The new NEC4 contract – the end of Z clauses?

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Summary and implications

12 years since the launch of the NEC3 suite of contracts, the NEC is bringing out its next edition of contract in June – the logically (and predictably) named NEC4. The NEC3 contract introduced a different behavioural mind-set to project delivery through collaboration, active project management and the early identification and allocation of risks to the parties best able to manage it.

According to the NEC's recent paper entitled “The next generation; an explanation of changes and benefits”, the NEC4 builds upon the success of the NEC3 by taking into account the direct feedback from the industry in order to improve the contractual framework whilst retaining the core NEC3 principles. In particular, the NEC confirmed that they sought to plug the gaps in the suite identified by employers to avoid the need for Z clauses to be regularly incorporated. However, will this actually spell the end of Z clauses going forward?

Changes in terminology

Prior to looking at the new features, it is helpful to understand some of the changes in terminology in the new suite identified by the NEC. For example:

• the Employer will be the Client in all the forms save for the Supply Contract;
• the Scope will be the document describing the works in all forms for consistency replacing the Works Information in the ECC, the Service Information in the TSC and the Goods Information in the SC;
• the Risk Register has been renamed the Early Warning Register;
• Section 8 (Risk) in the contracts has been renamed Liability and Insurance;
• Secondary Option X4 (Parent company guarantee) has been renamed Ultimate holding guarantee; and
• Secondary Option X12 (Partnering) has been renamed Multi-party collaboration.

New main features highlighted by the NEC

Assignment

A new core clause has been introduced to permit either party to assign their rights under the contract to another party.

Building Information Modelling (BIM)

NEC4 incorporates a new secondary option for the use of BIM. It deals with issues pertaining to the Information Model, ownership of information and liability of the parties.

Bribery and corruption

Core clauses have been included to keep up to date with legislative changes brought about by the Bribery Act 2010 and the enhanced safeguards often required by Clients.

Compensation events

Additional compensation events may now be added by the Client in the Contract Data Part One. A new compensation event has also been added in the core clauses entitling the Contractor to claim its cost of preparing quotations for a proposed instruction which are not accepted by the Project Manager.

Confidentiality

Additional core clauses have been incorporated to restrict the disclosure of confidential information relating to the Project.

Contractor's proposals

The Contractor now has the option to propose an acceleration to achieve Completion before the Completion Date. There is also a new secondary option for the Contractor to make a proposal to change the Scope in order to reduce the cost of an asset over its lifecycle.

Collateral warranties

There is a new secondary option for the provision of collateral warranties to other parties with an interest in the project.

Design and build option

The NEC has added a new secondary option for design and build contracting, which before was only set out in the Works Information. This deals with:

• professional indemnity insurance requirements;
• aligning the Contractor’s standard of skill and care for design to that commonly used by professionals designing similar works;
• copyright licences; and
• retention of documents.

Early Contractor Involvement (ECI)

The clauses previously published by the NEC for early contractor involvement in 2015 have been directly incorporated as a new secondary option. The ECI permits the Client to appoint the Contractor at an early stage to input into the design process to innovate and eliminate risks to achieve better cost and time certainty.

Final assessments

NEC4 contracts also include new procedures for agreeing final amounts due. In the cost based contracts (main options C, D, E and F), the Contractor notifies the Project Manager when the Defined Cost is ready for review. The Project Manager then reviews it within 13 weeks and either accepts it or advises of errors. The sanction for the Project Manager’s non-compliance is that the Defined and Disallowed Costs are accepted, which encourages the parties to assess such costs regularly rather than just at the end of the project. There is also a new requirement in all the contracts for the Project Manager to issue its final assessment of the payment due to the Contractor within four weeks of the Defects Certificate. If the Project Manager does not do this, the Contractor can issue its own final assessment like in JCT contracts. The final assessment becomes conclusive if not challenged and referred to dispute resolution within four weeks of it being issued (again similar to JCT contracts).

Schedules of Cost Components and Fee

The Shorter Schedule of Cost Components has been deleted in NEC4 contracts main options C, D and E leaving only the Schedule of Cost Components in these contracts to assess Defined Cost for simplicity. Subcontractor costs have been moved across to the SCC and payment has been made consistent across the options. The rules for people have also been significantly changed, so that if people’s normal place of works is within the Working Areas, their time spent working “on this contract” will be included within Defined Cost as opposed to just their time spent within the Working Areas. Further, there is no longer a separate fee percentage for subcontracted works.

Tiered dispute resolution

A consensual four-week negotiation period between nominated senior representatives has been introduced for projects in the UK. It is mandatory for international projects. The ECC now also includes a dispute avoidance board option for international projects similar to the DAB in FIDIC contracts.

Conclusion

The NEC’s willingness to take on direct feedback from the industry is a positive step to improve the NEC4’s contractual framework and to plug some of the obvious gaps in the legal risks generally allocated within engineering and construction contracts. The need for Z clauses consequently appears to have been lessened as a result in the NEC4 suite, but they will no doubt still be used by parties to varying degrees in line with current market practices to address specific commercial and project requirements.