A rough guide to NEC contractsâ€¨
Chris Holwell identifies the key points that non-construction lawyers should be aware of to avoid being caught out by NEC contracts, particularly with regard to terminology
New engineering contracts (NEC) have been around for years, but they are now being used more and more frequently, and practitioners in fields beyond construction are coming into contact with them. In particular, property lawyers are now finding that NEC contracts are being used and are struggling
to come to terms with the different approaches to construction, and terminology, which
NEC3 – the third edition of the NEC – is in reality a suite of contract documents. There are professional appointments, term service contracts, a framework agreement, contracts for the supply of goods, long and short-form versions of most of them, and so on and so forth.
However, they have all been developed from the original source document, which, as part of their drive to get it used for more than just engineering projects, the publishers now call the engineering and construction contract (and almost everyone else calls ‘the NEC contract’).
All of the contracts in the NEC suite therefore work in a similar way and use similar concepts, approaches, and terminology. The rest of this article will focus on the NEC contract, but you
can take it that others in the suite will operate
in a broadly similar way.
A different approach
A government report on the construction industry said that the way that the industry worked
was wrong – reactive, confrontational, overly dependent on lawyers and forensic quantity surveyors, and in fact dysfunctional in most respects. When difficulties arose they were ‘parked’ and dealt with in a huge punch-up at the end of the job when the final account was settled. Nobody really knew the cost of the job until then. Joint Contracts Tribunal (JCT) and a host of other ‘standard’ contracts all worked in broadly the
NEC was designed to be different – not just a different contract, but a different way of running a project. When difficulties arise they are to be dealt with immediately, in real time, prospectively not retrospectively. If a difficulty is not dealt with in
real time, within a few days or at most weeks of when it arose, then the contract says that things are ‘deemed accepted’. There is no final account, there is no opportunity to raise issues late, or to raise them now but ‘park’ them for resolution later: there is either agreement, or a dispute, or ‘deemed acceptance’.
This means that the property documents (agreements for lease, forward sale agreements, funding agreements, etc.) have to take the same approach. There is no scope for leaving things to
be calculated at the end, following completion of the work. If something happens and there is to
be additional payment or additional time, then it has to be dealt with there and then, not left for resolution later.
The timetable for notifying such things and resolving how much extra time and money is
to be given has to match what is in the contract, and that will be very different from what the standard drafting of property precedents is
likely to envisage. NEC timetables for notifying, responding, and deeming things accepted are typically very short.
As to terminology, there is no distinction
made between events which entitle the contractor to an extension of time and those which entitle them to additional money. They are all called ‘compensation events’ – sometimes the contractor’s compensation is in terms of
time, sometimes money, sometimes both.
Whenever any ‘compensation event’ happens – whether it is a ‘change to the works information’ (i.e. a variation instructed by the employer), a delay in giving the contractor access, the contractor being delayed by the tenant’s fit-out contractor,
a fire, or another event – the contractor has a timescale within which to give a quotation, and once accepted that is binding. You don’t wait to
see how long the contractor was delayed by the event or what it cost: as soon as the event happens, the contractor has a timetable in which to
provide a quotation for its effect on the price and programme, and once accepted that quotation is binding. It isn’t revised later if in fact the event delayed the contractor more (or less) than they expected or cost them more (or less) than they expected.
This is helpful in terms of variations to the works. It mirrors what is usually required in property development documents. However, it means that the employer needs decisions from the tenant, purchaser, or fund within set timescales because otherwise the contractor’s quotations can be ‘deemed accepted’.
The ‘Employer’ appoints the ‘Contractor’ to carry out the ‘works’ (in NEC, terms have capital letters if they are defined in the legal terms and italics if they are defined in the contract particulars, where the practical information is filled in before the contract is signed). So long as the definitions in your own document are clear then you don’t need to worry about it, but if you are saying ‘as defined in the building contract’, then you need to be careful.
For example, NEC says: ‘The Completion Date
is the completion date unless later changed in accordance with this contract.’ That means that the intended completion date written into the contract at the start, say 5 November 2017, is the ‘completion date’ but it may change if there are compensation events which entitle the Contractor to an extension of time, so the Contractor’s obligation is to finish the works by the ‘Completion Date’ (i.e. a potentially extended date). The property documents should therefore refer to the ‘Completion Date’ as defined in the building contract. This way of defining things is handy for construction lawyers but creates traps for unwary property lawyers who don’t check just which version of a defined term they ought to be using.
The Employer engages the ‘Project Manager’
to run the contract and the ‘Supervisor’ to check
on quality. ‘Certificates’ are issued by the ‘Project Manager’.
The drawings, specifications, and everything else which sets out what the Contractor is to do
are called the ‘Works Information’. There are no employer’s requirements or contractor’s proposals or the like. Information about the site (boundaries, means of access, etc.) are set out in the ‘Site Information’.
The Works Information can also describe design work which is to be done by the Contractor. There is no design and build version of the NEC contract because there doesn’t need to be – if you want the Contractor to be responsible for any design work, then you just say so in the Works Information and
it is automatically part of what the Contractor
has to do.
When the works are finished, ‘the Project Manager certifies Completion’ (but ‘Completion’ does not mean absolute completion: snagging items are still allowed). Once a snagging item
or other ‘Defect’ has been spotted, it has to be rectified within the ‘defect correction period’, but that does not mean what you think it does. Instead, the ‘defect correction period’ is a period of just a few days or a couple of weeks – that is, a timetable for fixing an individual Defect (there is no equivalent in JCT contracts).
Rather confusingly, the period within which Defects can be notified, typically 12 months after Completion, is not described as a period at all – NEC says that Defects can be notified for rectification at any time before the ‘defects date’, which is typically ‘the date which is 12 months after the date of Completion’. This means that the usual definitions in property documents will need to be revised with care.
Finally, following the defects date the Project Manager issues the ‘Defects Certificate’. Note that
it is issued even if there are outstanding Defects which are known about and which the Contractor has failed to rectify, despite being asked to do so.
In such cases, the Employer’s rights in relation to the Defect turn into a simple claim for money for the failure to rectify the Defect, which they can deduct from any contractual retention. Therefore, you need to be careful about tying release of money or anything else to the issue of the Defects Certificate – it does not mean that all Defects have been dealt with.
There are numerous other differences between NEC and JCT contracts but this article identifies those which are normally the most important. If you are interested in what is payable under an NEC contract then you need to look more closely – option A is fixed price, most like a JCT design and build or without quantities contract. Other NEC options are more esoteric and beyond the scope
of this article.