13 December 2018

NEC4 - part two

The new NEC4 contract has been in existence now since June 2017.  A year on, we are now seeing it being used, so is it useful to remind ourselves of the changes.

Please don’t forget the two new contracts, Design, Build and Operate and The Alliance contract which are not covered here. 

The key financial changes are set out below. The other key changes were covered in part one.

1. Schedule of Costs Components and the Fee Percentage

There have been several changes to simplify the Schedules.

The changes that simplify are:
a)    Sub-contractor costs are now included in the Schedule of Costs Components. Previously, they was covered in Defined Cost which was confusing;
b)    Individual Fee percentages for sub-contracted works have been replaced with one Fee; again this simplifies;
c)    In options A and B, a rate is payable for a particular discipline in the Shorter Schedule. This is a huge step forward and awards problems in proving rates for individuals;
d)    People costs now includes those working in locations that aren’t the Working Areas. I have seen Contractors/Sub-contractors refused payment for not complying with this previous drafting, which always seemed a little unfair; and
e)    The Shorter Schedule of Cost Components (SSCC) has been removed from options C, D and E.

The changes that I think are a retrograde step are;
a)    The Working Areas Overhead and People Overhead in both Schedules have been removed and now actual Defined Cost is paid. Previously it was calculated on a percentage basis; now the small items of cost in the “Charges” category will have to be claimed and substantiated on an individual cost basis. By way of example this includes the cost of services (water, gas, electricity) and minor services relating to site offices, medical facilities, first aid, security, copying, telephones, CCTV, surveying, computing and hand tools. I wonder how Contractors and Sub-contractors will be able to show the actual cost of many of these items and whether, it will be worth the time and trouble for the Contractor to provide it and PM to review it;

2. Cost savings to be shared

The contractor can now propose Scope (previously called Works Information) changes and the contract states how any resulting savings are to be shared between the parties.  In default, the sharing is on a 50/50 basis, but this can be changed between the parties in the Contract Data. 

In addition, Secondary Option X22 allows the Contractor to propose Scope changes which reduce the lifetime cost of the project.  The, savings are shared between the parties, but on a more flexible basis than changes to the Scope.  M & E subcontractors tell me, there are often substantial savings to be made to the lifetime cost, so this is potentially an area where everyone benefits from innovations. 

3.  Drawing a line under payment assessments
Under Options C, D and E (which are target and cost reimburseful contracts), a Contractor can require the Project Manager (PM) to review the costs at a certain stage in the project with a view to drawing a line and finalising those costs up to that date. 

This helps contractors and subcontractors, particularly in high value, long-term projects as it means that the PM, once he/she has agreed the figure, cannot then reduce the sums assessed.  Having said that, the Client (previously the Employer) can still adjudicate to recover monies if it considers sums have been over-assessed and over-paid.  However, this should still be a useful tool for Contractors and Subcontractors if PM’s engage with it. 

There is a process to be followed and there are default provisions whereby, if the PM fails to follow the process, he/she is deemed to have accepted the Contractor’s costs. This is similar to the deeming provisions in the Compensation Event (CE) provisions in NEC3.  There have been instances where PM’s have missed the deadline and Employers have had to make payment on the deemed basis. PM’s need to be careful with this new provision.

4. Conclusivity of the Final Account
There is a similar procedure in JCT, although it is rarely used. 

However, it may be used more frequently under NEC, simply because there is no final account procedure.  How it works is that within four weeks of the Defects Certificate (this is the end of the defects period), the PM issues a “Final Assessment” of the Contractors’ account.  If the PM fails to do this, the Contractor can do it. 

The Final Assessment becomes conclusive unless:-
a)    within four weeks of the Final Assessment it is referred to the senior representatives (a new dispute resolution procedure);
b)    within three weeks thereafter the issue is referred to adjudication.

This is a sensible way to finalise the account and, of course the NEC ethos is that there shouldn’t be much to sort out as it should have been done through the project. It is also a good opportunity for the Contractor to take control of the account, if the PM fails to do so.