Principles of NEC Dennis Li HKCIC Lecturer Lecture

Principles of NEC Dennis Li - HKCIC Lecturer

Lecture 7 Remaining Contract Provisions and a Review • Other Contract Provisions ▫ Managing a CE ▫ Title ▫ Comparison between NEC and GCC • Hong Kong’s NEC Contract ▫ ▫ History Practice Notes Open Book Accounting Subcontracting

27 January 2011 B&V QUOTATIONS FOR COMPENSATION EVENTS • The Project Manager has to instruct the Contractor to submit quotations for all compensation events • Quotation for compensation events proposes changes to the Prices and Completion Date assessed by the Contractor

NOTIFICATION PROCESS The PM The Contractor CE Notified (Cl. 61. 1) 61. 3) Notes CE must be notified before the defects date (Cl. 61. 7) C notify CE within 8 weeks of the event. Instruction to submit Quotation (Cl. 61. 3) (Cl. 61. 1 or 61. 4) Gives notice if no EWN was issued (Cl. 61. 5) Quotation accepted, or revision instructed or PM assesses (Cl. 62. 3) 3 weeks Quotation(s) Submitted (Cl. 62. 3) 2 weeks See Notes on Assessing CEs PM replies within 1 week and may instructs C to submit quotation unless the event is the C’s fault … etc (Cl. 61. 4) PM may make assumptions (Cl. 61. 6) PM must give reasons for requesting a revised quotation (Cl. 62. 4)

CE - QUOTATION & ASSESSMENT The Assessment • Changes to Prices - consider the effect of the CE upon The actual Defined Cost of the work already done The forecast Defined Cost of the work not yet done The resulting Fee • Delay to Completion Date the delay on planned Completion caused by the CE. • Contractor’s cost and time risks included that have a significant chance of occurring are included. • Basis of Assessment Contractor reacts competently and promptly to the CE; additional cost and time that are reasonably incurred & the Accepted Programme can be changed. • Assessed as if Contractor had given an EWN • The PM assesses a CE in certain circumstances (Cl. 64. 1 & 2) • PM implements the CE and notifies the Contractor of the changes to the Prices and the Completion Date.

6 Compensation Events - Sanctions Time Bar 61. 3 Contractor notification tests – 8 week time bar Default Acceptances 61. 4 Default acceptance of compensation event if no response from the Project Manager within the correct timescales (1 week + 2 weeks) 62. 6 Default acceptance of quotation if no response from the Project Manger within the correct timescales (2 weeks + 2 weeks)

What if the C does not provide the quotation/ revised quotations within 3 weeks?

PM’s assessments (Cl. 64. 1) • The PM assesses a compensation event ▫ If the C has not submitted a quotation … within the time allowed ▫ If the PM decides that the C has not assessed the compensation event correctly … ▫ If C submits the quotation without a programme which this contract requires him to submit; or ▫ If, when the C submits the quotations, the PM has not accepted the C’s latest programme

27 January 2011 B&V DEFINED COST (52. 1) Principle – Defined Cost includes only amounts calculated using rates and percentages stated in the Contract Data and other amounts at open market or competitively tendered prices with deductions for all discounts, rebates and taxes which can be recovered

Quotation for CE: Build-up from People, Equipment, Plant and Materials …? Or by quotations of Subcontractors?

27 January 2011 B&V DEFINED COST Defined Cost under Options A & B is (Cl. 11. 2(22)): ▫ The cost of the components in the Shorter Schedule of Cost Components whether work is subcontracted or not excluding the cost of preparing quotations for CEs Less Disallowed Cost. Defined Cost under Options C & D is the same as what used for Payment. If PM and C agree, the SSCC can be used for assessment.

Assessing compensation events • Assessment of the effect of a compensation events includes risk allowance for cost and time for matters which have a significant chance of occurring and are at the C’s risk under the contract (Cl. 63. 6) • The assessment of a compensation event is not revised if a forecast upon which it is based is shown by later recorded information to have been wrong (Cl. 65. 2)

Discussion – Addition of Works § Can the price stated under the Activity Schedule/ BQ be adopted as a basis for valuing additional works?

Discussion – Addition of Works • The valuation should be based upon what it will cost the Contractor to do, called Defined Cost (Cl. 63. 11). • The amount added is not based upon what the Contractor has in the Activity Schedule for the additional works. • However, if the PM and the C agree, rates and lump sums may be used to assess a compensation event. (Cl. 63. 14)

Discussion – Review of Project Manager’s Assessment § For a instruction issued by the Project Manager which is considered as a compensation event, the Project Manager has provided his own assessment after rejecting the Contractor’s quotation. § Can the Contractor reject the Project Manager’s assessment and provide a revised quotation? Or can the Contractor refuse to carry out the instruction unless the price is agreed?

Discussion – Review of Project Manager’s Assessment • The Contractor is obliged to put that instruction into effect and cannot “consent” to anything other than that (Cl. 14. 3, 27. 3 and 61. 1). In other words the Contractor cannot refuse to do the work until the price has been agreed. • Once the Project Manager has notified the Contractor of his assessment then the compensation event is implemented (Cl. 65. 1) and that is the end of the matter (Cl. 65. 2). If the Contractor is not happy he can only go to the Adjudicator.

EXERCISE – CEs & Assessments Nr Question 1 Can the PM do anything to determine the likely effect on the Prices and Completion Date of a change to the WI which he is considering but has not yet instructed. If so, what? 2 The Contractor has stated a price for 8 Nr specific DI couplings in the Activity Schedule as $800, i. e. $100 each. The Fee stated in the Contract Data Pt 1 is 25%. The true market price to purchase such a coupling is currently $500. A PMI is issued which changes the type of couplings to ones which costs $600 each. Assuming this does not delay planned Completion, how is the CE assessed, and what is the change in the Prices? No work has started yet. 3 How might your answer differ (and on what grounds) if the Contractor had already purchased the original couplings when the PMI was issued? Answer

EXERCISE – CEs & Assessments N Question r Answer 2 Can the PM do anything to determine the likely effect on the Prices and Completion Date of a change to the WI which he is considering but has not yet instructed. If so, what? The PM may instruct the Contractor to submit quotations for a proposed instruction pursuant to clause 61. 2. 3 The Contractor has stated a price for 8 Nr specific DI couplings in the Activity Schedule as £ 800, i. e. £ 100 each. The Fee stated in the Contract Data Pt 1 is 25%. The true market price to purchase such a coupling is currently $500. A PMI is issued which changes the type of couplings to ones which costs $600 each. Assuming this does not delay planned Completion, how is the CE assessed, and what is the change in the Prices? No work has started yet. Changes to the Prices are assessed as the effect of the CE upon the forecast Actual Cost. Therefore, the tender /AS prices etc are of no relevance. The FAC of the original couplings at the time of the CE = $500 x 8. The CE alters this to $600 x 8, being an additional $800 in total. Plus a Fee of 25% and the Prices are increased by $1, 000. 4 How might your answer differ (and on what grounds) if the Contractor had already purchased the original couplings when the PMI was issued? In this case, the ‘effect’ on Actual Cost would be the full additional cost of the new couplings – ($600 x 8) plus 25% Fee. Credit or savings (restocking) etc would reduce this if it was foreseen as reasonably achievable.

What would be the VVO if this is GCC?

Discussion – CE Quotation Preparation and Assessment § There is a CE notified by the PM on the road re- construction work where design is changed due to latest comments from the DC members. It is a major part of the works and the C agrees that works will be proceeded during quotation preparation and assessment to avoid lengthening contract duration. § As works progresses, some of the risk allowance such as number of TTAs that was originally allowed in the quotation has been clarified, i. e. C allows for 4 TTA schemes in the original quotation, turns out the Police was lenient and allowed 3 longer TTA schemes. § Should the quotation be revised to include the price of 3 TTA schemes only?

Discussion – CE Quotation Preparation and Assessment § Cl. 63. 1 The changes to the Prices are assessed as the effect of the compensation event upon § The actual Defined Cost of the work already done, § The forecast Defined Cost of the work not yet done and § The resulting Fee § (Cont’d) If the CE arose from the PM or the S giving an § instruction, …. , the date which divides the work already done from the work not yet done is the date of that communication. In all other cases, the date is the date of the notification of the CE. However, in reality it is very difficult to resist the temptation of using actual cost.

GCC vs NEC • Which one is better?

Time Control GCC NEC 3 Programme is specified to More stringent requirements require the details on on details to be shown on sequence, method and timing programme. Approval of programme is not explicitly required Requires regular updates and acceptance of programme Specified period for reply to speed up communication and ensure timely resolution of site issues.

Approach to Underground Risk GCC NEC 3 Re-measurement approach Physical conditions for payment to ensure unforeseen by experienced Contractor gets paid on the Contractor based on excavation works in different information available are a ground conditions. compensation event where additional cost and time will SCC allows Eo. T claim for be compensated. unforeseen utility works

Approach to Problem Solving GCC NEC 3 No particular provisions on First clause, Clause 10. 1, project management and requires the parties to act in a partnering in the contract. The spirit of mutual trust and Engineer or ER are expected to cooperation, which calls for use their experience and skills adopting a partnering to manage the contract approach. Non-contractual partnering can be carried out to enhance team spirit and overall efficiency Early warning mechanism, risk register and risk reduction meeting are in place to promote risk management

Cost and Change Management GCC Adopt re-measurement approach for payment NEC 3 Different payment methods, e. g. re-measurement, costplus, target cost and lump Engineer may make sum, are available appropriate change of rates if actual quantities of work is The principle of substantially different from compensation event is that those in BQ the Contractor will not be better or worse off due to Valuation of variation is Employer’s risk events based on contract BQ rates that ensure cost certainty.

Hong Kong’s NEC contract

NEC in Hong Kong • The “Construct for Excellence” Report (CIRC in 2001) ▫ wider adoption of partnering • From 2001 ▫ Non-contractual partnering ▫ To 2008, 86 public work projects • In 2006, Government decided to try out NEC 3

NEC in Hong Kong • Steering Committee on NEC Pilot Projects under DEVB ▫ Steer the direction ▫ Oversee implementation • Working Committee under DSD ▫ Provide recommendations to SC ▫ Monitor progress of implementation • Representatives from DEVB, LAD(W), ICAC, Works Departments, 29 29

NEC in Hong Kong ▫ In 2006, DSD appointed NEC technical consultants to advise on : NEC Option evaluation Tendering strategy Contract administration procedures Drafting of NEC tender documents ▫ LAD(W) appointed legal adviser to provide advice on legal parts of tender documents 30 30

NEC in Hong Kong August 2009, award the pilot NEC contract – DC/2008/02 Improvement of Fuk Man Road Nullah in Sai Kung Subsequently Arch. SD, Hy. D, WSD, CEDD/GEO had subsequently launched their NEC Contracts. More than 100 NEC ECC and PSC Contracts are implemented/ planned to implement to date

The Practice Note for NEC for Public Works Projects in HK http: //www. devb. gov. hk/en/publications_and_press_releases/publications/standard_contract _documents/practice_notes_for_new_engineering_contract_engi/index. html

“Construct for Excellence” Report in 2001 The construction industry today • The industry is very fragmented and is beset with an adversarial culture. • Many industry participants adopt a short-term view on business development, with little interest in enhancing their long-term competitiveness. • There is a tendency to award contracts to the lowest bidders and delivery programmes are often unrealistically compressed. • Accountability is undermined by the prevalence of non-value adding multi-layered subcontracting and lax supervision. • An inadequately trained workforce also impairs the industry’s ability to adopt new technologies and to cope with new challenges.

“Construct for Excellence” Report in 2001 Vision for Growth and Development • • • Foster a quality culture. Achieving value in construction procurement Nurturing a professional workforce Developing an efficient, innovative and productive industry Improving safety and environmental performance; and Devising a new institutional framework to drive the implementation of the change programme for the industry.

“Construct for Excellence” Report in 2001 Foster a quality culture • Efforts should be made to secure more integrated input from different disciplines at the outset and to allow sufficient time for all stages of project development and implementation • To improve construction quality, non-value adding multi-layered subcontracting must be eradicated. Clients can give impetus to this development by requiring their contractors to engage registered subcontractors only • Emphasis should be placed on site inspections instead of paperwork. Independent technical audits should be carried out on a regular basis during project implementation to guard against substandard work.

“Construct for Excellence” Report in 2001 Achieving value in construction procurement • Best value does not necessarily equate with the lowest initial tender price; it also encompasses various quality considerations as well as longer-term benefits • To encourage consultants and contractors to continuously improve their performance and to offer better value, clients should give balanced consideration to both price and quality in tender evaluation. • As past performance will become one of the key quality criteria to be taken into account, an objective and transparent system for assessing the performance of consultants and contractors during project implementation is necessary

“Construct for Excellence” Report in 2001 Achieving value in construction procurement • Clients should offer debriefings to unsuccessful bidders and carry out post-completion reviews with consultants and contractors to provide feedback on their performance • In view of the industry’s widespread concern about the current allocation of risks under the GCC, the Government should urgently reconsider the recommendations on risk allocations based on best international practice. • The resolution of disputes can be expensive and time-consuming. We urge employers, consultants and contractors to adopt a proactive approach to resolving claims and disputes as they arise. • We advocate the wider adoption of a partnering in local construction so that all project participants will work as a team to achieve shared project objectives rather than in competition with one other.

Use of the NEC in Hong Kong by HKJC in 1993 - 1996

Use of the NEC in Hong Kong by HKJC in 1993 - 1996 Quantity Surveyor – Mr. Alan Parry, Partner, Levett & Bailey

Use of the NEC in Hong Kong by HKJC in 1993 - 1996

Use of the NEC in Hong Kong by HKJC in 1993 - 1996 Contractor – Mr. Paul Royds Jones, Director, Franki Contractors Ltd.