NEC ECC Contracts - Assignment Example

?NEC ECC Contracts Project Under Consideration This is a project concerning a 100 million ? Postgraduate Accommodation and Outreach Center Project in Malaysia. The project provides accommodations for 2100 postgraduate students, along with teaching activities and a continuous professional development course. General Construction Contract Principles The Housing Grants, Reconstruction and Regeneration Act 1996 (HGRRA) focuses on payments under a construction contract. Specifically, the Act states that, when a construction contract is for 45 days or more that the party to the construction contract is entitled to installment payments (HGRRA 1996 §109). Section 111 of the HGRRA 1996 states that a construction contract shall stipulate the dates of the payments, and when the final sum comes due. Section 112 forms the basis on when and why one party may not pay the other party. Local Democracy, Economic Development and Construction Act 2009 gives further protections to contractors. Another provision of this Act, section 142, appears to address the issue of subcontractors. Specifically, it states that any provision where payment is conditional upon performance of obligations under another contract, or a decision made by another person as to whether the obligations under another contract have been performed, is void. The terms are void, in that the time to make payment to the contractor cannot depend upon the performance of the other contract. This seems to specifically address subcontractors, and any kind of clause which might state that the general contractor will get paid if the subcontractor has performed his duties. The Design of the NEC3 ECC Contract Main Options The main options that would be used in this project would be Option C– the reason why Option C is appropriate in this case is because the work is only planned, and there is not an indication that there is a design in place. Option A assumes that there is a design in place, therefore the contractor would provide the works that are described in the contract. In Option B, the employer assumes the risk of the correctness of quantities, because the Contractor is the person who prices the bill of quantities and is responsible for the remeasurement of quantities if not correct. Therefore, this option is not appropriate for a design and build contract, as this contract appears to be. Option D also has a greater risk for the employer, as the target price is adjusted for changes in quantities and for compensation of events. Option E is not appropriate because it is only used when the work is not defined at the outset, and, since the project is defined, this option shouldn't be used as it presents greater risks to the employer. Option F is inappropriate, because this option assumes that subcontactors do most of the work (Yuet, 1993). Option C is appropriate because, while there is a planned project in place, there is not yet a finished design. The employer can provide an activity schedule and the target price can be set according to this schedule. Moreover, costs are minimised to the employer, because the payments are made according to the actual costs that are incurred by the Contractor, and risks are shared by the Contractor and the Employer, because each party shares the burden of over-runs and each party also shares the benefits of savings. This also leads to fewer disputes. Secondary Options There are a number of secondary options which should be used, in order for disputes to be minimized. One of these is, Option P which should be negotiated, as this option provides for additional financial security should the contractor not complete any part of the works, and other contractors have to complete the works. Option Q might be used as an incentive for the contractor to complete the work early, as Option Q provides for a bonus for early completion. This might be appropriate if the University is motivated to open the centre early for the students to enjoy, especially if this centre is going to be one of the selling points for the University. By the same token, Option R should be used, which penalizes the contractor if there is a delay in the completion of the contract. Option S, which relieves Employer of the burden to prove that the Contractor's work is substandard, if this is, in fact, the case, is another option that the University should pursue. These are all options which protect the Employer against risks, so these are options that should be pursued by the University. The Contractor will also want his own terms in there, selected from different options, and this is something that will be negotiated between the two parties (NEC3 Procurement and Contract Strategies, 2009). At any rate, the employer should put as many advantageous terms as possible into the contract, up front, as a negotiating tool (Hughes, 2012). Z Clauses These clauses shouldn't be used unless absolutely necessary to accommodate special needs (Inga-Hall, 2007). “Additional conditions should never be used to do the work in the contract as this is a part of the function of the Works information” (NEC ECC Guidance Notes, 2005). Therefore, there is not a need to add a Z clause, as there is not yet a need for it. Conditions Guiding Payment Under the NEC3 ECC Contract The conditions that will be guiding the payment under the contract would be that the contractor will complete the tasks that are assigned to him or her, and then would present a bill of quantities, and this is how the contractor will be paid. There is a target price and an activity schedule, so, as long as the contractor is adhering to the activity schedule, the contractor will be paid the target price for the activities which are completed. The project manager can invoke Clause 61.1, which states that the Project Manager can request quotations after instructions are put into effect (NEC ECC). Clause 61.2 states that the Project Manager may instruct the contractor to submit quotations for a proposed Compensation Event (NEC ECC). Other clauses that effect the payment schedule are compensation events, which entitle the contractor to be compensated for effect on the prices, key days and completion date (Patterson & MacDonald, 2012). Another condition that guides payment is the concept of the early warning. This is a warning that is given either by the project manager or the contractor, whenever the relevant party becomes aware of the situation, of an event that could increase the total of the prices, could delay completion, could delay meeting a key day or impair the performance of the work in use. The reason why this could become a relevant condition to payment is that, if this is not given by the party, then, under Option C, which is the option that was chosen for this project, there can be disallowed costs if there are costs that are incurred because there was not an early warning given (Patterson & MacDonald, 2012). Moreover, there is an issue of force majeur – according to Clause 19, if there is some act of God that prevents the project from being completed on time, then the project manager has the authority to give instructions as to how to proceed, and his decision represents a compensation event, and the Project Manager changing to the Works information would be considered to be another compensation event (Higgins, 2009). Contractual Standing In this case, the employer or the project manager would have excellent standing, if the conditions that are proposed will be in place when the contract with negotiated. This is because, according to the conditions which have been set forth above, the employer has adequately allocated the risks that are associated with delays, force majeur, etc. This is not to say that the contractor will also negotiate favourable terms which will help balance out the risk allocation between the parties. However, the employer, if his terms are accepted, at least has some important risk allocation measures in place – the project manager will be able to decide how to proceed if there is an act of God that prevents or delays the project; the employer has a way to penalize the contractor if the project is overrun, while also giving incentive to the contractor to finish early; and choosing Option C is the best way to allocate the risks between the parties of delays in compensation events and cost overruns. Dispute Resolution The dispute resolution approach regarding NEC contracts is two-tiered. The first step is adjudication, and the second step is arbitration or litigation (Sheridan & Marvin, 2010). There are also two different dispute resolution provisions, W1 and W2. W1 is used for areas where the Housing Grants, Construction and Regeneration Act 1996 does not apply, and this option may be used outside the UK, with the only caveat being that it meets local rules on adjudication. Option W2 is used in the UK, and either party may refer the matter to adjudication at any time in the process. This is different from W1, as W1 sets out who may refer the disputes and which time period should be used for the referral of disputes. The adjudicator has 28 days to make a decision, which may be extended an additional 14 days with the consent of both parties. If one of the parties does not agree with the decision of the adjudicator, then that party may refer the matter to a tribunal within four weeks of the decision being handed down (Sheridan & Marvin, 2010). There are certain qualifications for the standing neutral. Among these is that the standing neutral is familiar with the forms of construction inherent in the contract, and that the standing neutral is acceptable to both parties. It is not advisable to appoint a lawyer a standing neutral. The standing neutral must be independent, impartial and objective. The fees paid to the standing neutral should be shared equally between the parties. The use of the standing neutral provides the probability of a quick, on-site resolution of any dispute between the parties (Thompson, 1998). Advice Given for NEC3 ECC Contract v. FIDIC Red Book Form of Contract The aspect that will be examined is the contractor's claim preparation and submission procedures as prescribed by the standard form construction contracts and the NEC contracts. The standard form construction contracts are used by the FIDIC Red Book Form of Contract. This comparison is for when a contractor may make a claim for loss or expense, and the procedures for this (Croeser, 2007). Under the Red Book Form of Contract (RBFC), the contractor has to submit to the principal agent, within 40 working days of the delay ceasing, the claim, and if the contractor does not submit this claim, then the contractor forfeits the claim. If the contractor requests a revision of the date for practical completion, the claim shall separately state the relevant clause or clauses on which the contractor is going to rely, the particulars of the effect of the delay on the critical progress towards practical completion and the extension period claimed in working days and the calculation thereof (Croeser, 2007). Moreover, the contractor shall notify the principal agent within 42 working days from becoming aware or from when he ought reasonably to have become aware of such expense or loss, and, if he fails to do so, then no compensation shall be made. If the notification is given, then the contractor shall submit details of the expense and the loss, once these are quantified (Croeser, 2007). There is also a requirement regarding record-keeping – the contractor must keep records to substantiate his claim. The contractor also must send a final claim within 28 days after the end of the effects resulting form the event or the circumstance, or within such other period as may be proposed by the contractor and approved by the engineer (Croeser, 2007). Moreover, as Croeser (2007) notes, there is a difference between claim provisions for claims for the revision of the date of practical completion and claims for the adjustment of the contract value. The date for practical completion has to comply with a 20 working day notification time-bar, and a claim for adjustment to the contract value requires compliance to the 40 working day notification time-bar. In contrast, the NEC has different provisions for this event. It sets out various provisions related to the submission of quotations for compensation events by the contractor. In the NEC contract, the project manager has control, and he asks the contractor to submit quotations for the event. Within either one week of the contractor's notification or a longer period to which the contractor agreed, the project manager can notify his decision to the contractor or instruct the contractor to submit quotations. This quotations from the contractor are proposed changes to the prices and delay of the completion date assessed by the contractor. The contractor must submit a detailed assessment with each quotation. If the programme is affected, then the contractor must submit a revised programme in his quotation that shows the effect of the new condition that had arisen. These quotations must come within three weeks of being instructed by the project manager. This all begins with an early warning, which is a potential compensation event. The project manager is the one who decides if the compensation event has occurred. Therefore, it seems like the major difference between the two is the power of the project manager. The project manager is the one who decides if the unforeseen circumstance is considered to be a compensation event, and the project manager is the one who has control over the proceedings. There also a provision that states that the early warning is necessary – if the early warning is not given by the contractor, then the project manager must notify the contractor of this fact, and this might preclude the compensation event from going forward. Moreover, even after the contractor submits the quotation that is requested by the project manager, the project manager has the option to ask for a revised quotation or even has the option not to proceed. There is not the same time limitation as in the FIDIC contract – the contractor must submit the quotations within three weeks of being asked for the quotations by the project manager, but that does not seem to be a “drop dead” clause, which it is with the FIDIC contract - in the FIDIC contract, if the contractor does not submit within the time period allowed, then the contractor loses his ability to contest the matter. It seems that if the project manager decides that the matter is not compensable, then the process ends there. In contrast, with the FIDIC contracts, the contractor has more power, and the project manager has less power. In fact, there is some indication that, in the FIDIC contracts, the project manager is not the one making the decision regarding the claim, but, rather, the engineer is the person for this – the contract manager has to send the information to the engineer, and the contractor has to send monthly interim claim, setting forth all the particulars that the engineer asks for. Moreover, there is a requirement regarding record-keeping in the FIDIC contracts, and this requirement is not in the ECC contracts - the contractor has to keep good records, and the engineer has the ability to monitor this record-keeping or instruct the contractor to keep more detailed and contemporary records. Thus, the project manager has total control in the ECC contract when there are unforeseen circumstances that might cause a delay or a cost overrun. In the FIDIC contracts, this is not the case – the engineer is the one who works with the contractor, but it seems that, in the FIDIC, the two parties have more equal power determining whether or not the event is compensable or might excuse performance in some way. The reason for this is probably because the engineer is in a better position understand if the particular issue is one that is compensable or if the issue is one that is not or does not excuse delay or other performance issues. The engineer has the expertise for this, more than the project manager might. Also, the record-keeping is important – contractors might not keep good records, and this doesn't seem to the an issue in the ECC, but it is an issue with th FIDIC. Sources Used Chan-Yuet, M. (1993) New engineering contract (NEC) 1993 as radical changes to the Malaysia standard forms of contract. Croeser, E. (2007) How effective are standard form construction contracts in dealing with contract variations and contractors' claims. Submitted in Fulfillment of Part of the Requirements for the Degree of Bsc (Hons) (Quantity Surveying), University of Pretoria. Gerrard, R. (2005) NEC2 and NEC3 Compared. Hall, I. (2007) Z-Clauses: Friend of foe? Available at: docsfiles.com/pdf_z_clauses_friend_or_foe.html Higgins, P. (2009) Prevention under the NEC contracts. NEC Panel Briefing. Housing Grants, Reconstruction and Regeneration Act 1996. Hughes, K. (2012) Understanding the NEC3 ECC Contract. London: Routledge. Local Democracy, Economic Development and Construction Act 2009. NEC3 Engineering and Construction Contract (2005) NEC3 Procurement and Contract Strategies (2009) NEC3 Guidance Notes (2005) Available at: www.neccontract.com/contracts/guidance_notes.asp Patterson, R. & MacDonald, M. (2012) Using NEC contracts to manage risk and avoid disputes. Hong Kong Institute of Arbitrators, 26 April 2012. Sheridan, P. & Marvin, J. (2010) NEC3 Dispute Resolution Provisions. Thompson, R. (1998) Efforts to manage disputes in the construction industry: A comparison of the New Engineering Contract and the Dispute Review Board. Thesis Submitted to the Faculty of the Virginia Polytechnic Institute and State University in Partial Fulfillment of the Requirements for the Degree of Master of Science in Civil Engineering. Read More