers, ’provision and use of equipment, supplies and services’; people employed do not fall into any of those categories.

Time-barred compensation eventsQuestion

Under the ECC, if the contractor fails to submit a compensation event within the correct time limits, so that it is time-barred, how can you get around this if the event is genuine and payment is just?

AnswerCompensation events are not submitted, they

are notified; see clauses 61.1 and 61.3 as to who is contractually responsible for notifying them.

If the contractor fails to notify a compensation event within 8 weeks of becoming aware of the event, as the contractor is supposed to, then the contractor loses all rights to any such additional time and monies – see the last sentence of clause 61.3. This is what the law calls a time bar and if it is not complied with there is no way around it, whether it is genuine, whatever that may mean, or not.

It is however important to understand that the same does not apply to compensation events that the project manager is supposed to notify; see clause 61.1. In addition, the 8 weeks starts from when the contractor was aware of the underlying event itself, not when the contactor became aware that it was a compensation event.

NEC3 in facilities managementQuestion

We are currently considering procuring a new facilities management (FM) provider for our premises. Can you please advise if and how an NEC3 contract would cover the contractual requirements of an FM contract? Answer

NEC3 refers to a family of contracts rather than just one contract. Together, this family provides contracts for the management of an asset through all the stages in that asset’s life, from inception through to demolition. An introduction to all of these contracts is shown in the NEC3 procurement and contract strategies guide.

The NEC3 contracts that you can use for your FM work are the NEC3 Term Service Contract (TSC) and the NEC3 Term Service Short Contract (TSSC), both of which are specifically designed for operating and/or maintaining an asset. They can be used for both soft and hard FM, as well as proactive maintenance, reactive maintenance and betterment and improvement projects. The difference is that the TSSC is for low-risk

straightforward services, whereas the TSC is for high-to-medium-risk complex services.

The use of the TSC and TSCC for FM has been specifically endorsed by the British Institution of Facilities Management for use in the UK (see issue 63). The use of these contracts in the UK public sector has also been endorsed by the UK Cabinet Office’s FM Board, which recognises that these contracts support good practice in FM procurement in the public sector.

Executing the contractQuestion

We note that there does not appear to be a section for both parties to sign within the NEC3 contracts, with the exception of the short contracts. If this is correct, would producing a cover letter for both parties to sign contradict the intention of these contracts in their current form?

AnswerThe lack of such a form is deliberate. Clients

often wish to use their own methods for making contracts. Some, for example, will require the contract to be made as a deed, in which case specific rules have to be followed. In other parts of the world other specific laws may apply to the setting up of a contract. The NEC panel therefore left it up to the parties as to how they wish their contracts to be formed. This does not apply to the short contracts, because they are for simple, straightforward work, supply or services, and therefore a simple offer and acceptance type arrangement will normally be appropriate.

It is therefore up to the parties as to how they formalise their contract. It can, if they wish, be as simple as the employer writing and accepting the contractor’s tender. Or it can be by a suitably worded letter signed by both parties, as you suggest. Alternatively it can be something much more formally executed, in which case you may need to get some legal advice. There is some more information on this for example in the ECC’s guidance notes.

Is there a payless form?Question

Has NEC produced a standard payless form for use with the ECC in the UK?

AnswerThere is no standard payless form. Such a notice

should, in any event, be rarely needed for the ECC. It is only issued if the employer decides to pay less than the project manager certifies, or if the project manager does not issue his or her certificate within the timeframe set out in the contract. Since both of these should rarely, if ever happen, a payless form should not be needed. ●

For further information please email the NEC

helpline at info@neccontract.com.

CONTRACTS • BOOKS AND GUIDES • TRAINING • USERS’ GROUPS • PROJECT SUPPORT SERVICES • CONFERENCES • RECRUITMENT • SOFTWARE

“The use of the TSC and TSCC for FM has been specifically endorsed by the British Institution of Facilities Management for use in the UK”

8 NEC USERS’ GROUP NEWSLETTER•No.64•OCTOBER 2013 TELEPHONE: +44 20 7665 2446 EMAIL: nec@neccontract.com WEB: neccontract.com

All articles in this newsletter are the opinions of the authors and do not necessarily reflect the views of the NEC.

For ease of reading, all NEC contract terms are set in lower-case, non-italic type and their meanings (unless stated otherwise) are intended to be as defined and/or identified in the relevant NEC contract.

Constructive contributions to the newsletter are always welcomed and should be emailed to the editor Simon Fullalove at simon@fullalove.com (telephone+44 20 8744 2028).

Current and past issues of the newsletter are also available on the NEC website atwww.neccontract.com.

All other enquires should be made to the NEC product development manager Jessica Weaver, NEC, 1 Great George Street, London, SW1P 3AA, telephone +44 20 7665 2446, fax +44 20 7538 2847, email nec@neccontract.com.

10 October Introduction to the ECC Bristol

16 October Preparing and pricing the ECC New Zealand

17 October Managing risk under the ECC Birmingham

22 October Introduction to the TSC London

23 October ECC project managers’ workshop Birmingham

24 October NEC UK Users' Group workshop Leeds

29 October ECC compensation events workshop London

29 October APM: What is NEC3? London

05 November ECC programming workshop Birmingham

14 November Introduction to the ECC London

19 November Introduction to the Supply Contract London

20 November Practical application of the ECC London

25 November NEC Asia-Pacific Users' Group conference Hong Kong

28 November ICE Procurement 2013 London

03 December Introduction to the PSC Birmingham

10 December Introduction to the ECC Birmingham

11 December Preparing and managing the ECC London

Key: Bold – NEC events, ECC – Engineering and Construction Contract, PSC – Professional Services Contract, TSC – Term Service Contract

For further details of all courses and events, please visit the NEC website at www.neccontract.com

NEC is supporting a number of industry events on project management and procurement management during autumn 2013. The events offer a perfect opportunity to engage with members of different professional bodies and ensure they are fully aware of the advantages of using NEC3 for procurement in their sectors.

The Association of Project Management’s series of NEC-supported events continues with an evening seminar on 29 October 2013 in London, introducing the NEC3 family of contracts. Entitled ‘What is the NEC3?’, the event can be attended by Users’ Group members for free.

ICE Procurement 2013NEC is also partnering with the Institution

of Civil Engineers for a one-day procurement conference in London on 28 November 2013. Entitled ‘ICE Procurement 2013: Driving Better Value’, the event will focus on the UK government’s new, more strategic approach to public-sector construction procurement, in which NEC3 is expected to play a key role. Users’ Group members are entitled to a discounted delegate rate of £275.

In addition NEC will be supporting a series of events planned by the British Institute of Facilities Management on how the NEC3 Term Service Contract and Term Service Short Contract can be used in facilities management projects. Again Users’ Group members will be able to attend for no charge. ●

For further information please contact the author on +44 20 7665 2445 or email events@neccontract.com.

CHERYL FRENCH NEC EVENTS

PLATINUMAmey plcAreva S.AAWE plcBauer Technologies LtdDounreay Site Restoration LtdHighways AgencyNpower RenewablesPinsent Masons LLPRWE Technology UK LimitedSellafi eld LtdTransport for LondonWest Yorkshire Councils

GOLDAMEC Power & Process UK & EuropeAmey Local GovernmentAtkins UKBalfour Beatty Major Civil EngineeringBalfour Beatty Regional Civil EngineeringBarhale Construction PlcBechtel LtdBelfast City CouncilBirse Civils LtdBolton Metropolitan Borough CouncilBridgend County Borough CouncilCarillion plcCCS Group plcCentral Procurement DirectorateCity of Edinburgh CouncilCNS Planning LtdColas LtdConstruction Effi ciency & Reform Group, Cabinet Offi ceCostain LimitedCumbria County CouncilDavis Langdon (an AECOM Company)Defence Infrastructure OrganisationDepartment of Health ProCure21Doncaster Metropolitan Borough CouncilDriving Standards AgencyDundee City CouncilEDF EnergyEnterpriseMouchel LtdEurovia Group LtdFarrans (Construction) LtdFife CouncilForeign and Commonwealth Offi ceGalliford TryGlasgow City CouncilGovernment Procurement ServicesGovernment Property UnitGuys and St Thomas NHS TrustGwynedd County CouncilHanover Housing AssociationHanson ContractingHorizon Nuclear PowerHyder Consulting UK LtdInterserve Construction LtdInterserve Support ServicesInverclyde CouncilJackson Civil Engineering Group LtdKier Infrastructure and Overseas LtdLagan Construction LtdLaing O’RourkeLand Engineering (Scotland)Leicester City CouncilLend Lease Consulting (EMEA) Ltd

LLW Repository LtdLondon Borough of CamdenLondon Legacy Development CorporationMace Limited (London)Magnox LimitedMay Gurney LtdMiller Construction (UK) Ltd.Ministry of JusticeMorgan Sindall Group PlcMurphy Group LtdNewham University Hospital NHS TrustNexus RailNorfolk County CouncilNorthern Ireland Housing ExecutiveOsborne ClarkeOve Arup & Partners LtdPerth & Kinross CouncilPlasticon UK LtdPT McWilliamsQinetiQ LtdRhead Group LimitedRider Levett BucknallRowecord Engineering LtdRoyal Borough of Kingston upon ThamesRPS Consulting EngineersRutland County CouncilSiemensSkanska Construction GroupSLR Consulting LtdSolomons Europe LtdSouth London & Maudsley NHS TrustSouthwark CouncilSpringfi elds Fuels LtdSSE PlcSuffolk County CouncilT & N GilmartinThe British MuseumThe Capita Group PLCThe Coal AuthorityTube Lines LtdTurner Estate Solutions LtdUK Power NetworksUnited Utilities Capital MaintenanceVinci Construction UK LimitedVolker Wessels LtdWelsh Health EstatesWhipps Cross University HospitalWiltshire County CouncilWorcestershire County CouncilWSP UK LtdWYG Management Services

SILVERAnglian Water Services LtdBAA PlcBalfour BeattyBalfour Beatty Utility ServicesBAM Construct UK LtdBAM Nuttall LtdBorough of PooleBoskalis Westminster LtdBournemouth Borough CouncilCanal and Rivers TrustConnect Plus (M25) LtdCorderoyCornwall CouncilDavid Adamson & PartnersDeane Public Works LtdDepartment for Regional DevelopmentDLA Piper UK LLPDyer & Butler LtdEast Riding of Yorkshire Council

East Sussex County CouncilEastern Solent Coastal PartnershipEC Harris LLPEMCOR Engineering Services LtdEnterprise Managed Services LtdEnvironment AgencyEskomExtrudakerb LtdFaithful & GouldFP McCann LtdFranklin & AndrewsGleedsGve Commercial SolutionsHalcrow Group Ltd.Health Facilities ScotlandIndustrial Electrical Services (I.E.S)Interserve Industrial Services LtdJ N Bentley LtdJacobs UK LtdLindford Consulting LtdLondon Borough of HillingdonLondon Borough pf MertonMansell PlcMoreton Hayward LimitedMott MacDonald Group LtdMouchel Group plcMWH UK LtdNatural Resources WalesNavigant Consulting (Europe) LtdNBS ServicesNeath Port Talbot County Borough CouncilNorthumbrian Water LimitedNPS GroupPCC Controls LtdPD TeesportProcom-IM LtdPrysmian Cables & Systems LtdR J McLeod (Contractors) LtdRamboll UKRedray Consulting LtdRenfrewshire Council - Roads DivisionRotherham Metropolitan Borough CouncilSalvation ArmyScottish WaterSelwood LimitedSevern Trent Water LtdSeymour (Civil Engineering Contractors)Sheffi eld City CouncilSouth East Water Ltd.South Lanarkshire CouncilSouth West Water Services LtdSouthern Gas NetworksThames Tideway TunnelThe Royal ParksThorntask LimitedTrowers & HamlinsTurner & TownsendUniversity of LincolnURS Infrastructure & Environment UK LimitedVeale Wasbrough VizardsVolker Rail LtdVolker StevinWalter Thompson (Contractors) LtdWardell Armstrong LLPWarwickshire County CouncilWater Service (NI)Wedlake BellWheeler Group ConsultancyYorkshire Water Services Ltd

BRONZE4ProjectsAdvent Project Management LtdAlan Auld Associates LtdAlway AssociatesAnthony Collins SolicitorsBeattie CommunicationsBennetts AssociatesBevan BrittanBezzant LtdBIS Industrial ServicesBlack & Veatch LtdBlack Country Housing GroupBowdon Consulting LimitedBrett Consulting LtdBritish Institute of Facilities ManagementBrodies LLPBunton ConsultingBurges Salmon SolicitorsBuro HappoldCaerphilly County Borough CouncilCardiff CouncilCastle Hayes Pursey LLPChandler KBSCMToolkit LtdColas LtdColin Toms & PartnersCommercial SolutionsConjectConwy County Borough CouncilCostain Oil, Gas and Process Ltd.DKB Project Controls LtdDocté ConsultingDoig & CoDumfries & Galloway CouncilDundas & WilsonEast Ayrshire CouncilEast Lothian CouncilEngineering Contract StrategiesEntec UK LtdEta ProjectsFladgate LLPFone Alarm Installations LtdFugro SeacoreGeorge Leslie LtdGHA Livigunn LtdGibson Consulting LtdGMH Planning LtdH A Goddard & SonsHannah Reed & Associates LtdHarelawHLG Associates LimitedHochtief (UK) Construction LtdHogan Lovells (UK)Hydro International (Wastewater) LimitedJ Breheny Contractors LtdJ T Mackley & Co LtdJohn F Hunt DemolitionJohn Newson & Co LtdJohn Papworth LtdKeegans LtdLancaster City CouncilLand & Water GroupLeicestershire County CouncilLM Engineering Services LtdLondon Borough Of Hammersmith & FulhamMacKenzie Construction LimitedManagement Process Systems LtdManches LLPManchester City CouncilMarina Developments LimitedMcAdam DesignNewcastle City CouncilNG Bailey & Co LtdNorth Ayrshire Council

North Yorkshire County CouncilNorton RoseNottinghamshire County CouncilNuclear Decommissioning AuthorityNuvia LimitedPatronus Consulting LtdpdConsultPellings LLPPeter Cousins & AssociatesPeter J Douglas Engineering LtdPinsent Masons LLPPlan AheadPromanex LtdProvian Construction LtdPyments LtdQatari DiarQuigg Golden LtdR A Gerrard LtdRamsden Enterprises LtdRamskill MartinRex Procter & PartnersRhead Group LimitedRidge & PartnersRoyal HaskoningDHVRoyal Holloway, University of LondonRSK Group plcRussell Scott LtdShanks Waste Management LtdShropshire County CouncilSIAC Construction LimitedSIMS LtdSouth Ayrshire CouncilSpecialist Engineering Contractor’s GroupSquires Consulting LtdStates Property ServicesSynergie TrainingTaylor Wessing LLPThe Big Red Apple Company LtdThe Clarkson AllianceThe Highland CouncilThe Orange PartnershipVenn Engineering Services LtdVHE Construction LtdViridor Waste Management LtdWallace Stone LLPWDR & RT TaggartWestinghouse Electric BelgiumWestinghouse Signals LimitedWorley ParsonsWYG Environment

ASIA-PACIFICACEHKAirport Authority Hong KongAPM (HK)Beria Consultants LtdBK Surco LtdChun Wo Construction & Engineering Co LtdCivil Engineering & Development Department HKSAR GovernmentCLP Power Hong Kong LtdConcentric Construction Ltd - Hong KongConstruction Industry CouncilDragages Hong Kong LtdDrainage Services DepartmentEC Harris (Hong Kong) LtdEvans & Peck (Hong Kong) Co LtdGammon Construction LtdHighways Department HKSARGHogan Lovells (Hong Kong)Hsin Chong Construction Group LtdInstitution of Civil Engineers Hong Kong

King & Wood MallesonsKum Shing (KF) Construction Co LtdLangdon & Seah Hong Kong Limited.Mace Limited (Hong Kong)Maka Consulting Company LtdMayer Brown JSMMeinhardt Infrastructure & Environment LtdMott MacDonald Hong Kong LtdMTR CorporationNavigant Consulting (Hong Kong) LtdOve Arup & Partners Hong Kong LtdPERT Management ConsultantsPinsent MasonsPMMS Consulting GroupShui on Building Contractors LtdShun Yuen Construction Co. LtdSum Kee Construction LtdSweett (Hong Kong)The Contracts Group LtdThe Hong Kong Construction Association LtdThe Hong Kong Jockey ClubVSL Intrafor (HK)West Kowloon Cultural District Authority

AUSTRALASIABecaChristchurch City CouncilCity Care LimitedCoffey Projects LtdDowner New Zealand LimitedEvans and Peck Pty LtdExcelsis LtdHorowhenua District CouncilMace Group Of CompaniesManawatu District CouncilMeridian Energy AustraliaMeridian Energy LimitedMurphy Pipe & Civil Pty LtdPBA LtdRICS OceaniaSinclair Knight MerzSpire ConsultingWatercare Services Limited

INTERNATIONALCardno Emerging MarketsCMS Hasche SigleContract CommunicatorFulton Hogan LimitedHazelton LawIlitha Quantity SurveyorsKentz (Pty) LtdNuclear Consultants InternationalPellias ConsultingPGC Consulting PQSSimpson GriersonThurlow AssociatesTransfi eld Services (New Zealand) LtdVGI Consulting IncWorley Parsons

ACADEMIAGlasgow Caledonian UniversityKingston UniversityLeeds Metropolitan UniversityLoughborough UniversityNorthumbria UniversityUniversity of BirminghamUniversity of Central LancashireUniversity of PortsmouthUniversity of SalfordUniversity of the West of EnglandUniversity of UlsterUniversity of Wolverhampton

NEC Users’ Group members A warm welcome is extended to all new members, highlighted in bold in the membership categorylists below.

NEC supports industry events