An Analysis of Two Engineering Forms of Contract - Coursework Example

An analysis of two engineering Forms of Contract NEC3 and the FIDIC May 4 Introduction The Engineering and Construction Contract (NEC3) and FIDIC are both popular standard forms of engineering and construction contract, utilised on many projects in the UK as well as on international stage. Nevertheless, these contracts differ on approaches they have on how projects should be managed and performed. Higgins (2009) describes FIDIC as more traditional form of contract while new NEC3 adopts a more cooperative approach. FIDIC is drafted as a turnkey contract. In this case the employer gives the contractor full obligations pertaining the engineering and construction project, where the employer is required to make little participation in management of the project (Higgins, 2009). NEC3 sees the project as a cooperative process and majors on contract administration. The parties involved have the duty to act in mutual trust and collaboration, a key responsibility in NEC3 concept. Standard Form Contracts: NEC The New Engineering Contract (NEC) is a collection of standard form construction contracts developed by Institution of Civil Engineers. It includes the renowned Engineering and Construction Contract (ECC). The utilisation of NEC in construction projects is gaining pace and was the contract of choice for the 2012 London Olympics. Brief history The UK Government commissioned the Latham Report(Constructing the Team) to examine the existing construction procurement and contractual arrangements and came up with strategies that needed to be followed to create contract with a wide application, spur productive management and halt the existing often hostile dominant strategy. NEC3 is currently being used in many great construction and engineering projects in the UK and internationally. It is supported by several standard regulation bodies like the Institute of Civil Engineers, the Office of Government Commerce and the Olympic Delivery Authority that advocates for its usage all construction projects especially the public sector. NEC3 principles NEC3 assumes a totally different concept and practice as compared to other available construction and engineering contracts. Its main principles are: Clarity and simplicity: the NEC3 contract is well backed with extra materials, such as elaborated flow-charts and instruction notes. NEC3 is meant to be user friendly by being clear, simple and easy to use. It is composed in the present tense in plain English, although this can cause serious interpretation problems. Brevity is prone to ambiguity related scenarios in the courts due to its untested terminology. Stimulus to good management: NEC3 centres on real time project management instead of focusing on what the parties ought or ought not to do. Nevertheless it is very intense on administration, and needs good comprehension of its methods and enough resources from both parties (the employer and the contractor) for its success. Flexibility: NEC3 can be derived from nine parts of main clauses, six major alternatives, two dispute resolution choices and seventeen secondary alternatives. This flexible strategy is aimed to avert the need for many bespoke changes, reduce the importance of a prolonged negotiation and also reduce the possibility for disputes. But, in practice majority of NEC3 contracts entail considerable specific changes known as the Z clauses that form part of Option Z under the NEC3 contract. The NC3structure NEC3 contracts have the following structure: Core/Main clauses: comprises of nine parts that are alike and provide basis that are applicable in each contract: 1. General - entails defined terminology, interpretation, communications as well as ambiguities; 2. Contractors main responsibilities- Design, subcontracting, distribution of works, people; 3. Time – commencement time, dates of completion, takeover timestamp, key dates, project schedule, access, acceleration; 4. Testing and defects – encompasses tests and inspections, notifying defects, rectify defects, tolerating defects, uncorrected defects; 5. Payment – covers payment provisions, assessing amounts due, loss or gain where appropriate; 6. Compensation events – events that cause time, money and procedures; 7. Title – materials; 8. Risks and insurance – party’s (contractor and employer) risks, insurance necessities; 9. Termination – grounds, methods and payments after the end of contract period. Main options: these options correspond to contract structure and pricing. Only one option is chosen among the six (Murdoch and Hughes, 2000). NEC Procurement option Option A Priced Contract with Activity Schedule Option B Priced Contract with Bill of Quantities Option C Target Cost Contract with Activity Schedule Option D Target Cost with Bill of Quantities Contracts Option E Cost Reimbursable Contract Option F Management Contract Dispute resolution: there exist two options W1 and W2 of which only one must be chosen; secondary options: seventeen extra clauses to cover particular matters like changes in law and prices to cater for inflation occurrences and performance bonds provision can be chosen as suited; Contract data: this part of contract is crucial as it holds contract-specific requirement information. It is devoid of default options. The first part is provided by the employer while the second part by the contractor. It entails the works and site-specific information (like scope of work and design obligation); Z clauses (bespoke amendments), can also be included if the need arises. Some key differences between NEC3 and other standard form contracts At a more specific elaborated level, NEC3s strategy to some of the common characteristics and practices followed in construction and engineering projects is very different, including: interim payments are determined and paid on an estimation basis, instead of being paid by reference to exact costs; The occurrences that may cause additional payment and extension of time are relatively extensive. NEC operates a maintenance period as opposed to the typical defects liability period once the project is completed; Payment is normally done on completion where an initial assessment on gain is conducted. The assessment is done once, the actual cost determined and the target cost is ascertained. Comparisons between Engineering and Construction Contract (NEC3) and FIDIC Contract An assessment of NEC3 against the typical FIDIC on their suitability for significant international construction and engineering projects by considering in detail the contrasting strategies and concepts of the two contract forms. This is done in relation to the contract structure, portability, risk and administration among other features. Quality According to Glover and Hughes (2006), both NEC3 and the FIDIC 1999 contracts clearly state the specific employer quality requirements. This is normally drafted in a different technical document with the terms of contract describing this document and setting the required level of quality. It entails requirements corresponding to materials and labour to get the desired outcome or performance. FIDIC provides separate contracts for either employer-design or contractor-design while NEC provides employer-design and contractor-design by describing in the works information the design the contractor is required to carry out. NEC finds a state at completion which is described in the works information, while on the other hand FIDIC which depends on a subjective judgement of completion is decided at the time (Glover and Hughes, 2006). Both NEC3 and FIDIC 1999 contracts assign responsibility for searching defects; the focus is mainly on the contractor’s duty to correct defects and the contractor’s negligence in correcting any defects. NEC3 contracts gives obligation to both contractor and supervisor to inform each other of defects immediately they recognise them thereby giving a more open procedure for attending and dealing with defects. This specific obligation is absent in FIDIC. NEC provides a procedure for tolerating any contractor’s defect. If it is acceptable for both employer and contractor, a proposal from the contractor indicating the time and cost savings is approved by the project manager. NEC allows the incorporation of key performance indicators that deal with giving the contractor incentives as a way of increasing the performance to outweigh the operational cost of an asset being used. Clarity and Simplicity Clarity means free from obscurity and easy to understand. It is of great importance for the contract parties to fully comprehend the extent of the contract, their rights and responsibilities, and the risk associated with their activities. FIDIC was initially created in legal language. However, as numerous revisions were made, the languages became more elaborated beyond the comprehension of the novice reader and to some extend even beyond easy understanding of intelligent person (Chappell, 2006). In making payments, FIDIC is known to be quite unclear specifically on the calculation methods for getting a suitable variation order or sum for an instruction. It is noted that FIDIC has long sentences, ridiculous layout and significant legal expression redundancy giving it a poor language design structure. Despite these shortcoming FIDIC is more familiar than NEC giving it an advantage. This is so because of its long history and popularity. In most cases NEC clauses are more readable than FIDIC, and consequently give a superior interpretation. NEC drafting policy begins from scratch but not on any other foundation and therefore makes it totally different from FIDIC and other standard forms in style and structure. This makes it possible to greatly reduce the number of incidences resulting from unclear language; this is a major objective of NEC. On a final note on clarity, it can be acknowledged that that NEC is far from perfection; however it has significant improvement on clarity as compared to FIDIC Flexibility Flexibility is one and the main objective of NEC3 as opposed to FIDIC 1999 nevertheless, flexibility is incorporated in both NEC and FIDIC in various features. Both FIDIC and NEC were created for international use as they allow for choice of governing law and language, and thereby can be utilised on both domestic project and both international. Both forms of contracts are flexible in assigning duties and roles. Under NEC3, design can be determined by either party at any given amount from nil to total. The same can be said about FIDIC options namely: build only design and build, fully engineer, procure and construct On another note, FIDIC has confined payment systems covering partly or wholly the re-measurement or lump sum. NEC on the other hand is superior as it offers a greater scope of payment options such as re-measurement, target cost, lump sum as well as cost reimbursable (Forward, 2002). FIDIC has some degree of flexibility that allows employers to choose whether particular clauses apply. Fundamentally, FIDIC considerations of contracts are comprised of both the general and specific conditions. The specific conditions allow the parties to alter, amend or delete but not add extra wording to the general conditions. On the other hand, the flexibility of NEC is much greater through its modular format. NEC conditions of contract comprise of core, main option and secondary options clauses that differ depending on the preference of procurement approach chosen. NEC contract ‘boasts’ of being all-purpose contract for kinds of construction and engineering disciplines encompassing civil, building, mechanical and electrical as well as for small and large projects. Effective Project Management NEC3 is remarkably different from FIDIC in that it centres on informed, active and foresight-oriented management and decision-making instead of reactive and hindsight-oriented negative strategy. The cooperatively applied foresight extenuates problems, reduces risks and adverse effects, and dismisses majority of the reasons for dispute. NEC was created in accordance with the view that standard form should be manual for project management processes and practices, while FIDIC tends to be oriented towards the view that it is an agenda for legal actions and that its typically designed to centre exhaustively on the risk, liabilities and duties of the parties. NEC‘s good management methods involved include: dynamic planning and programming, early warning techniques and processes, communications, advanced price quotation and assessment, strict response times for administrative affairs and prompt dispute resolutions. For effective engineering and construction, it is common that NEC is the main standard form of contract with the precisely and clearly communicated objective of spurring good project management. Variations FIDIC embraces the traditional strategy to variations and claims. FIDIC has different clauses that warrant claims that are cross-referenced and distributed throughout the contract. This contract does not reckon time and cost claims concurrently I.e., there are absolutely no compensation rights for the extension of time claims. Variations are responsible for the increased claims rates under FIDIC. Despite the fact that FIDIC acknowledge that changes are unavoidable, the reduction of incidents and impacts of changes remains a core principle for FIDIC. FIDIC has a demerit in variations handling in that it is ineffective in handling significant variations. NEC3 is more preferred by the users as it covers all matters concerned with variations and claims on the broad list of compensation events. NEC does not approve the phrase ‘variations’. NEC covers the contractor‘s responsibility to conduct variations indirectly by use of a different clause that covers/serves as the variation clause. It allows for pre pricing for a variation before being executed; meaning that the instruction ‘variation order’ given will at first assume a quotation instruction state for the work and if acknowledged will be followed by an execution instruction (Clamp, Cox and Lupton, 2007). Both FIDIC and NEC acknowledge the fact that variations are a typical cause of disputes. FIDIC attempt avoiding disputes by reducing variations to an acceptable level after which a new mechanism is consented. Nevertheless, the price quotation is still elusive. On the contrary NEC does not limit variations, but provides pre-pricing and quotations that set the prices before starting the variation. NEC is inclined to be more preferable as it focuses on price agreement. Claims on extension of time, and loss and expense FIDIC and NEC have a similar claim procedures. In both cases it is the duty of the contractor to inform the engineer or project manager of any case requiring cost and time claims. According to McInnis (2001), both NEC and FIDIC have put in place penalties and time restriction clauses explicitly expressing that in an event that the contractor fails to comply to time restrictions on raising claims, the contractor will forfeit his/her rights and entitlements to either or both compensation and time extension. Additionally, both FIDIC and NEC provides a clear statement that the engineer or project manager is required to respond to contractor notice within the allocated period to avoid stalling the contractor (McInnis, 2001). Nevertheless, there are significant differences between these contracts. In FIDIC contract, the main obligation is to give notice of a claim to extra time or money while on the contrary the obligation under NEC is to give a notification of an event. Lastly FIDIC provides no outright penalties on the employer‘s team in scenarios of a failure to provide a prompt response. This becomes a contentious issue that needs to be resolved. Comparative summary of the NEC3 and FIDIC Conditions of Contract Criteria FIDIC Silver NEC3 Similarities Clause structure Traditional: all provisions set out as "general conditions" with parties defining detail or changes within "specific conditions" composed of core clauses and a series of major and secondary options Portability Created for international purpose in range of jurisdictions and languages Designed to be portable but only in English language and from English orientation Entitlement to more time and money Tighter list of events Extremely involving role of Project Manager calls for resource intensive. Design responsibility Fitness for purpose Silent as to design standards Errors in employers requirements Generally a contractor risk Employer risk Site conditions Contractor takes responsibility for the site including unforeseen difficulties Unexpected physical conditions are a compensation event Role of third parties No structured role (but, may be assigned in practice) Project manager is considerably involved in administration of contract clarity and simplicity Is quite obscure Familiarity- through its long history and popularity NEC clauses are more readable and consequently have improved interpretation. Creating policy begins from scratch instead of building foundations stimulus to good management: centres on real time management of the project flexibility: Has confined payment systems offering re-measurement and part or whole lump sum. provides a wide-range of payment options such as re-measurement, target cost and lump sum Both created for international use and are flexible in allotting design role and obligations Effective Project Management Designed and centred on the risk, liabilities and duties of the parties centred on informed, active and foresight-oriented management and decision-making, Partnering No provision for partnering Basis of mutual trust and collaboration. Advocate a more cooperative strategy Risk Allocation and Management few express risk allocation provisions Should be mechanism for risk allocation, active and dynamic risk management. Effective communication among the parties. Both distribute risks fairly and reasonably among the employer and the contractor Force Majeure and Prevention issues force majeure events are beyond an individual’s control Prevention events are also compensation events Both transfer the risk of force majeure events to the employer Environmental risks(Physical and Weather Conditions) Ensures the employer has provided the data about the site to the contractor. No obligation on employer‘s liability in case of error Claims (extension of time, and loss and expense) Notify of an entitlement to extra time or money Duty is to notify of an event Avoidance and Resolution of disputes Adopts Dispute Adjudication Board concept Aims to settle the upstream and root cause of disputes Variations Avoid and reduce cases and impacts of changes via good planning NEC gives pre-pricing a variation prior to being carried out and addresses the contractor‘s aim to conduct variations Project Organisation. Engineer vs. Project Manager roles Design, supervise works construction and execution as well as contract administration. Decide and determine the contractors claims. Resolve disputes among parties (contractor and employer) Create plans, administer the contract, certify and value payments. Ensure quality of works and defects removal Conclusion It is noted that NEC and FIDIC contracts are typical principle forms of contract among the various standard families for obtaining works or practice services (in FIDIC contracts), goods, works or services (in NEC). In each of the contracts a person is assigned to represent the employer; an engineer for FIDIC and project manager in NEC contracts. In both forms of contracts each obligations concerns time, economic value and quality, even though the specific needs totally differ; NEC provides in-depth provisions and selection that needs the sanctioning of proactive and cooperative strategy in managing the contract. The major NEC drafting options are oriented to flexibility, clarity and easiness, and spur smart management; no such objectives exist in FIDIC contracts. In conclusion to this note according to many contractors’ opinions NEC has most likely benefits as compared to FIDIC significantly in characteristics such as clarity, flexibility, precisely and clearly communicated project management processes, cooperation and teamwork. Also NEC has more advantages in risk management, targeted measurements of weather and ground considerations risks, and modifications. The very few recorded reports on NEC forms imply low cases of disputes than for more aggressive traditional forms despite the extreme administrative burdens for project manager. Works cited 1) Bailey, J. (2011). Construction law. London: Informa Law. 2) Baker, E. (2009). FIDIC contracts. London: Informa. 3) Chappell, D. (2006). Construction contracts. London: Taylor & Francis. 4) Clamp, H., Cox, S. and Lupton, S. (2007). 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(2010). Critical analysis of the NEC3 form of contract. Manchester: University of Manchester. 15) McInnis, A. (2001). The new engineering contract. London: Thomas Telford. 16) Murdoch, J. and Hughes, W. (2000). Construction contracts. London: Spon Press. 17) NDEKUGRI, I. and MCDONNELL, B. (1999). Differing site conditions risks: a FIDIC/engineering and construction contract comparison. Eng, Const and Arch Man, 6(2), pp.177-187. 18) New edition of NEC3 Contract published. (2005). Structural Survey, 23(5). 19) Nicholas, J. and Steyn, H. (2008). Project management for business, engineering, and technology. Amsterdam: Elsevier Butterworth Heinemann. 20) Pickavance, K., Burr, A. and Axelson, A. (2005). Delay and disruption in construction contracts. London: LLP. 21) Ramsey, V. (2007). Construction law handbook. London: Thomas Telford. 22) The FIDIC digest: Contractual claims and responsibilities under the FIDIC conditions fourth edition. (1990). 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