Latest Updates to NEC4 Contracts – third set of amendments published

The Institution of Civil Engineers has recently published the third set of updates to its NEC4 suite of contracts (January 2023), following the previous updates in January 2019 and October 2020. These updates track changes in best practice, developments within the industry and feedback from users and stakeholders across the sector.

As a reminder, the NEC suite of contracts is designed to promote collaboration and proactive risk management between its users. The Cabinet Office has endorsed the NEC4 suite for use in public sector projects, so understanding each update is important for those procuring and tendering construction works in that area.

Nearly all of the contracts within the NEC4 suite have been amended in the January 2023 update. This article focuses on the most commonly used contracts, being the Engineering and Construction Contract (ECC), the Engineering and Construction Sub-Contract (ECS). These are accompanied by “short” versions, being the Engineering and Construction Short Contract (ECSC) and Short Sub-Contract (ECSS).

Adjudication – All contracts including the Y(UK)2 Option

Under the previous drafting, clause W2.3(2) provided that all adjudication submissions (“any further information from a Party to be considered by the Adjudicator”)  were required to be made within 14 days of the referral unless extended by agreement between the parties and the Adjudicator.

The new amendment replaces the default position by providing that the Adjudicator decides the procedure and timetable to be followed in the adjudication, which brings the provision in line with the Housing Grants, Construction and Regeneration Act 1996.

For those interested, the amendments achieve this by:

  • deleting the last two sentences of W2.3(2); and
  • replacing W2.3(5).

Working from home and other locations outside the Working Area now part of Defined Cost

Both the ECC and the ECS have several main “Options” for pricing the contract works. Options A and B are priced contracts, Options C and D are target cost contracts and Option E is a cost reimbursable contract.

All Options refer to a definition of “Defined Cost” in the valuation of a Compensation Event (or the calculation of the Price itself under Option E). The Short Schedule of Cost Components sets out the components which are included in the assessment of Defined Cost for Options A and B, the Schedule of Cost Components applies to Options C, D and E.

Previously, there were specific components within those Schedules which accounted for the cost of people who were working within the “Working Areas”. As hybrid and remote ways of working are increasingly becoming the “new norm”, the new amendments have addressed this issue by expanding the components to include costs for people working on the contract outside the Working Areas.

Specifically, component 1 in the Schedule of Cost Components has been replaced and there is now an option for the Contract Data to identify people working outside of the Working Areas whose costs are included in the Defined Cost, even if they are not normally based within the Working Areas.

Component 11 in the Short Schedule has been amended to replace the reference to time spent within the Working Areas to the time spent on work in the contract, allowing the cost of people who would normally be based in the Working Areas to be recovered if working on the contract from elsewhere.

Option X29 – Climate Change

First published in July 2022, option X29 was a standalone secondary optional clause aimed at achieving net-zero emissions and more sustainable building practices by supporting and incentivising carbon reduction. It will now be included within all of the major NEC4 contracts and sub-contracts.

Climate change requirements can be included within the Scope and users can set financial incentives for achieving certain targets set out within a performance table.

Option X22 – Early Contractor Involvement

Available in Options C (target contract with activity schedule) and Option E (cost reimbursable contract), optional clause X22 creates a two-stage contract with the details of each stage set out in the Scope. Stage one is the pre-construction phase, with development of the scope, detailed design and agreement on price. Stage two is the construction phase, which includes the completion of any remaining detailed design.

The amendments to Option X22 aim to introduce more flexibility during the first phase as the project is developed and greater certainty where the Contractor is not engaged for the construction phase. This is achieved by:

  1. Allowing the Project Manager and Contractor to agree changes to the Site Information during Stage One. As a reminder, the Contractor is assumed to have taken into account the Site Information when judging the physical conditions of the Site when assessing a Compensation Event.
  2. Providing that Compensation Events originally judged against the Contract Date are now judged against the date of the notice to proceed to Stage Two. This allows the information gathered in Stage One, including any agreed changes to the Site Information, to be taken into account in assessing the Stage Two Compensation Events.
  3. Including any Compensation Events before the date of a notice to proceed within the changes to Prices and Completion Dates in the notice to proceed. All outstanding Compensation Events can therefore be dealt with as part of the transition to Stage Two instead of requiring a separate resolution.

Design Liability in Short Contracts (ECSC and ECSS)

The default design provision in the short versions of the Engineering and Construction contracts previously imposed a “fitness for purpose” obligation in relation to design carried out by the Contractor. This is a strict legal obligation which, unlike a requirement to exercise reasonable skill and care, does not necessarily require the Contractor to have acted negligently to be in breach.

A professional indemnity insurance policy will exclude cover (or void the policy altogether) where the insured has agreed to a fitness for purpose obligation. For that reason, such obligations are usually negotiated out as a void PII policy does not benefit either party.

The amendments have introduced an Option within the ECSC Contract Data to limit the Contractor’s design liability to the exercise of reasonable skill and care to reflect the current reluctance within the industry to accept a fitness for purpose obligation. A similar amendment made in relation to Sub-Contractors in the ECSS.

For context, both the ECC and ECS have Option X15 relating to design which provides that the standard of care is “the skill and care normally used by professionals designing works similar to the works“.

Limitation on Liability in Short Contracts (ECSC and ECSS)

As a final note, the (Sub)Contract Data has been updated in the short contracts to include an optional limitation on liability. This reflects the main contracts which can include a limitation on liability in Option X18.

Publication of the new JCT 2023 suite of contracts had been expected prior to 2023. However, this is now expected to be published in late 2023 or early 2024, so we have slightly longer to wait until then.

For advice on this or any other construction and engineering related issues or support, please contact our team and we will be happy to help.

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