Boring name, interesting implications, that's NEC4

Lawyers are not renowned for their creativity, so it was no surprise when the title of the latest edition of a major suite of standard form contracts was unveiled. NEC, the family of contracts used in many civil engineering and construction projects, is so called as the first one, in 1993, was known as the New Engineering Contract. They've had 12 years since NEC3 to come up with a new name'¦ and here comes NEC4! It may sound a bit like a movie franchise, but will this sequel be a hit or a miss?

Euan Pirie

The NEC has published a “white paper” entitled “nec4: The next generation” with a number of useful insights regarding the changes we can expect to see at its June launch.

The early indications are that NEC has actively engaged with the industry and is genuinely attempting to cut down on the need for the dreaded “Z clauses”, drafted by lawyers to make changes to the standard form provisions in individual projects.

Whether the need for detailed Z clauses can be avoided, however, remains to be seen, as the temptation to “tinker” will remain strong, as can be seen from generations of practice involving the other construction industry standard form contracts. The proof will come in how they are received and adopted.

In the meantime, two entirely new forms of NEC precedents are to be introduced: the NEC 4 Design, Build and Operate Contract (DBO); and the Alliance Contract (ALC) in a consultation form. The objective of the DBO contract is to allow procurement of design, construction, operation and maintenance services from a single supplier. The white paper confirms there will be flexibility regarding the level and nature of services that can be procured following completion of the works, from sophisticated performance levels to more basic FM services.

The contract will not include the additional provisions required where the supplier is also to provide finance to meet with the cost of the works and services that are being provided and that this is not intended to be a Design, Build, Finance and Operate (DBFO) contract, which has been the main use for combined construction and maintenance services in the UK previously through PPP projects.

It remains to be seen whether the DBO will be widely adopted as, first, only a limited number of companies currently provide both construction/engineering and operational/maintenance services through a single contracting entity. Second, procurers may not be willing to pay the premium likely to result from purchasing combined construction and maintenance services of this nature.

The benefits of a DBO contract are potentially significant, however, and we look forward to seeing how key issues are addressed, including whether the client will be entitled to make deductions against operational or maintenance payments where problems are experienced at the completed facilities that are attributable to defects in the original construction or engineering works.

If that option applies, that would be a major step forward for clients and provide them with a highly effective means of encouraging prompt remediation of construction defects.

The ALC is set to be a multi-party contract, intended to deliver deeper collaboration driven by common interests, risk sharing and an integrated risk and reward model.

Alliance contracts have been used in the UK previously (principally in the oil industry) and are intended for use mainly in high technical complexity/high risk contracts, for which the adoption of a traditional risk transfer based approach to contracting might not be effective due to the large price contingencies that would likely be applied. The ALC is likely to be an evolution of the partnering principles included in existing Option X12 drafting in nec 3, but with the “Partners” signing a single multi-party contract, rather than a series of related “own contracts”.

The challenge for the ALC is likely to be persuading procurers of construction services that the potential savings offered by the contractor not applying significant risk contingency pricing is not outweighed by the lack of cost certainty created due to the absence of robust risk transfer provisions.

There are a number of other “highlights” from the preview, such as new “design and build” and collateral warranties options that are set to bring nec drafting more closely into line with market precedents.

The acid test of many of these will be the extent to which they cut down on the need for lawyers to draft detailed Z clauses to meet the requirements of project funders and sponsors on key issues.

There’s cautious optimism about the impact NEC4 could have, and I for one look forward to the summer premiere.

Euan Pirie is a Partner, Infrastructure & Projects, Harper Macleod LLP