Problem: Struggling to understand an Engineering and Construction Subcontract
I work as a quantity surveyor for a medium-sized ground works company based on the borders of Leicestershire and Warwickshire. Our work is focussed on the industrial and commercial sector and as the economy has picked up over the past 12 months or so, we have started to receive enquiries for larger projects, and recently we have secured our biggest ever contract.
As the company quantity surveyor, I have been tasked to ensure that I am familiar with the terms and conditions of the contract, especially as to payment applications and the procedure for changes. However, the contract referred to is the Engineering and Construction Subcontract, which I am totally unfamiliar with. I have gone through the terms, but I am totally flummoxed by such references as early warning notices, compensation events and core and Z clauses. Even trying to understand how to agree variations is alien to me. Are you familiar with this contract and if so, can you give me any advice?
Response: The NEC3 contract explained
The contract you have mentioned is more known as the NEC3, with the latest edition being April 2013. If you have never procured a construction or engineering project under a NEC contract, it can be quite daunting at first, especially if you are more familiar with say a JCT contract.
The NEC contract was designed some 20 years ago, and was intended to encourage a more consensual approach to the procurement of a project. One of the main areas of disputes in building projects are fall-outs over changes and whilst most forms of standard building contracts, such as a the JCT, allow the changes to be retrospectively claimed, the NEC3 ‘forces’ the parties to agree to the impact of any changes as work proceeds. Thus, every time there is a change (which is referred to as a compensation event), the project’s final account is agreed – in theory!
In addition, the NEC3 also makes it a requirement for the contractor to issue an advance warning notices to the project’s engineer if it foresees something that may cause a change in the prices or delay to the project. I summarise some of the main points in the NEC3:
- Key dates: The contract allows for key dates to be included in the subcontract data and there are financial remedies available to the contractor if the subcontractor defaults in achieving such dates. Equally, contractor’s changes to a key date qualify as a compensation event.
- Risk register: This is a register based upon risks listed in the subcontract data (there are 2 data’s – part 1 and part 2). This register must be kept updated under the early warning procedure.
- Notices: No change to the subcontract has effect unless it has been confirmed in writing and signed by the parties, and each and every notice issued must be separate.
- Early warning notices: The subcontractor is required to issue early warning notices that flag up possible future problems which are then entered in the risk register by the contractor. Either party can call a risk reduction meeting, at the end of which the contractor must update the register to record the decisions taken.
- Prevention clause: There is a term that caters for the effect of intervening circumstances which neither party could prevent.
- Compensation events: This is changes to the contract. The maximum period allowed to the subcontractor for notification of a compensation event is seven weeks, after which period the subcontractor will be barred from making a claim. The contract also allows the parties to agree to the price of any changes, or alternatively, there is also a mechanism for the valuing of changes.
- Adjudication: There are two options available, with W2 being for works covered by the Construction Act.
- X-clauses: These are the secondary option (albeit important) clauses, and includes such terms as price adjustment for inflation, limitation on liability and delay damages.
- Z-clauses: These are additional clauses that can be selected to be incorporated into the contract if appropriate.
I would, however, suggest that you enrol yourself on an NEC 3 course, which I have no doubt you will benefit from.
© Michael Gerard 2015
The advice provided is intended to be of a general guide only and should not be viewed as providing a definitive legal analysis.