USING NEC3- WHAT YOU NEED TO KNOW?

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USING NEC3- WHAT YOU NEED TO KNOW?Page 1

WELCOMEWe have been asked to speak to you today about using NEC3 Contracts so as to manage thesecontracts effectively and avoid pitfalls!This session is designed to be as practical as possible so please do ask any questions as we go along.Keith KilburnASSOCIATEAmy CorneliusSENIOR SOLICITOREmail: keith.kilburn@brodies.comTel: 0141 245 6741Mobile: 07890740725Email: amy.cornelius@brodies.comTel: 0141 245 6273Mobile: 07855097280“The knowledge base is excellent, the team is fully committed to thechallenges. They provided sufficient resources and the turnaround timewas quick"Chambers and Partners 2013/14Page 0

PROGRAMMEWELCOMESESSION 1 Overview of NEC 3 NEC 3 suite of contracts and options Key Clauses – including Z clauses Contract assemblySESSION 2 TimelinesSESSION 3Practical examples – interactive session, covering: Early Warning Compensation Events Payments/WithholdingQUESTIONS AND ANSWERSPage 1

NEC3 OBJECTIVESThree specific objectives for the contract compared to existing standard forms:1Should be more flexible in its scope2should provide greater stimulus to good project management3should be expressed more simply and clearlyNEC3 FLEXIBILITY1When can it be used?2In what sectors?3What type of projects?NEC3 GOOD MANAGEMENT1Clear and simple allocation of risk2Collaborative working3Risk reduction proceduresNEC3 CLARITY & SIMPLICITY1Short sentences2Plain English, avoiding jargon3Each clause stands alone- no cross referencing4Options clauses add to core clauses rather than alter and delete themPage 2

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NEC3 FAMILY NEC 3 Engineering and Construction Contract (ECC) and Subcontract (ECS) NEC 3 Professional Services Contract (PSC). NEC 3 Short Contract (ECSC) and Short Subcontract (ECSS). NEC 3 Adjudicator’s Contract (AC). NEC 3 Term Services Contract (TSC). NEC 3 Term Service Short Contract (TSSC). NEC 3 Framework Contract (Framework Contract). NEC 3 Supply Contract (SC). NEC 3 Supply Short Contract (Services Contract).Page 4

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NEC3 BUILD UP Choose one of six main options on pricing mechanism – Option A-F. Include the nine sections of core clauses. Choose which dispute resolution option applies W1 or W2, Y(UK)1 or Y(UK)2. Choose which (if any) of them secondary option clauses applied. Not all secondary options can be used with the main options, eg X8-X11 appear in the PSC but not in the ECC; X19only appears in the TSC. Include any additional (“Z”) clauses.NEC3 MAIN OPTIONS Option A – priced contract with activity schedule, Lump sum price for the Works. Lump sum may change if a “Compensation Event occurs or the Employer varies the Works”. Option B – priced contract with bill of quantities. Option C – target contract with activity schedule. Option D – target contract with bill of quantities. Option C & D are target price contracts. If the Works cost more than the target price when complete, they share the “pain” of the cost overrunin pre-agreed proportions. Likewise if the Works are completed for less than the target price, theContractor and Employer share the “gain” – pain share/gain share mechanism. Option E – cost reimbursable contract. The parties agree levels of the Contractor’s overheads and profit and theEmployer pays the actual costs of the Works, plus agreed level of overhead and profit. Option F – management contract. Does not distinguish between construction management and managementcontracting.The main options do not change the rest of ECC except to deal with pricing and payment. The main options are A,C andE.Page 6

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NEC3 CORE CLAUSES1General.2Contractor’s main tion events.7Rights to material.8Indemnity insurance and liability.9Termination.Page 8

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NEC3 SECONDARY OPTIONS W1 – Dispute Resolution. W2 – Dispute Resolution. X1 – Price adjustment for inflation. X2 – Changes in the law. X3 – Multiple currencies. X4 – Parent company guarantee. X5 – Sectional completion. X6 – Bonus for early completion. X7 – Delay damages. X8- Collateral warranty agreements X9 – Transfer of rights X10 – Employer’s Agent X11- Termination by the Employer X12 – Partnering X13 – Performance Bond X14- Advanced Payment to Contractor X15 – Limitation of Liability for design X16 – Retention X17 – Low performance damages X18 – Limitation of Liability X20 – Key Performance Indicators Y(UK)2 – HGCRA 1996 – Payment and suspension Y(UK)3 – Third Party RightsPage 10

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NEC3 CONTRACT DATA Identity of parties. Services. Scope. Language of the contract. Period for reply. Period for retention of documents. Access and access dates. Defects date. Adjudicators. Programme intervals. Weather measurements. Level of insurance. Key dates. Additional compensation events. Additional risks – a risk which is not expressly stated to be an Employer risk in the contract Data or Conditions ofContract (Clause 80) will be a Contractor risk.Page 12

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NEC3 WORKS INFORMATION Works information is information which either: Specifies and describes the works; or States any constraints on how the Contractor Provides the Works.And is either In the documents which the Contract Data states it is in; or In an instruction given in accordance with this contract.Vitally important document BUT the source of many disputes.UNDERSTANDING ITS IMPORTANCE The contractor designs the parts of the works which the Works Information states he is to design (Clause 21.1) Completion is when the Contractor has done all the work which the Works Information states he is to do by theCompletion Date (Clause 11.2(2). A Defect is part of the works which is not in accordance with the Works Information (Clause 11.2(5)) The Contractor acts in accordance with the health and safety requirements stated in the Works Information(Clause 27.4)Page 14

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WORKS INFORMATION - WHAT SHOULD IT COVER? Technical info/specifications/drawings which describe the works Completion – what is required? Design responsibility and design procedures Health & Safety requirements Tests/inspections State who is providing what (services; equipment etc) Detail the activities of Others within the Working Areas Use by Employer pre-Completion without take-over occurring Programme issuesWORKS INFORMATION – SENSE CHECK Make sure language use consistently with contract provisions, particularly if using standard specifications Clear delineation of responsibilities If incorporating other documents do so explicitly Understand the difference between the Employer’s Works Information and the Contractor’sPage 16

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THE PROGRAMME Contractual significance, Clause 31 and 60.1(2), (3), (5) Supposed to be updated regularly (at the intervals stated in the Contract Data) Financial penalty if no programme submitted, Clause 50.3 Key Dates and Condition and “carry out the Works in accordance with the Works Information”.Page 18

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NEC3 Z CLAUSES Project & Client specific requirements. Order of precedence of documents. PM resolves ambiguities and inconsistencies by instruction which may give rise to a Compensation Event. Consider whether Compensation Events should be amended or restricted – when preparing Sub-Contractors makesure position in Sub-Contract is back to back with the main Contract. Intellectual Property. Assignation. Collateral Warranties. PI Insurance Contract. Provisional sums not dealt with in core clauses. Requirement to comply with minimum statutory requirements and clear statement of minimum standards toapply to materials, goods and workmanship. Should be dealt with in Works Information but include in Z clauses toprevent omission as an oversight.Page 20

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NEC3 - TERMINOLOGYNEC 3 TermNot used in NEC 3Contract DateExtension of TimeCompensation EventVariation/ChangePossessionDelay & disruptionCompletionLoss & ExpenseDefectsClaimsDefects datePrelimsDefect correction periodInterim valuationSchedule of Cost ComponentsPractical CompletionPage 22

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NEC3 CHARACTERISTICS Front loading of information Clear risk allocation No blanket exclusive remedies provision No huge Schedule of Amendments Proliferation of paperwork High management input requiredPage 24

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NEC3 – EARLY WARNINGEARLY WARNING NOTICES Clause 16.1 – both Contractor and Project Manager to give an early warning notice as soon as either becomesaware of any material which could: increase the contract price delay completion or meeting a key date; or impair the performance of the works in use Early warning matters – Clause 16.1 also provides that Contractor ‘may’ give early warning to Project Manager ofany other matter which could increase his total costs. Failure to give early warning notice – sanction on Contractor is that the assessment of any Compensation Eventcannot be greater than the assessment which would have followed the notice.RISK REDUCTION MEETINGS Project Manager or Contractor instructs the other to attend Those who attend are required to co-operate in considering how the effects of risks can be avoided or reduced,seeking solutions that will bring advantage to all affected and deciding actions to be taken.Page 26

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NEC3 – RISK REGISTER Register of risks already identified in the Contract documents and risk that the Project Manager or Contractor havenotified as an early warning letter. Register is to include descriptions of the risk and descriptions of the actions to be taken to avoid or reduce them. Risks which are not expressly carried by the Employer are carried by the Contractor (Clause 81.1). Be CAREFUL! Additional Employer’s risks are stated in the Contract Data (Clause 80).Page 28

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COMPENSATION EVENTS Clause 60 Cover all Contractor claims for time and money. Numerous – 19 listed in Core Clauses and 5 in Secondary Options. Some notable omissions e.g. Specified peril (as defined in JCT) is not a Compensation Event. The Project Manager is required to notify the Contractor of compensation events arising from instructions or thechanging of earlier decisions. The Contractor is required to notify the Project Manager within eight weeks or other events not notified by theProject Manager. SERIOUS CONSEQUENCES IF YOU FAIL TO COMPLY TIMEOUSLYDEEMED ACCEPTANCE PROVISIONS If Contractor notifies the Project Manager of what he thinks is a compensation event and the Project Manager failsto reply within one week, or such other time as the parties agree, then Contractor reminds Project Manager of theneed to reply. If Project Manager still doesn’t reply within two further weeks then compensation event notification is deemed tobe accepted.QUOTATIONS: The Contractor is required to submit quotations for compensation events showing both time and moneyimplications. He may be required to submit alternative quotations. A revision of the accepted programme must besubmitted with each quotation if there are time or disruption implications. Again deemed acceptance if Project manager does not reply to a quotation within a stipulated time, a quotation istreated as having been accepted.Page 30

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COMPENSATION EVENTS CONTINUED The Project Manager is permitted to make his own assessment if the Contractor does not submit his quotation ontime or if the Contractor’s programme is not in order or if the Project Manager decides that the Contractor’sassessment is incorrect. Again deemed acceptance where Project Manager does not accept a quotation but fails to make his ownassessment within the stipulated time. The Project Manager notifies the Contractor when a quotation is accepted or his own assessment is made. The contract price and the times for completion and key dates are changed accordingly.Page 32

POINTS TO NOTE . Time Limits – Contractor loses all right to claim a compensation event after the 8 week period. Deeming Provisions & Project Manager Input – for the compensation event scheme to work effectively the ProjectManager must be active in recognising compensation events and in seeking quotations from the Contractor. Unlike JCT – can claim time and money for adverse weather compensation event. Assessment of a compensation event is not revised if a forecast upon which it is based is shown by laterinformation to have been wrong. Float – delay to the completion date is assessed s the length of time that planned completion is later than plannedcompletion shown on the Accepted Programme. Overload – if multiple compensation events the procedure for assessment can break down. Works information related events – most claims in past have been to do with changes to Works Information. Physical Conditions – compensation event if; within the site; not weather; and conditions that an experienced contractor would have judged at the contract date to have such a smallchance of occurring that it would have been unreasonable to have allowed for them.Adverse Weather – a compensation event if by comparison with ten year records or assumed values stated in thecontract data, weather is regarded as adverse. Note it is only the difference that qualifies as a Compensation Event. Physical conditions – betweenwhat a reasonable contractor should have accounted for and what is discovered. Weather – ten yearaverage or contract data figures and actual weather.Page 33

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TESTING AND DEFECTS Clause 40 Heavy reliance on what is specified in Works Information. Must specify as much detail as possible – what tests,when, who undertakes, what standards etc. A defect is a part of the works which is not in accordance with the Works Information or a part of the worksdesigned by the Contractor which is not in accordance with the applicable law or the Contractor’s design which theProject Manager has accepted. Clause 42.2 requires both the Supervisor and the Contractor to notify each other as soon as either finds anydefects. Uncorrected Defects – on strict reading, clause 45.1 means Contractor is liable to pay an assessed cost ofrectification whether or not that proves to be the actual cost. Also, whether or not incurred.Page 35

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PREVENTIONOften deleted.Clause 19.1 – if an event: stops Contractor completing the works, or, stops him completing the works by the date shown on theaccepted programme; and which neither party could prevent; and an experienced Contractor would have judged at the contract date to have had such a small chance ofoccurring that it would have been unreasonable to have allowed for it then Project Manager gives an instruction on how to deal with the event.Prevention” is capable of wide interpretation. Could it include insolvency of suppliers and subcontractors, supply of defective materials, defectivedesign by Contractor’s consultants, strikes, accidents and other disturbances?It may or may not be a Compensation Event.Page 37

TITLE Titles to Plant and Materials passes to the Employer when it has been brought into the Working Areas or where ithas been marked by the Supervisor and marked for payment. What happens if Plant and Materials are removed from Working Areas for work done on them elsewhere e.g. bythe manufacturer for modifications.Page 38

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REPAIR AND INDEMNITY Repair – Contractor to replace loss of and repair damage to works, Plant and Materials until the Defects Certificatehas been issued (Clause 82). Indemnity – each to indemnify the other against claims, proceedings and compensation costs due to an eventwhich is at his risk. Liability to indemnify reduced to the extent that the other party contributed to the claims, proceedings andcompensation costs (Clause 83).Page 40

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INSURANCE Clause 84 Contractor to provide insurance in Joint Names for: Loss of or damage to the works, Plant and Materials. Loss or damage to Equipment. Loss or damage to property Certificates of insurance to be produced. If Contractor fails to ensure, Employer insures the risk and cost payable by the Contractor.Page 42

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TERMINATION Clause 90 Both parties have right to terminate. The Party wising to terminate initiates procedure by notifying the PM and giving his reasons. If PM satisfied thatthe Party giving he notice has provided reasons which are valid under the Contract, the PM issues a terminationcertificate. Only Employer has right to terminate entirely at his discretion. Contractor can terminate only for the reason state din the termination table. PM to carry out assessment of sums due following termination so that he can certify the final payment within 13weeks.Page 44

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TIMELINESNEC 3 – TimelinesPayment –Y(UK)2 (CLAUSE 50 – NOT ACT COMPLIANT)Assessmentdate7 daysDueDateAt least 7 daysFinal DateForPaymentIf either Party intends to pay less thanthe notified sum he must notify theother party stating the amount due andhow this sum is calculated.The Project Manager approves payment in line with the agreed monthly invoicing and payment cycle.If an approved payment is late, interest is paid on the late payment.Note – Notices must be given within the periods stated. The timeline reflects the outer limits of the timescale.Page 46

TIMELINESEARLY WARNING – CLAUSE 16A matter ARISES WHICHCOULD: Increase Prices; Delay Completion; Impair performance ofthe works, or Delay meeting a KeyDateProjectManagerorContractornotifies theother assoon as itbecomesaware ofthe matterProjectManagerEntersWarningmatter inRiskRegisterEither partymay instructthe other toattend a riskreductionmeeting.EitherParty mayinstruct otherpeople toattend ifother partyagreesAt themeeting theattendeesco-operatein seekingsolutions toAvoid or reducerisksThe ProjectManagerrevises the riskregister torecorddecisions madeat the meetingand issues therevised registertotheContractorIf a decisionRequires achange to theWorksInformation,the ProjectManagerinstructs thechange at thesame time asissuing therevised RiskRegisterPage 47

TIMELINESCOMPENSATION EVENTS – CLAUSES 60-65If the event arises from a change of instruction by the Project Manager (61.1) then the compensation event must be submitted by the Project Manager at the time of thechange. Otherwise:If the Project Manager doesnot respond within 2 weeks,If no reply is sent within 1 week,Contractorthe Contractor may notifythe Contractor may notify themust haveto this effect. If the ProjectProject Manager of this. If no replynotified ProjectManager does not reply tois sent within 2 weeks, the ProjectManager ofsuch notifications within 2Manager is deemed to haveoccurrenceweeks, the Contractor’saccepted and the Contractor iswithin 8 weeksNotification is treated asentitled to submit quotes.deemed acceptance bythe Project Manager.1 weekCompensationevent occurs3 weeks2 weeks3 weeksUp to 8 weeksContractorNotificationProject ManagerReplies withAcceptance or rejectionQuotations must besubmitted byContractor. Failure todo so, or an initialrejection by the PM,allows the PM tointimate notice thatthey intend to performthe assessmentthemselves within 3weeks of the noticebeing givenProject Managermust reply with anacceptance,rejection or order toreviseRevisions, if required must besubmitted by ContractorPage 48

TIMELINESParty wishes toterminate theContractor’sobligation toProvide the worksParty wishing toterminate notifies theProject Manager and theother Party, givingreasonsProject Manager issuesa terminationcertificatedProject Managerapproves final paymentto or from theContractor within 13weeks of termination.Payment to be madewithin three weeks ofthe Project Manager’scertificate.NB. Thereasonsprocedure andamount dueonterminationfor each partyare set out inthe table atClause 90.2Page 49

WORKSHOP EXAMPLESEXERCISE 1 – NEC3In relation to payment the contract provides that: the assessment date is the first of the month and the

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