UK: The ECC 3rd Edition - Worth the Wait?

The NEC3 ECC has been formally endorsed by the Office of Government Commerce for use on all public sector construction projects and the revisions are said to be as a result of feedback received during use of the ECC over the last 10 years. This update focuses on the NEC3 ECC and the key differences between it and its predecessor NEC2.

In general terms the NEC2 form was criticised by some for its brevity and lack of clarity in drafting style. This style of approach has not changed in NEC3. Substantively NEC3 retains many the key features of NEC2 and has not been significantly amended. A number of minor drafting clarifications and simplifications have been incorporated as well as some additional optional elements and revisions to reflect inconsistencies/inadequacies in the NEC2 version.

Another key criticism of NEC2 was that by virtue of clause 81.1 the Contractor was made responsible for all risks which were not expressly allocated to the Employer. The clause remains, however NEC3 introduces the concept of a Risk Register. The key function of the Risk Register is to apply pre-assessed and documented risk management procedures to specific identified hazards.

The 'Risk Register' will initially contain those risks identified by the Employer and the Contractor in the Contract Data. Thereafter risks will be added to the Risk Register as part of the early warning process (set out in clause 16), or removed because actions have been taken to avoid the relevant risks or because they have passed. Matters in the Risk Register identified as Employer's risks are compensation events.

The Contract introduces a new concept - the 'Key Date'. For each Key Date it is necessary to define what is required to be done by this date. New clause 30.3 places an obligation on the Contractor to do the relevant work so that it is completed by the Key Date. Such dates are to be specified in the Contract Data as is the work relevant to each date. The Contractor is also obliged to show on any programme which he submits for acceptance the dates when the Contractor plans to carry out the work relevant to a Key Date.

The intention is that Key Dates can be used by the Project Manager (PM) to ensure that the Contractor completes a certain activity or part of the works to a precise programme so that any other contractors involved, or the Employer, can proceed with the works in accordance with the overall programme for the project. This concept is used throughout the contract.

Working Areas used to be the whole area identified in the Contract Data. Now it is only those parts of the Working Areas which are necessary for providing the Works. There is room for significant ambiguity/disagreement here if the access arrangements are not agreed in detail from the outset.

‘Access dates’ rather than ‘possession dates’ are referred to, to reflect the increasingly common approach of giving access but no possession.

Clause 50.2 provides that the amount due (at each assessment date) is based on the Price for Work Done to Date in the non-fixed price contracts. The NEC2 definition of ‘Price for Work Done to Date’ was ‘the Actual Cost which the Contractor has paid plus the Fee’. This wording was considered to have negative cash flow implications for Contractors in that they could not claim for sub-contracted work as part of an assessment until such payments had actually been made. The NEC3 definition of Price for Work Done to Date seeks to avoid this implication by providing that it is ‘the total Defined Cost which the Project Manager forecasts will have been paid to the Contractor before the next assessment date plus the Fee’ . Whilst it is not ideal for payments to be based on forecasts made by the PM this wording does avoid the negative cash flow problem.

The definition of the Fee has been revised so that this is calculated by applying (a) the subcontracted fee percentage to the Defined Cost of subcontracted work and (b) the direct fee percentage to the Defined Cost of other work. Hence if the subcontracted fee percentage is the same as the ‘Fee’ in the subcontract the Contractor loses margin on subcontracted work. The same applies on termination.

A number of categories of costs/amounts are now expressly excluded in the non-fixed price options, including retention, payments to the Employer, correction of defects, payments to others and matters included within overheads.

New clause 19 is in effect a force majeure clause, covering events that either stop the Contractor from completing the works or make it impossible for him to complete on time. Such events are the subject of a compensation event by virtue of new clause 60.1(19).

The compensation events clause extends the period for notifying the PM of a compensation event (from 2 weeks to 8 weeks) following the date of the Contractor's awareness of the event. Importantly however there is no entitlement to claim after the 8 week period (the exception to this is where the PM should have notified the Contractor of the event - this applies in respect of PM instructions and changes in PM decisions).

Under NEC2 a separate instruction by the PM for the Contractor to provide a quotation was the trigger for assessment of a compensation event. No sanctions or alternative outcome were specified for the situation where the PM does not instruct the Contractor to provide a quotation, nor for his failure to reply to a quotation in the first place. This created a procedural ‘black hole’ as to how the claim should be assessed.

NEC3 now provides that where the PM does not provide the required notification or instruction within this period then the Contractor can notify the PM of this failure and a failure by the PM to respond within two weeks is treated as acceptance by the PM of the compensation event and a PM instruction to the Contractor to submit quotations (thus triggering an assessment). Hence the Contractor now has an ability to help himself though there remains a ‘black hole’ if neither the Contractor nor the PM issue their notices. Similar mechanisms for deemed acceptance by the PM exist in relation to quotations and assessment (clauses 62.6, and 64.4, 65.1).

Additional compensation events have also been included.

It has been recognised that some of the requirements of NEC2 were not compliant with the scheme for adjudication set out in Housing Grants, Construction and Regeneration Act 1996 and therefore they have been replaced with Options W1 and W2, one of which must be chosen when completing the contract. Option W1 is the dispute resolution procedure specified for use unless the Act applies (in which case Option W2 should be used). Option W1 is very similar to the original unamended clause 90 from NEC2, containing an adjudication table which prescribes (in relation to different types of dispute) which party may refer it to the adjudicator and when it may do so. Option W2 is compliant with the Act as it provides that any party may refer a dispute to the adjudicator at any time.

NEC3 also provides a new Employer ground of termination (R21) in recognition of the possible effect of a force majeure, where an event occurs which stops the Contractor completing the works altogether or for more than 13 weeks beyond the programme date. Presumably connected to this the right to terminate for war/radioactive contamination (causing 26 weeks delay) has been removed.

Under NEC2 where termination occurred in circumstances where neither party was at fault the Contractor could recover half of the Fee.. This right has been removed so that the Contractor now only recovers costs.

It is now prescribed that where the PM certifies his assessment of the amount due on termination then payment must be made within 3 weeks of the PM's certificate.

New Option X18 (Limitations of Liability) provides a series of optional caps on liability that may be incorporated.

Option X15 (formerly Option M - Limitation of the Contractor's liability to reasonable skill and care) provides (as it did in NEC2) that the Contractor is not liable for defects in the works due to his design in so far as he used reasonable skill and care to ensure that his design complied with the Works Information. Additionally new X15.2 provides that where the Contractor corrects a defect for which he is not liable under the contract then this is a compensation event.

Provision is made in new X7.3 (formerly Option R - Delay Damages) for a proportional reduction of delay damages where the Employer takes over a part of the works before Completion. The PM assesses the benefit to the Employer of taking over the part of the works and the delay damages are reduced accordingly.

New Option X20 (Key Performance indicators) provides a regime whereby the performance of the Contractor can be monitored and measured against Key Performance Indicators (KPIs), with the aim of offering an incentive to the Contractor to achieve the Employer's objectives. This option is not for use with Option X12 (Partnering), which has its own regime. The Contractor is paid a bonus if the target for the KPI is achieved but is not penalised if it is not achieved. The intention behind this is that the Contractor should be encouraged rather than coerced to meet the Employer's objectives.

Option U (CDM) and Option V (Trust Fund) of NEC2 have been deleted.

The Contract Data has been changed to reflect the new terminology and process described above. However a statement has been added ‘Completion of the data in full, according to the Options chosen, it is essential to create a complete contract’. This raises the question - if the documents have not been completed in full is there a binding contract? The wording would suggest not. This would leave the question as to what agreement/arrangement had been reached between the parties. It would be a matter of interpretation and very much dependent upon the circumstances. This is a good incentive for ensuring the contract is properly completed.

Another unusual step in NEC3 Contract Data is to provide for different defects correction periods for different parts of the works. This would seem problematic where parts of the Works with different periods interface with one another.