In a previous article, we introduced the FIDIC contract and its particular features, the different types of FIDIC and the points to watch with these contract models. In this article, we turn to one of its cousins (more or less distant): the NEC contract!
1. NEC contract: definition and overview
Let us get straight to the point: the acronym “NEC” stands for New Engineering Contract, which can be rendered in French as “nouveau contrat d’ingénierie”. NEC contracts are therefore suites of standard contract models published by the British institution of civil engineers (whereas the FIDIC contract is published by the international federation of consulting engineers).
Another parallel with FIDIC: the NEC forms were built through practice and have evolved over time, since four NEC suites have appeared in 30 years. We are now on the suite known as “NEC4”, published in 2017, which contains no fewer than… 18 separate contract models!
A lesser-known alternative to the FIDIC model (which is French in origin!), the NEC is used by certain common law jurisdictions such as the United Kingdom and Hong Kong, and is also applied on many projects in Australia, Ireland, the Netherlands, New Zealand and elsewhere.
When its first version was drafted in the early 1990s, the NEC’s ambition was “simple” and was summed up in three main objectives:
- To offer a flexible framework;
- To give pride of place to good project management practice;
- To be drafted in plain, intelligible language.
In form, this is a bet that has largely paid off, with a contractual framework that sits somewhere between a form and a contract, offering readability, pragmatism and above all flexibility, notably through core clauses, options, and the insertion of “Z clauses”, which act as a kind of particular conditions.
In substance, there are visible efforts (particularly in the latest edition) to optimise contract management processes and reduce the cost of administering the contract. New models have also appeared, such as the “DBO” for Design, Build and Operate and the Alliance Contract, which respond to new demands in the construction and major projects market regarding stakeholder involvement in the operational phase, as well as integration and cooperation between them.
2. NEC: key clauses and issues
Identifying the “most important” clauses in the NEC4 suite of contracts is extremely difficult, both because of the variety of models and use cases and because of the flexibility these models offer. We will also publish short practical guides to the main contracts in the NEC suite in the near future.
That said, some clauses strike us as fairly representative of the NEC philosophy, both in terms of flexibility and in terms of the importance given to contract management, whether during contract negotiation or during the execution phases.
- Clause 14.3: “the Project Manager may give an instruction to change the Scope”. For non-bilingual readers (and for those who do not use the excellent translation tool Deepl), this clause simply states that the client’s project manager may, by a simple instruction, change the scope of the project! On the client side, any alert contract manager will make sure to amend this standard clause, or to put internal processes in place to control its impact and reach. On the supplier side, the most seasoned will see in it a way of adjusting or changing the contractual scope in a subtle manner.
- Clause 10.2: “The parties, the project manager and the supervisor act in a spirit of mutual trust and co-operation”. While this clause may seem trivial at first reading, it remains essential in light of the objective and ambition of the NEC contract, and more broadly in light of how important the relationship and the quality of communication are to the smooth running of a project. Note also that the supervisor and the project manager, although appointed and paid by the client, are not included in “the parties” and are expected to act impartially towards them. Finally,
- Clause 15.1: “Contractor and the Project Manager shall give an early warning by notifying each other as soon as they become aware”. Simple as it is, this clause sums up on its own the mindset of the NEC and the differences with more traditional contracts such as FIDIC. Early notices and early warnings are indeed everywhere in NEC contracts. You must therefore not only take no offence when you receive such notifications, but also make sure you have put in place the processes and responses needed to handle them, and issue them yourself where appropriate.
- Clause 13.1: “Each communication which the NEC contract requires is communicated in a form which can be read, copied and recorded. Writing is the language of the contract.” This clause illustrates the effort and the standard to be reached in contract management, particularly given the volume of information and material exchanged during meetings, which must be recorded in a precise form to count as a communication.
- Clause 61.3: “If the contractor does not notify the compensation event within eight weeks of becoming aware that the event has happened, the prices, the completion date or a key date are not changed ”. Here we have a mechanism setting a deadline for notifying an event that gives rise to an extension of time or a change in price, showing that while cooperation is a founding principle of the NEC, sound contract management and administration matters just as much.
We could have added several dozen other equally important clauses, covering notifications, liquidated damages, the programme, cooperation and claims.
3. NEC vs FIDIC: which model should you choose?
For once, let us begin this final section with the answer: there is no nec plus ultra (we will let you enjoy the pun); choose the model best suited to your case, but also to your corporate culture and your contracting practice!
To get there, we started by visiting the official NEC website to read the arguments put forward by its creators in the aptly named “why choose NEC” section.
According to the British organisation, the main strengths of NEC4 are as follows:
- Good relationship management: the NEC encourages proactive cooperation and avoids disputes.
- Adaptability: the NEC can be used in a variety of commercial and geographical contexts.
- Clarity and simplicity: the NEC is drafted in plain English to avoid misunderstandings.
According to its drafters, the main difference between NEC and FIDIC contracts lies in the collaborative mindset of the parties to an NEC contract, who are participants in the project rather than adversaries.
Coming back to practice, what is set out above is in our view a reality, but one to be qualified by a good deal of experience. A cooperative mindset, clarity or simplicity cannot simply be decreed. Each party will also have its own definition of what a clear contract or plain drafting looks like.
Moreover, the criticisms traditionally levelled at NEC contracts often revolve around the heaviness of the processes, which generate a substantial volume of documentation, complex contract administration and, ultimately, very high contract management costs.
At Prime, we believe the difference between NEC and FIDIC contracts is above all cultural. The two models reflect, in a fairly striking way, two visions: one of “civil law”, the other of “common law”. A glaring example lies in the structure of the NEC contract, with choices to be made between “main options”, “core clauses” and “secondary options”, which reflect a very operational but also very simplistic view of how a contract is built. Note too the many pre-dispute mechanisms in the NEC contract which, while they may help avoid litigation, must nonetheless be handled with care, particularly with stakeholders unused to claims and other early warnings or early notices, which can be experienced as declarations of war.
So, for an audience used to civil law contracting practice and custom, working with the NEC will require a minimum of training and experience at every stage of the NEC contract lifecycle. A company’s level of contract management maturity is also a good indicator when choosing between FIDIC and NEC: a company with little contract management maturity would indeed be better advised to opt for a FIDIC model, which is more traditional.
By way of illustration, we often work in practice on NEC contracts where the parties have not understood the pricing option (options A to F), or have wanted to make adjustments and/or add additional clauses (Z clauses), thereby creating inconsistencies and difficulties of interpretation between the original clauses, the amended clauses and the additional ones.
In short, the success of a project governed by a FIDIC or NEC standard form requires good contract management practice. Before taking the plunge, ask yourself the right questions about your level of contract management maturity and the state of your internal processes and methods and, if need be: call in an expert!