| Date | 15 March 2006 |
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| Judgment | The New Engineering Contract |
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| The Issue | Selection of appropriate procurement options. |
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| Implication |
Only the contracting parties can refer a dispute or difference to adjudication.
A party other than the contracting party may act as an ad-hoc agent for all matters other than formal proceedings. |
printIn July 2005 the ICE published the third edition of the New Engineering Contract (NEC), still bearing the title Engineering and Construction Contract (ECC) to emphasise that it is not solely intended for use on engineering contracts. For a contract which is so different from anything existing when it was published in 1993, it has been remarkably successful in establishing both a name for itself and a committed following amongst contractors and clients alike. Use of the form is only likely to increase as a consequence of an endorsement by the Office of Government Commerce (OGC) stating that the contract complies with its Achieving Excellence in Construction (AEC) principles and is recommended for use by public sector construction procurers on their construction projects. Whilst it is pleasing to see such a ringing endorsement, public sector procurers, especially those who are not familiar with the approach adopted by the NEC, will need to exercise a degree of caution in at least three key areas before acting on that recommendation. Firstly, they will need to select the appropriate procurement route. One of the great benefits of the NEC is its flexibility in embracing a wide range of procurement options (ranging from fixed price lump sum contracts, through target cost contracts to cost reimbursable contracts). The contract also offers total flexibility as to the manner in which design responsibility is allocated. This wide range of alternatives means that care has to be taken in selection of the appropriate options and allocating responsibilities correctly, meaning that a simple statement that the contract complies with AEC principles rather overlooks the significance of choosing an appropriate procurement route. This point is well appreciated by the publishers of the NEC, who have produced a very helpful guide to the procurement and contract strategies. Secondly, they will need to appreciate that the NEC’s emphasis upon good management, and the procedures necessary to support that emphasis, mean that the contract will require a greater degree of professional input (both from those representing the employer and those representing the contractor) than is required on other standard forms of contract. Although this will inevitably be paid for by the employer, the intrinsic benefits of the contract cannot be gained without it. Thirdly, the contract places the employer, via the project manager (PM) in a strong position to control the project and ensure its objectives are met, offering considerable opportunity to direct the contractor’s activities to meet changed or developing requirements. This ability to control the course of the project is one of the key attractions of the NEC. However whilst the opportunity to control exists, and the ability to do so can bring benefits, the employer must appreciate that the contract recompenses the contractor via compensation events on a basis that is closely related to the contractor’s actual costs incurred – rather than by reference to measured rates or the like. This means that the effect of the employer’s interventions will fall to be paid by the employer. Turning to the third edition of the contract, one new way in which the employer is able to exercise control over the project is via key dates. These have been introduced to allow the employer the facility, within the contract data, to identify “conditions” that have to be met by specified key dates. These “conditions” fall short of a sectional completion (for which option X5 would be used), but are intended to accommodate circumstances where, for example, the employer wishes to bring another contractor onto the site at a certain stage or when a particular item of plant or equipment is intended to be delivered by the employer. One consequence of having key dates in this way is that whenever the contractor quotes for (or the PM assesses) the effect of a compensation event, then the quotation or assessment will need to include the effect of the compensation event upon not only the prices and the completion date, but also upon any key dates that may be affected. Although the key dates are identified in the contract data the employer (via the PM) also retains the flexibility to instruct changes to those dates, and such instructions are a compensation event. Where the changes make a key date earlier then, in effect, the contractor will be required to accelerate an element of the works, whilst if the key dates are made later the contractor’s obligations may be less onerous. Where key dates are changed by instruction any additional costs are intended be determined by reference to a largely cost based estimate prepared by the contractor. If the contractor fails to achieve a key date the employer’s rights are limited to the recovery of any costs incurred in either carrying out works or in paying additional amounts to others for carrying out work. The emphasis upon carrying out work seems to make it clear that the employer is not entitled to recover any consequential costs (e.g. additional storage or rental charges, claims from another contractor as a consequence of not being able to commence, loss of profits etc.), and this limited recourse may be unacceptable to some employers. The process of assessing the amount to be paid by the contractor is undertaken by the PM within four weeks of the “condition” required by a key date having been achieved, and may include an assessment of any costs that have yet to be incurred. These costs are then taken into account by the PM when certifying payments – meaning that there is no need for any withholding notice.
CJ-0610
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