NEC leverage… carrot or stick?
11/11/24
Newsletter #32:
Welcome to this weeks Instruct newsletter. We like carrots, not so much sticks!
NEC has several parts which demand action by the Project Manager, Client, Contractor, and Supervisor. But what do these demands really do. Are they a carrot (a positive incentive), or a stick (a negative incentive)? It often depends which side of the contract you are on…
This week we have a look at a few example…what do you think?
Let’s get stuck into some examples:
Programme Submission - Clause 31.3
The Project Manager must reply to a submitted programme within the time allowed otherwise it’s a ‘failure’. The Contractor can notify this failure and if it persists, treat the programme as accepted.
This places responsibility on the Project Manager to response…BUT…even if they don’t, it still requires the Contractor to notify it.
What is the incentive here? The Project Manager gets a stick (possibly) by having to respond to avoid the programme being automatically accepted, but the Contractor is given a carrot to notify the failure as soon as possible so the timescales are as short as possible.
Subcontractor Acceptance - Clause 26
Subcontractors needs to be accepted under clause 26 as it enables the Project Manager to check that the Subcontractors are capable of delivering the work, and contractual/ commercial risk can be assessed. The acceptance is also required before that Subcontractor can be appointed and the work can therefore be delivered. An important point!
Clause 26 required the name of each Subcontractor to be submitted for acceptance by the Project Manager. This create a variety of incentives:
Submit the Subcontractor as soon as possible, to de-risk the impact of the Project Manager not accepting the Subcontractor (Carrot)
Contract documents are to be submitted, unless its an unamended NEC (Carrot), keep it inline with NEC.
The Project Manager has the period for reply (generally 2 weeks) to respond. This is a stick held by the Project Manager, if the Contractor doesn’t get the submission correct it may not be accepted, or the Project Manager may take the full period for reply to respond! (Stick)
Quality Plan Compliance - Clause 40
Clause 40 requires the Contractor to submit a quality plan and have it accepted by the Project Manager. The plan needs to comply with the requirements stated in the Scope. Here are the interesting incentives:
There is no immediate penalty, just a carrot to say get it done and its complete. No further issues.
The Project Manager holds a stick in that failure to comply with the Scope, an instruction can be given by the Project Manager requiring the failure to be corrected. This is not a compensation event, stick!
What about the other big carrots:
Bonus for Early Completion - X6
A generous carrot which can be used to entice a Contractor to finish early and benefit from a financial gain.
‘Gain’ Share - Option C
Not only can the Contractor negotiate the target cost, they can they deliver beneath the target and earn a slice of the Contractor’s share. Making a ‘gain’. Another good carrot.
Key Performance Indicators - X20
The Contractor can be paid additional sums by achieving the KPI’s set out in the contract. Whilst they may not be easy to achieve, there is a major carrot to be had in doing so!
and the big sticks:
Delay Damages - X7
A Contractor will often be penalised (stick) with Delay Damages, allowing the Client to recoup pre-defined costs per period of delay.
Low Performance Damages - X17
If a Defect is noted which is due to low performance then the Contractor is liable to pay low performance damages!
(The hidden stick):
Failure to notify Early Warning - Clause 63.7
When a compensation event is notified for something which could have been notified early as an early warning (before it was actualised), then the Contractor is penalised because the assessment of the compensation event can be based upon the impacts assuming they did notify an early warning. This could be a big stick!