The warm and fuzzy bits of NEC everyone should know about

13/05/24

Newsletter #6:

Expanding on our introductions to NEC last week, here we explore some of the key components which are used most frequently and are the backbone of the contract. The kind of stuff that gives you the warm fuzzy feeling when you peel open the front page of an NEC contract and commence delivery:

• Early warnings

• Programme

• Payment

• Compensation events

1 General (Early Warnings)

Early warnings are notifications given by either the Contractor or the Project Manager upon recognising any matter that could influence project cost, completion, or quality. Emphasised by clause 15.1, this process isn't merely a step towards a compensation event but a proactive measure to mitigate risks.

Key points to note:

• Early warnings necessitate additions to the Early Warning Register, fostering collaborative risk management.

• Clause 61.5 and 63.7 address sanctions for not issuing an early warning, underscoring the process's significance in avoiding project delays and extra costs.

• The approach is designed to be reciprocal, thereby enhancing project outcomes through mutual responsibility and early risk identification.

Remember, early warning is about foresight and collaboration, aiming to ensure project success and client satisfaction while managing contractual obligations.

3 Time (Programme)

The process begins with the Contractor submitting the programme for acceptance, as outlined by Clause 31.1, 31.2, and 32. This will be at the frequency set out in the Contract Data and is often monthly. A key milestone, this step sets the stage for the forthcoming project management activities.

Upon this submission, the Project Manager is then equipped with a two-week window, mandated by Clause 31.3, to review and either accept the programme or provide reasons for its non-acceptance. Key reasons for non-acceptance pivot around the programme’s practicability, completeness, realism, and adherence to the Scope.

Should the Project Manager not respond within this critical period, the Contractor is positioned to highlight this oversight. A continuous lack of response could lead to deemed acceptance, bringing into play Clause 31.3's provision for default-approval if the Project Manager does not act post-notification by the Contractor.

This process emphasises the synergy required between the Project Manager and the Contractor, underscoring the importance of communication, transparency, and responsiveness. By adhering to these clauses, both parties ensure the project’s managed effectively, keeping it on track towards successful completion.

An often overlooked activity is the need for the Project Manager to sit with the Contractor and understand the mechanics of why the programme has been developed in the way it has, and where the risks in the programme are most prominent. Regular programme reviews therefore start from a common base and ensure transparency to all.

5 Payment

Central to this process is Clause 50.3, which delineates the Project Manager's responsibility to consider any application for payment submitted by the Contractor before the assessment date, and Clause 50.4, which addresses scenarios where the application is reviewed after this date.

Here's a breakdown of the critical steps:

• The Project Manager certifies payment within one week of the assessment date, guided by Clause 51.1, ensuring payments are certified at predetermined times throughout the contract.

• Should the Project Manager fail to make this assessment timely, as per Clause 53.2, the Contractor may issue its assessment of what's due, marking a crucial step designed to maintain project momentum and financial clarity.

• Clause 51.5 introduces a VAT consideration, mandating an addition of 20% on payments, reflecting statutory tax obligations.

• A significant innovation is found in Clause Y1.9-Y1.11, detailing the process for payment schedules, focusing specifically on the payments to Named Suppliers, and underlining the procedure for payment via the Project Bank Account, ensuring transparency and efficiency in fund distribution.

This payment framework within NEC contracts embodies a rigorous, transparent approach, facilitating smooth financial operations essential for project success. By adhering to these clauses, parties ensure timely, accurate payments, reflecting the collaborative essence of NEC contracts and sustaining healthy cash flow and project advancement.

6 Compensation Events

The compensation event (CE) process within NEC contracts is a fundamental aspect that ensures fairness and flexibility is maintained throughout the project lifecycle. Initiating from Clause 60, this process identifies various circumstances under which a CE may be declared, ranging from unforeseen physical conditions to a change in the Scope.

Upon identification of a potential CE, Clause 61 stipulates that the Contractor or the Project Manager must provide notification. This initial step is critical and must be performed within eight weeks of becoming aware of the event for notifications required by the Contractor, underscoring the necessity for vigilance and prompt communication.

Following the notification, under Clause 62, the Contractor is required to submit a quotation, detailing the proposed changes to the Prices, the Completion Date, or a Key Date. This quotation should encapsulate all the ramifications of the CE, including cost and time implications.

The Project Manager then assesses this quotation as per Clause 63, deciding whether it is acceptable, needs revision, or if they will make their own assessment. This clause ensures that the assessment of a CE is both fair and thorough, taking into consideration all aspects of the project impacted by the event.

Subsequently, Clauses 63 and 64 allow for the Project Manager to request revised quotations or to make their assessment if necessary, ensuring that the outcome is equitable and reflective of the actual impact on the project.

Finally, once an agreement is reached regarding the compensation, Clause 66 mandates that these adjustments are implemented into the contract. This formalises the changes and ensures that the contract accurately reflects the current scope, costs, and timelines following the CE.

This meticulous procedure underscores the importance of transparency, collaboration, and fairness in managing CEs, ensuring that both Contractor and Project Manager navigate these events with clarity and mutual understanding, thereby safeguarding the project's successful completion.