best practice with the new engineering contract

8/13/2019 Best Practice With the New Engineering Contract

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This paper presents some results of research car-ried out by the project and construction manage-ment group at the University of Birmingham intothe efficacy of the New Engineeri ng Contract1

(NEC), now published in its second edition as theNEC Engineeri ng and Constr uction Contract2

(ECC). The purpose of the research is twofold:firstly, to provide detailed feedback to the NECpanel for use in developing the family of docu-

ments, and secondly, by comparing characteris-tics of dif ferent projects, to develop models ofbest practice.

A researcher of project management has twopractical problems in coming to proven conclu-sions.

Projects, or in this case contracts, are uniqueand therefore there is no control for directcomparison. The researcher cannot observetwo identical contracts with the same objec-tives, constraints, technical content and per-sonnel, but under two different conditions ofcontract.

Management is done by people, and projectsinvolve social interaction between people. Fora given set of circumstances people will per-ceive things differently, react differently andas a result draw dif ferent conclusions fromthe same experience. Consequently theresearcher, when asking questions, willreceive different accounts of what has hap-pened and, when asking for peoples views,var ying strengths of opinion.

For these reasons it is extremely hard to provesomething in the scientific or engineering sense.

However, the research methodology aimed par-tially to overcome these problems.

From a literature review and discussion-style

interviews, over 150 dif ferent parameters andclassifications on which the NEC could be testedwere identified from which a questionnaire wasdeveloped. Some of the questions measured thefinancial and time per formance of the project, butthe majority were in the form of attitudinal state-mentsthey attempted to measure the strengthof the interviewees opinions and asked them to

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Best practice with the NewEngineering Contract

J. C. Broome, BEng, MAPM

The Institution of Civil Engineers published the first edition of its NewEngi neer i ng Contr act(NEC) in 1993 and a second edition came out in1996. The rate of take-up continues to increase with, in addition to civilprojects, the NEC fast finding favour in the process and building sectors.This paper is based on detailed inter views with 81 individuals involvedwith 28 NEC-procured projects. It takes the reader thr ough the necessar yor desirable changes in the contract process which should be made toachieve the best results, and concludes by summarizing some of the bene-fits that use of the NEC has produced.

Proc. Instn Ci v. Engrs,

Civ. Engng, 1997,

120, May, 7481

Paper 11154

Wri tten discussion closes

15 June 1997

Jonathan Broome is a

researcher in t he project

and constr uction man -

agement group of the

School of Civi l

Engineeri ng at theUni versity of

Birmingham


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compare their experiences on an NEC contractwith the normal conditions of contract they wouldwork under. The control was their experience ofthe constr uction or engineering industr y to date.

The significance of their opinions was evaluated

by looking at a sufficiently large sample size.However, as attitudinal statements have signifi-cant limitations,3, 4 after each reply intervieweeswere then asked for the richer qualitative detailson why they had this view and what experiencescaused them to take it.

The findings of this paper are predominantly,but not exclusively, based on the use of the ques-tionnaire. The 81 interviewees (Fig. 1) have hadsignificant involvement in 28 different NEC pro-jects of various disciplines (Fig. 2). The award val-ues range from 500 000 to over 60 million (Figs38).

From the research it has become apparent that

the principal features and events which lead to ahigh likelihood of success of a constr uction pro-ject will have already occurred or be in placewithin the first month of starting the contract.Success is crudely defined as increased profitabil-ity and perceived employer satisfaction for thecontractor and an increased l ikelihood of the pro-ject achieving its aims of time, cost and quality forthe employer.

This paper aims to present, from obser vation,what the principal characteristics of a successfulNEC/ ECC project are. Some of these characteris-

NEW ENGINEERINGCONTRACT

75

Fi g. 1 ( above) .

Employment of

interviewees

( sampl e size = 81)

Fig. 2 (left) . Mai n dis-

cipl ines of contr acts

researched

( sampl e size = 28)

Fig. 3 (below) . Coffer

wall in the central area

of Heathrow Airpor t

constr ucted after the col-

lapse on the Heathr ow

Express Link ( cour tesy

of Balfour Beatty Civil

Engineeri ng Ltd)

Civils = 18

Consultants 17%

Contractors 37%

Clients 41%

Subcontractors 5%

Building = 6

Process/plant = 4


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tics are specific to the use of the NEC system,while others reflect generally accepted principlesof good project management which have beenencouraged by the NEC system. The paperassumes a basic knowledge of the ECC, which

can be gained from reading the contract andaccompanying guidance notes.

Contract strategyThe ECC offers six main contract strategies, of

which the employer has to choose one. To date,the most widely used main options have been thepriced contract with activity schedule (option A)and the priced contract with bill of quantities(option B). See Fig. 9 for composition of researchsample.

The theoretical advantages which the use ofoption A should give seem to be materializing inpractice. The advantages and disadvantages of

option A are as follows.

Any significant level of contractor design ismore easily accommodated as design canbecome an activity. If design is not finalized attender, then it may be impracticable to pre-pare a bil l of quantit ies.

Contractors have to plan the job before theyprepare their activity schedule. Because theystar t fr om a blank sheet, they tend to preparea more thorough tender, giving greater confi-dence and possibly a lower final total price.However, this is more costly for contractors,

as they have to take off the quantit ies individ-ually.

As payment is linked to completion of an activ-ity or group of activit ies, the cash flowrequirements for both parties are more visi-ble.

In order to receive payment as planned, thecontractor has to complete an activity by theassessment date. Consequently, the contractorhas to programme realistically and ismotivated to keep to that programme duringconstruction. Throughout the contract thepayment document (activity schedule) mesheswith the time, method and resource document

(accepted programme). The assessment of the effect on actual cost of

a compensation event is easier with activityschedules than with bills of quantit ies. This isbecause any change in resources or methodsassociated with an activity can be comparedwith those stated in the accepted programmebefore the compensation event occurred.However, in situations where both par tieswould be happy to use a bill rate to assess acompensation event, the advantage of rapidagreement is lost.

Assessment of the amounts due to the con-

tractor is easier and involves fewer personhours.

This and the preceding point may well account

BROOME

76

Fig. 4 (r ight) .

Ear thworks for the

new J. C. Kau Sai

Chau publi c golf

course being constr uct-

ed on an i sland i nHong Kong ( cour tesy

of Royal Hong Kong

Jockey Club)

Fig. 5 ( below).

Bundwal l on extension

to ash storage facil i ty

at D rax Power Station

( cour tesy of Nat ional

Power plc)

Fig. 6 (bottom) .

Ai rside pictur e of

near ly compl eted new

term inal buil ding at

Southampton Ai rport

( cour tesy of Wari ngs

Contr actors Ltd)


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for a general feeling among par ticipants on com-pleted projects that the total administrative andmanagement input from the contract date to set-tlement of final account is slight ly less underoption A compared with a conventional contract

form, and slightly more under option B.Therefore, while option B can be (and has

been) used successfully, the use of option A maywell give a greater likelihood of success. Theauthor therefore suggests that option B should beused when specific circumstances warrant it andnot just because bills of quantities are traditionallyused on contracts of that nature. The author hasalso noticed a general shift among more experi-enced users towards option A.

The option most commonly used outside Aand B has been the target cost with activityschedule (option C). In most cases, the employ-er had decided that a target cost strategy was

appropriate and then selected the NEC as theonly standard contract form available of thistype.

The activity schedule rather than the bill ofquantities option for target cost was selected,since target costs contracts are generally usedwhere there is a high level of r isk or when anearly star t on site is required. The latter impliesthat the contractor has to do a significant amountof design and hence the use of activity schedules.The par ticular emphasis of the remainder of thispaper is on the use of the ECC on option A and Bcontracts, although many of the points also apply

to other options.

Contract documentationWhen preparing an ECC specification, the mini-

mum differences between conventional and ECCpractice are

the relocation of the specification material intothe works information, site information andthe contract data

changing the terminology in existing specifi-cations to the terminology used in the ECC,for example from engineer to project manag-er or supervisor as appropr iate and from

constr uction plant to equipment.

However, a view often expressed is that theNEC system will highlight any shortcomings anddeficiencies by project part icipants, whatever sideof the industry they originate from, as the defini-tions of roles, risks and processes are muchtighter than in other forms of contractor in thewords of one employer, there are no hidingplaces in the NEC. This is especially tr ue in thepreparation of the contract documentation, whichis often cited as the main cause of delays and inef-ficiencies, and hence claims and disputes, whatev-

er the conditions of contract used.5

Four general guidelines given to the author byinterviewees are as follows.

Make sure, as far as possible, that the infor-mation given wil l not change during the con-struction phase. This is a generally acceptedprinciple of good project management.

Do not state similar things in slightly differentways in different places of the specificationand drawings. Instead, cross-reference themto one place. This helps to avoid the tendencyto alter the text in only one place later on andintroduce ambiguities.

Avoid subjective statements such as in theopinion of and to the satisfaction of. I t is bet-

ter to state a standard based on the designersbest judgement at the curr ent time thaninclude a potential source of argument.

At every stage of the preparation and reviewof the specification and drawings, designersshould ask if it is clear to the contractor whathas to be done. If unsure, they should eitherstate their requirements as a performancespecification or find out more information andproduce a precise description. If they cannotdo either, they should omit that component ofthe design from the works information, butinclude a contingency in the overall estimatefor the project.

A few employers have rewrit ten their contractdocumentation into language similar to the ECCand to guidelines available from the Plain EnglishCampaign.6

Attitudes and educationThere is strong evidence that those projects

which are run in the spirit and intent of the NEC,and by its procedures, lead to a more successfuloutcome than those where tradit ional attitudesand practice prevail. Therefore all par ticipantsneed to be educated in what the spirit, intent and

procedures of the contract are, as well as the rea-sons behind them.

Education can star t at the tender stage.

Fi g. 7. South elevati on

of new B io-sciences

buil ding at Leeds

University ( cour tesy of

Frankli n Andrews)


77


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Employers should inform contractors why theyare using the ECC (having first asked them-selves) and what the advantages to the contractorare. The introduction of the ECC can be a strongsignal that employers wish the nature of relation-

ships to change. Employers have found that whenthe above has been done, the quality of tenders ishigher.

Because of the relative newness of the NECfamily of contracts, the majority of personnel onboth sides of the industry will be unfamil iar withit when they are assigned to a project. Someemployers give a talk to all staff who will beinvolved in the running of the contract. Some con-tractors have done this internally and have pro-duced guides for their employees on what theyhave to do to conform to the contract and site pro-cedures.

When triall ing the NEC, organizations on both

sides of the industr y have selected their moreprofessional individuals who are more suited to acooperative style of management. This raises thequestion of whether it is the education, the per-sonnel or the NEC/ ECC which causes greatercooperation. Research elsewhere has shown thatgood project management leads to cooperation.7, 8

The authors view, based on the research obser-vations, is that the ECC, by stimulating good man-agement, helps preser ve and enhance coopera-tion but training and good personnel create theinitial conditions for it to flourish.

TenderingThe aim of the authors of the ECC was to drawa clearly distinguishable financial line betweenthe work that the contractor tendered for and forwhich it is responsible and any other events forwhich the employer is responsiblethe compen-sation events. The contractor, in preparing a ten-der, should bear this in mind.

Many project managers and contractors haveexpressed the view that it is much harder for acontractor to make up for a low bid through varia-tions and claims on an NEC contract comparedwith other forms of contract. This has beenobserved on a number of contracts.

Contractors which have not paid sufficientattention to the following two items have had diffi-culty in recovering the additional costs to whichthey are entitled

the programme to be submitted either withthe tender or within a stated period after thecontract date and which, if accepted by theproject manager, becomes the accepted pro-gramme

the cost data for use with the schedule of costcomponents which is included as par t of thetender in par t I I of the contract data.

Accepted programmeThe programme is given much higher priority

in the ECC than in other contracts. What a pro-gramme is required to show is stated comprehen-sively in clause 31.2 and includes method state-ments and resource levels.

The following points should be borne in mind

when preparing a programme.

A quar ter of the price for work done to dateis withheld until a programme which showsthis information is presented to the projectmanager.

The project manager can assess a compensa-tion event directly if the latest programme does not contain the

necessar y information the latest programme is not acceptable to

the project manager (and there is a con-tractual reason for not accepting it)

the contractor does not submit a quotation

within the specified t imescale. If the project manager does assess a compen-

sation event, the assessed effect on the con-tractors actual cost and delay to planned com-pletion is l ikely to be less than the contractorsassessment would be. This is because the pro-ject manager can only judge the contractorsquotation or make an assessment on the basisof the information available when the quota-tion is or should have been submitted.

Once the project manager accepts a pro-gramme, the employer is committed to provid-ing things such as possession of par ts of the

site, completion of work by other contractors,equipment, tests and access by dates shownon the programme. Failure to do so is a com-pensation event. This clarifies the responsibili-ty of the contractor to provide the works andenables the contractor to drive the contractforward. Only four contractors that the authorinter viewed said they realized this at the star tof their contract.

One contractor which did realize the impor-tance of the accepted programme installed pro-gramming software on site and updated the pro-gramme fortnightly. On two contracts, the con-

tractors expected profit increased by 34%ofturnover and in both cases, completion wasachieved within the original programmed dateand the final account was settled by the originalcompletion date, despite extensive problems onone contract. The site agent stated that in 10years in that position the only two contractswhere this had been achieved were NEC ones.

Cost data for the schedule of costcomponents

The cost data for the schedule of cost compo-nents are required to be tendered in part I I of the

contract data. A number of contractors haveadmitted, with the benefit of hindsight, that theyhad not taken enough time to understand and

BROOME

78


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complete it. Consequently, some of the figuresentered have been unrealistic.

If they are too high, the contractor may not winthe contract or will be making money on compen-sation events at the employers expense. If toolow, the contractor wi ll be losing money onchanges and when this is later realized, it maywell affect the contractors motivation to collabo-rate. Employers should therefore also look closelyat these figures.

Staffing and authority levelsOne of the aims of the ECC is to define precise-

ly the roles of the principal project participants.To satisfy the specified timescales within theECC, most of the decision-making authority hashad to be driven down to project level.

On large projects the authority of the projectmanager has been delegated into sectional areas.When, on occasions, the project manager has torefer upwards for a decision, the employer mustensure that the decision can be made within thetimes stated in the contract. The ECC requires

that all delegations of the project managers andsuper visors authority are clearly stated and com-municated to the contractor.

Because changes and variations are assessedand agreed as the contract progresses, moreadministrative and management time is spentduring the contract period, rather than once thecontract has been completed. Both employers andcontractors should staff the contract accordinglyand monitor the level of compensation events tomake sure that a backlog in assessing compensa-tion events and preparing quotations does notbuild up with the result that periods for reply can-

not be met.

CommunicationsThe ECC has tight t imescales for notification

and reply and a logical and structured approachto information flows. Virtually all the contractsobser ved have had a system of pro formas eitherin place or rapidly put in place once work on sitehad begun. This can be developed using the flowchar ts with reference to the project characteris-tics.

However, because of the tight timescales withinthe ECC, there is l itt le time to come to a decision

by wr itten correspondencemost decisions willhave to be arrived at by face-to-face discussion.However, any communication that is to have a

79

Fi g. 8. New

Eur olounge transi t

bui lding at Gatwi ck

Ai rpor t ( cour tesy of

Kyle Stewar t)


7/8

contractual standing has to be in a form whichcan be read, copied and recorded (ECC, clause13.1).

It is suggested by the author that the system ofpro formas should direct people to wri te downand state the decisions and actions that have beentaken, not to discuss the problem or solution. Itshould extend down to include subcontractors inthe decision-making process. A monitoring sys-

tem should be set up to ensure that thetimescales are adhered to.

Compensation event procedureOn the basis of comments made to him by

inter viewees, the author considers that generallynot enough time is spent agreeing the underlyingprinciples on which the compensation event is tobe assessed, before the detailed cost and timeimplications are worked out and agreed. This canresult and has resulted in wasted staff time. If theproject manager wants accurate and realistic quo-tations, then the contractor should be suppliedwith sufficiently detailed information on which to

base that quotation.The author has attempted to formalize an

approach which has evolved on some projects forthe assessment of compensation events and sug-gests the par ties agree, in order

the cause of the compensation event the desired solution and any conditions or

assumptions behind this the change in the contractors method of

working the additional risks in this new method and

who takes them

the changes in the total quantity (amount mul-tiplied by duration) of labour, equipment, plantand materials that are directly involved in the

activity and which wil l r esult in additional cost(for example an additional 2 h use of a piece ofequipment which is hired on a daily basis doesnot necessari ly increase the contractors costs)

the change, if any, to the overall duration of

the contract the change in actual costs related to each of

the last three points.

The author asked a number of experiencedNEC par ticipants to cri tique this approach. Thegeneral response was that they would have foundit useful, par ticularly at the star t of a project theywere involved in. Adoption of this approachshould save time, decrease the likelihood of acri-mony developing and assist users in overcomingtwo common situations found on projects.

The first is when a series of independent andminor compensation events occur which, if only

one occurred, would have a minimal effect ontime, but when a number occur start to have asignificant effect. An example would be when anunexpected service crosses a new trench which isbeing dug and delays the works by a few hours.The contractor is entitled to additional costs forthe extra work in moving the service and for thecompletion date to be extended by a few hours.However, it would be impracticable for the con-tractor to present a full and rescheduled pro-gramme for acceptance by the project manager. Iffive or six unexpected physical obstructionsoccur, each of a few hours duration, then the

activity would take one to two days longer. Inpractice, project managers and contractors haveagreed to wrap up these minor time effectswhenever a new programme is due for submis-sion. If the completion date is extended, then thecontractor is paid its additional time-related costs.

The other situation is when the full extent of aproblem is not known. For instance, the contrac-tor might come across an unexpected soft spot inthe ground, yet the size and thereforeconsequences of it are unknown at the time ofdiscovery. The project manager may instruct thecontractor to dig tr ial holes so that the size of thesoft spot becomes known. This would be valued

using records. The contractor is instructed to pro-vide a quotation once enough information isknown. This quotation would include the changein actual cost of the work already done, as well asthe forecast actual cost of completing the addi-tional work. A stated assumption could be that thesoft spot has a certain depth and that i f th is isexceeded then an additional compensation eventresultsthe employer takes the risk.Alternatively, the contractor could take the risk(and be paid a premium for it).

Additionally, when a compensation event occursunder the ECC, the project manager has the

option of asking the contractor for a quotation tokeep to the original completion date, for a least-cost solution or to price different technical solu-

Fi g. 9. Opti ons under

which contracts

researched were let

( sample size = 28)

BROOME

80

Option A = 16

Option A Priced contract with activity schedule.

Option B Priced contract with bill of quantities.Option C Target contract with activity schedule.

Option B = 7

Option C = 5

Option A = 16


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tions. In order to choose between alternative quo-tations and risk allocations, the project managershould be aware of the employers priorities con-cerning t ime, cost and quality for the contract, aswell as the employers atti tude to risk.

On recorded work, the only profit that contrac-tors should make from compensation events isfrom the profit in the fee percentage. However,contractors are entitled to include risk in theirquotations and the following two strategies havebeen adopted by some.

Pri ori ti zing the assessment and agreement ofwork that has not yet been done. Once the costand time implications of the compensationevent have been agreed with the project man-ager, contractors then have the incentive towork efficiently and possibly increase theirprofit . The employer gains by having a fixed

quotation and potentially paying less. Quote for di srupti on. I f a compensation event

occurs on a current activity, the effect onprogress may be hard to quantify because ofknock-on effects. The project manager andcontractor have then negotiated a sum overand above the actual cost of doing the workfor the compensation event. This figure isbased on the risk of disruption and an esti-mate of the cost of putting the project back onthe original programme should the disruptionoccur. This is a relatively subjective figure andrequires the project manager to see risk from

the contractors point of view. The projectmanager can then compare this figure withthe overall cost of a delay to the employer.

ConclusionsIn the words of one project manager experi-

enced on NEC projects, You need to hit theground with your feet r unning, because whereyou get hit hardest is in the early stages. This isbecause, in the early stages, there is likely to bethe greatest uncer tainty ( for instance, as theground is opened up), yet the site organizationwill be least set up to deal with i t.

Well-prepared works and site information will

reduce uncer tainty and possible changes, but thisis true under any conditions of contract. On anECC contract, a more appropriate contract strategycan be selected. Par ticipants will help themselves ifthey have the right people with the right authority,educated in the spirit, intent and procedures of theECC, and an accepted programme and pro formasin place on site at the star t of the contract.

Whereas different individuals who have beeninvolved in contracts run under the NEC family ofcontracts have varying strengths of opinion, somecommon benefits are emerging. The par ties to acontract feel they have greater knowledge of the

likely financial and time outcome of the project atany time during its duration. With this knowledgeemployers and their project managers have

greater certainty of completing the project totheir time and cost objectives, as they have beenable to use that knowledge, by way of the mecha-nisms in the NEC, to influence the outcome.

A strong view is that the final account is settled

much sooner after completion, often within twomonths if not faster. Contractors have almost uni-versally commented on having a much better cashflow (as they receive money quicker for workdone) and hence increased profi t. Par ticipantshave commented on the greater degree of cooper-ation and openness compared with normal con-tractsthis lack of conflict and dispute is reflectedin the relatively fast settlement of the final accountand few referrals to an adjudicator.

A number of contractors have said that theycould not see the contract in which they wereinvolved achieving completion as early as they didunder any other form of contract, owing predomi-

nantly to the increased emphasis on planning andworking with the employer. This has also led toan increase in their profit margin.

Lastly, the effect of the ECC in highlighting anydeficiencies and shor tcomings should, if viewedconstructively, lead to a steady improvement inthe professionalism of engineering and projectmanagement personnel and organizations. Whilestressing that it is hard to distinguish between theeffects of the use of the NEC and the effects ofgood personnel and project management in gen-eral, par ticipants have attributed these outcomeslargely to the former. The contracts that have

achieved these objectives have displayed many ofthe considerations outl ined in this paper.

AcknowledgementsThe author would like to thank the EPSRC,

National Power plc and, more recently, LondonUnderground Ltd for their financial suppor t, andmany other companies for the time they havegiven for th is research.

References1. INSTITUTION OF CIVIL ENGINEERS. The New Engineeri ng

Contract. Thomas Telford, London, 1993, 1st edn.

2. INSTITUTION OF CIVIL ENGINEERS. The NEC Engineeri ng

and Constr uction Contra ct. Thomas Telford, London,1995, 2nd edn.

3. OPPENHEIM A. N. Questi onnai re design and atti tude

measurement. Heinemann, London, 1966.

4. BLUMER H. Symbolic interacti onperspective and method.

Prentice Hall, Englewood Cliffs, New Jersey, 1979.

5. AUSTRALIAN CONSTRUCTION SERVICES, DEPARTMENT OF

ADMINISTRATIVE SERVICES, et al. Stra tegies for the reduc-

ti on of clai ms and disputes in the constr uction i ndustry

a research repor t. Queensland, Nov. 1988.

6. CUTTS M. and M AHER, C. The Plain English story.

Plain Engl ish Campaign, Stockpor t, 1986.

7. AL-SEDAIRY S. T. Management of conflict: public sector

constr uction in Saudi Arabia. In t. J. Project M gmt, 1994,

12, No. 3, 143151.

8. M OHSINI R. A. and DAVIDSON C. H. Determinants ofper formance in the traditional building process.

Constr uc. Mgmt Econ., 1990, 10, 343359.


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best practice with the new engineering contract

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