Construction partner Ian Yule looks at the New Engineering Contract 4 and how it will manage the allocation of risk for employers and project managers.
Twelve years ago, the third version of the New Engineering Contract, NEC3 appeared. It is fair to say that it was not exactly employer-friendly. Amongst other things, it introduced a new compensation event (ie an event allowing the contractor to recover time and money, in principle) for matters that the contractor could not prevent. It allowed the contractor a fairly leisurely period of 8 weeks in which to give notice of compensation events - albeit coupling this with a stiff 'time bar' provision. And it provided for three situations where a Project Manager ('PM') could be deemed to have accepted an event as a compensation event (or to have accepted a contractor's valuation of it) if the PM failed to send a notice in time.
How does the new NEC4, published in June, measure up in terms of allocation of risk?
One interesting innovation is the introduction of a new final account procedure. The NEC has always tried to avoid the well-known scenario of the parties storing everything up until practical completion, then having a huge bunfight over the final account. The new User Guide (no longer 'Guidance Notes') states 'The Parties should of course have been building up to [an assessment of the final amount due] and very little should need to be done to close the account'. That may be a tad optimistic in practice, but there is no reason why two parties who buy in to the NEC's philosophy should not achieve that position.
Under the new regime, the employer's Project Manager ('PM') is to make an assessment of the final amount due no later than the date when defects are certified to have been made good. If he does not do so within the time allowed, the contractor may serve its assessment. Any assessment - including a contractor's one - that it is 'issued within the time stated in the contract' becomes conclusive unless challenged. The challenge must be made within four weeks, by way of an escalating dispute resolution procedure. This starts with reference to the 'Senior Representatives' of the parties, or with adjudication.
There is a trap for an unwary PM. If the PM serves his assessment a little outside the four weeks, the way is still open for the contractor to serve its assessment, and claim conclusiveness. In the middle of negotiations, the PM might not appreciate this (there is no need for any warning notice from the contractor). Once the four weeks has expired, the contractor can claim that its assessment has now become conclusive - leaving the PM with a red face and an urgent need to contact his insurers.
NEC4 puts pressure on the PM in other ways. By clause 31.3, a PM who delays in notifying acceptance or non-acceptance of a contractor's programme may be deemed to have accepted it. The contractor must give the Project Manager a warning notice before this happens, but the effect could be drastic. The programme in NEC is a particularly significant document, and is the basis for extension of time claims.
Employers (now 'clients') will notice three further provisions that have changed in the new form.
First, termination at will is now at option only. That shifts the onus somewhat to employers at the negotiation stage to say why it should be there, as opposed to contractors saying why it should be removed.
Second, an instruction for acceleration - in the true sense of bringing the completion date forward (as distinct from catching up with existing delay) - had previously been something for which the PM could demand that the contractor provide a quotation. Acceleration now requires the consent of the parties.
Third, and perhaps most significantly, the contractor now gets paid the cost of providing quotations for a proposed instruction that the PM decides not to go ahead with. Employers may be put off investigating possible design changes to the work if they know that they are immediately committing themselves to paying the contractor's costs of preparing a quotation. Those costs will be unknown to the employer of course. Excessive costs would be open to challenge, but the employer will still be signing something close to a blank cheque.
The new contract has certainly made improvements in some areas. However, employers may continue to question the balance of risk. They are unlikely to leave the contract unamended.
First published in Building Magazine
This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.