THE NEW ENGINEERING CONTRACT: IMPROVED PROCUREMENT AND CONTRACTING WITH ITS SIMPLICITY, CLARITY AND GOOD PROJECT MANAGEMENT PROVISIONS

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1 THE NEW ENGINEERING CONTRACT: IMPROVED PROCUREMENT AND CONTRACTING WITH ITS SIMPLICITY, CLARITY AND GOOD PROJECT MANAGEMENT PROVISIONS ABSTRACT THURLOW, P.N. Thurlow Associates cc: Industrial Project Managers 4 Hillcrest Avenue, Craighall Park, 2196, South Africa Tel: , thurlow@mweb.co.za The international NEC suite of contracts published by the Institution of Civil Engineers in London is based on the principles of simplicity, clarity and a stimulus to good project management. The contract is widely used internationally and is now an integral part of the procurement and contracting scenario in RSA. The NEC s flexible structure is opening opportunities for new and wider project management applications not only in its priced, incentive and cost reimbursable options but in its firm foundations in competent time, cost, scope and risk management provisions. The use of the NEC is finding clients, professionals and contractors somewhat shy of its project management procedures, not because the contract is complex but merely as inexperience of the new, simple, clear ways of procuring and executing contracts. This paper analyses many of the traditional procurement and contracting philosophies and contrasts them with the improved, simple procedures under the NEC. The key elements are the competently structured, resource-driven programmes, their method statement provisions and their priced relationship with the activity schedule. Users are often confounded to find these new principles, along with time and cost risk allowances, float and health and safety provisions now being part of the management of their contracts. The management of change under the compensation event procedure rests on the contractor providing integrated time, cost and resource quotations largely in advance of the new or changed work being executed. The efficacy of these procedures in protecting both parties interests requires the construction industry players to take a bold step forward in embracing the new predictive, project management techniques and procedures. The NEC s use of adjudication as a contractually implemented decision to resolve any disputes has highlighted the need for skilled adjudicators to have honed time, cost and contractual skills within the terms of the NEC s procedures themselves. KEY WORDS: NEC Contract; Contract Procurement, Project Management; Partnering INTRODUCTION It is widely and wrongly believed that, in good project management practice, conditions of contract should remain in the bottom drawer until such time the lawyers call for them. This is due to the adversarialism built into traditional conditions of contract tainting the project manager s view of the pure mysticism of what project management is really all about. And yet despite this, large proportions of real, live project management services are provided by the hundreds of contactors controlling their own time, cost and performance deliverables who are forced to provide their best project management endeavours under the severe constraints of the many, adversarial conditions of contract used in the South African market. It thus seems as if the project management industry focuses more on the relationships between project managers and their clients, than in addressing the contractual constraints they place on the contractors and subcontractors providing their own project management services to those very same clients. Proceedings of the 2006 PMSA International Conference 30 May 1 June 2006 Growth and Collaboration for a Project Management Profession Johannesburg, South Africa Conference Organised by PMSA and PMI SA Chapter ISBN:

2 You may be surprised that I use the term project management services in the context of construction; however, this is not really surprising at all, when one considers that, in commissioning any construction work, the client buys the materials to be left behind, but only rents from the contractor the men and machines which manipulate them and the management skill to manipulate them effectively. In thinking about this, these contractor s own management skills are also what project management is all about. In South Africa our clients do not recognise that their choice of procurement system is a critically important decision determining the degree of success or the degree of failure of their projects. One only has to look around at the maze of traditional, adversarial contracts in use in South Africa and the resulting, poor track record of our construction industry in meeting our client s expectations, let alone exceeding them. The UK construction industry recognized these issues ten years ago and took the lead in providing the most comprehensive reviews of their contracting procedures; they have subsequently implemented and legislated recommendations making their industry, as a whole, more productive and internationally competitive. In 1995 Sir Michael Latham, in is his well-received Final Report of the Government / Industry review of Procurement and Contractual Arrangements in the UK Construction Industry recommended that Endlessly refining conditions of contract will not solve adversarial problems. A set of basic principles is required on which modem contracts can be based. A complete family of interlocking documents is also required. The NEC fulfils many of these principles and requirements... A target of one-third of Government-funded projects started over the next four years should use the NEC. Ten years on and, in addition to the UK Government s endorsement of the NEC3 for Britain s 40 billion public-sector construction market, Sir Michael recommended the NEC for procuring the 2.4 billion 2012 London Olympics facilities; his recommendation was recently endorsed by the Olympic Delivery Authority in London. But, where are we in all these international developments and of what concern is it for us? Well, the NEC family is being increasingly used and accepted in South Africa. Firstly, project managers need to understand the contract and its significant potential to improve project management practice. Secondly, project managers need to embrace the NEC and apply the contract - as it was intended - to improve our industry and make us more internationally competitive. In developing the NEC - the drafting Panel in London widely representative of all the industry s players set three objectives for the family of contracts. Firstly, flexibility that it should be suitable for all construction or service disciples, all or no contractor s design and for all contract types ranging from lump-sum, re-measurement, target contracts, cost reimbursable and management contracts. All the contracts in the family should be similar with consistent procedures and terminology. Secondly, clarity and simplicity that it should be written in ordinary language, organized in a structure which helps the user gain familiarity with its contents. The actions of the parties in administering the contract should be precisely defined to minimize any misunderstandings about who is to do what, when and how. Legal terminology should be minimized. Thirdly, a stimulus to good project management; every procedure is designed to ensure that it should contribute to, rather than detract from, the effectiveness of the management of the future work. However, the overriding and most important draughting principle had nothing to do with structure, words or grammar. It was that every action and every procedure should be designed to motivate the actors to collaborate. In this way, project results could be improved by applying collective foresight to all decisions about the future work. We all know that this will mitigate problems and shrinks risks; the clear function and responsibility will also promote accountability and motivate people to play their part. Many of these elementary principles are sadly lacking in our construction industry today. With this background, we can turn to the of the contracts and investigate the warranty of their good project management principles. The NEC is thus an integrated suite of contracts covering works, services, subcontracts, short contracts, term service, supply and maintenance contracts all have their associated guidance notes and flow charts. The flow charts show every action and response which the parties take in managing the contract, so users

3 are always aware of exactly what has to be done, by whom and in what time period. This certainly promotes cooperation, teamwork and early resolution of changes, difficulties and, of course, the old unforeseen situations. On first reading, the impact is that it is written in ordinary language designed for use by people whose first language is not English. The sentences are short, in the present tense and make maximum use of bullet points and an open layout. In as much as the PMBOK defines the broad areas of project management as integration, scope, time, cost, quality, human resources, communications, etc. so the NEC, in its turn, defines the detailed procedures within each PMBOK area which the parties take in managing the contract. The NEC thus amplifies the general provisions of PMBOK into a detailed set of project management procedures whilst, at the same time, providing thoroughly competent conditions of contract. The NEC principles are also based on modern principles of risk allocation. Consequently, its use reduces the risk of cost and time overruns for clients and of operating losses for contractors, sub-contractors and suppliers. Starting with the simple issues; the means by which, and the time periods within which, the parties communicate are clearly defined. A welcome provision is that each communication is to be communicated separately; this stimulates timeous communications and compensates the contractor for late responses. Proactive, predictive project management is required from the early warning actions which mandate the parties to notify the other as soon as either becomes aware of any which could affect the time, cost or quality of the work or services. This is, in fact, the project manager s ideal tool enabling him to pre-plan, manage and optimize the future work; there is thus no need for all the traditional wrangling after the fact - of how and why it all went horribly wrong. The contract defines the Works Information as the scope and constraints within which the contractor is to work; departures from these definitions are Defects which the contractor corrects. A welcome change is that information about the Site is separately defined. NEC users will understand the programme requirements and the actions which the project manager takes in accepting this programme, as key procedures underlying the management of time, cost and change. These are areas where the NEC is most pragmatic and where even the most stringent project management purest, will find favour. The programme also requires the contractor to provide details of the equipment and other resources which he plans to use for each operation, the full details of his time risk allowances and his float. These contractual (and good project management) requirements move the programme away from a pretty picture into a carefully assessed, resource-driven document showing the time risks and how the contractor plans to provide the future work. The programme is contractual in its defining the timing of the work of the employer and others and, by forming the basis of compensation for any actions which are out of time. The contract also settles the old arguments about the ownership of float the terminal float belongs to the contractor. Experienced employers are using the programme information to evaluate the competency and realism of tenders instead of the normal, lowest price approach and the substance of contractor s often, well-sung assurances that of course, we will finish on time! The management of change - under the compensation event procedures - rests on the contractor providing integrated time, cost and resource-driven quotations largely in advance of the new or changed work being done. The efficacy of these procedures, in protecting both parties interests, requires the construction players to take bold steps forward in embracing the new predictive methods of control. Indeed, this is not an easy step for an industry steeped in historic re-measurement and claim evaluation procedures long after the work has been completed. One reason why clients use the NEC is the change management procedure allows them facilities to price changes in different ways; the project manager may, for example, require alternative quotations; one with an extension of time and another to hold the programme in its last accepted state. Some commentators were initially horrified that NEC variations did not automatically entitle the contractor extension of time!

4 Thus the contract does not rely on the traditional we ll sort it out at the end approach, leaving the final account and its claims to be settled sometimes years after completion of the work; defined time bars stimulate the parties to deal with the changes in advance of the work being done. The Panel addressed the well-understood difficulties of valuing changes using the rates or sums in the contract; such procedures have and, always will, lead to argument about the applicability of rates to the new of changed work and the manipulation of P&G in one or other parties interests. As a default in pricing change, the contract uses defined Actual Cost (Defined Cost) where the amounts to be included in the assessment are at open market or competitively tendered prices; the effect is to end (once and for all) the one-sided unjust enrichment difficulties arising out of changes, the loading of rates or of ordering increased quantities of work at known, low bill rates. With these strong project management backgrounds, the NEC develops and promotes skilled, proactive project managers on both sides of the fence who understand how construction costs arise and how they will be affected by changes to plan; a knowledge of construction planning and of how plans will be affected by changes; the ability to obtain up-to-date information about construction costs and, an appreciation of construction risks and how allowances for them should be assessed. For our industry to develop, we need to grasp the extent of these NEC changes away from the traditional procedures which pays the contractor according to the measured quantities of permanent work left behind, using rates which hide the contractor s true costs relating to the methods and timing of the construction itself. Project managers will find a range of contract options to deal with the risks in their contracts in open and proactive ways. Where the scope of work is clearly defined at the time of tender, they would let the contracts on one of the priced contract options either with an activity schedule or a bill of quantities. Where the scope is less defined and risks are greater, he would tend towards the target (or incentivised) options where the parties share savings and overruns assessed against a managed target. Where speed of appointment is imperative or poorly defined scope, a fact, the project manager would be comfortable using the cost reimbursable option. It is important to realize that this NEC option does not expose the employer to paying for the contractor s inefficiency. The growth of the NEC worldwide is in the target contracts where the parties share the risks on the understanding that cooperation in mitigating the risks will optimise the outcomes for both parties. The UK s Channel tunnel rail link [CTRL] and Heathrow terminal five projects (the biggest construction projects in Europe) are both essentially incentivised NEC contracts. Such incentivised provisions underlie many of the alliancing and partnering contracts now in use. But what happens when the parties find there are differences of opinion about time or cost assessments or where one of the parties has not played his part in managing the contract? Traditionally, the parties proceed into arbitration, litigation or other ADR routes which, when seen in the project management context, are not a route willingly accepted by the project management fraternity. Following the NEC s lead with third party, independent adjudication, it is a welcome change to see locally used forms of contract also adopting adjudication and the considerable stimulus which the CIDB have provided in this direction as well. Adjudication is a set of simple steps where an independent, third party - named in the contract - makes a decision in a short period of time resolving any dispute referred to him. The parties implement his decision; it is final and binding unless a dissatisfied party wishes to refer the matter to one or other of the legal processes. There have been about 130 adjudications in South Africa since early 1990 s. Our information is that none of these Adjudicator s decisions has actually proceeded into the legal processes. This is not because all the decisions were necessarily technically and commercially correct; it is more likely that a disgruntled party, having reviewed the decision and the reasons for it, considered the decision a better done deal than reopening it under the legal scrutiny of the lawyers. Any of you here today could be potential adjudicators; in fact, the contract promotes using experienced industry practitioners who have a good knowledge of the contract and, time cost resource interactions, as adjudicators. The important issue underlying adjudication is its function where the parties can, at any time, agree-to-differ about an issue without allowing such a difference of opinion to affect their cooperative, working relationship.

5 In fact, this is exactly how the procedure is designed to work; the parties accept their disagreement in the full knowledge that they have a procedure that will shortly provide a decision which they can implement under the contract. So, with all this background, there is no need to place the NEC contract in the bottom drawer until things go wrong. In fact, the NEC should be seen as a set of live project management procedures which the parties use on a daily if not, an hourly basis as they follow the actions and responses they take in the daily management of the contract; in fact, the contract should be open on the top of the project manager s cluttered desk! As with introducing any new technology, there are always too few appropriately trained practitioners who can firstly understand good project management procedures in the contact and secondly, who can correctly manage NEC contracts. The problem is certainly not one solely in the domain of the NEC when it comes to effectively managing contracts it is a common concern for the whole industry. From the project management perspective and, in selecting a form of contract suited to good project management applications, progressive project manager s need to challenge the traditional procedures and start using the NEC to its fullest potential. It is interesting to see NEC project management moving into web-based communication and control systems where all the actions and responses which the parties take are centrally produced, issued, controlled and stored. These systems track and record all the communications and actions of what, when and how and provide regular prompts for the parties about the responses they need to take; users screen view all the contract documentation and the providers store and backup all the data a totally paper free office. The growth of these systems will dramatically improve project management productivity. The changes needed by the NEC means that first-time users of the NEC must expect to make behavioral shifts if they are to reap the benefits of the new contract. Evidence from NEC projects is that people who are prepared to bring an open mind into the reality of the NEC, bring out the best in the new system, in the organizations for whom they work and in themselves. I hope my attempts to rationalize the important project management developments around the NEC have been helpful. You will note I have concluded my presentation on time. I had to finish on time as nothing has fairly delayed me which would have entitled me to keep you any longer. REFERENCES The NEC family of contracts published by Thomas Telford Limited on behalf of the Institution of Civil Engineers in London Refer to the web page on