Principles of NEC Dennis Li HKCIC Lecturer We

Principles of NEC Dennis Li - HKCIC Lecturer

• We are a developer who wants to invest in building new infrastructure in Myanmar under one belt one road initiatives. • You have found a piece of land for a comprehensive development to this end. Your consultants have devised the design and provide a cost estimate at $10 billion. Based on your market analysis, only when the costs of development can be reduced by 20% can the investment become profitable. • What will you do?

Lecture 2 Procuring a NEC contract • • Different forms of NEC contracts Main Options and their risk profiles Secondary options and their implications Contract data

The common forms of NEC Contract • Engineering and Construction Contract (ECC) • Term Services Contract (TSC) • Professional Services Contract (PSC) • Framework Contract (FC)

Engineering and Construction Contract • The NEC 3 Engineering and Construction Contract (ECC) is the main construction contract within the NEC 3 family. This contract should be used for the appointment of a contractor for engineering and construction work, including any level of design responsibility.

Professional Services Contract • The Professional Services Contract (PSC) is intended for use in the appointment of a supplier to provide professional services. It can be used for appointing project managers, supervisors, designers, consultants or other suppliers under NEC contracts and can also be used for appointing suppliers on non -NEC construction projects or for non-construction projects. In what situation would you use Professional Services Contract?

Term Services Contract • The Term Service Contract (TSC) is intended to be used for the appointment of a supplier for a period of time to manage and provide a service. In what situation would you use Term Services Contract?

Framework Contract • The Framework Contract (FC) is intended for use in the appointment of one or more suppliers to carry out construction work or to provide design or advisory services on an ‘as instructed’ basis over a set term. In what situation would you use Framework Contract?

Engineering Construction Contract • Main Options ▫ ▫ ▫ Option A - Priced contract with activity schedule Option B - Priced contract with Bills of Quantities Option C – Target contract with activity schedule Option D – Target contract with Bills of Quantities Option E – Cost Reimbursable contract Option F – Management contract

Example of Milestone Schedule of Payment in GCC

What’s the difference between NEC’s AS and GCC’s Cost Centre?

Example of Activity Schedule Activities Price ($) Duration Commencement Activity 1 700, 000 Activity 2 200, 000 Activity 3 500, 000 Activity 4 600, 000 Activity 5 400, 000 … … Completion Date Float Critical path leads to completion

BQ, SMM, GP & PP

Example of BQ – Water Mains Laying Works Item Description Qty. Unit Rate (HK$) Total Amount (HK$) 1 Excavation 50 m 3 100 5, 000 2 3 inch Galvanized Iron Pipe 1, 000 m 300, 000 3 5 inch Galvanized Iron Pipe 200 m 500 100, 000 4 Trenchless Construction of 5 inch GIP 10 M 10, 000 100, 000 5 Connections 100 Nr 1, 000 100, 000 6 Concrete 30 m 3 1000 30, 000 7 Reinstatement 50 m 2 300 15, 000 Total Sum 650, 000

Example – Building Water Mains for Villagers Item Description Qty. Unit Rate (HK$) Total Amount (HK$) 5, 000 1 Excavation 50 Actual m 3 47. 5 100 2 3 inch Galvanized Iron Pipe 1, 000 m 1, 220 300, 000 3 5 inch Galvanized Iron Pipe 200 m 140 500 100, 000 4 Trenchless Construction of 5 inch GIP 10 M 8. 5 5 Connections 100 6 Concrete 30 7 Reinstatement 50 Nr 1, 000 4 m 3 1000 50 m 2 300 47. 5 Total Sum 10, 000 100, 000 30, 000 15, 000 650, 000

Understanding Target Cost PWDD lower than Target Price, , gain share! 100 90 80 70 60 50 40 30 20 10 0 Target Price PWDD (Interim Payments)

Understanding Target Cost PWDD higher than Target Price, pain share! 120 100 80 60 40 20 0 Target Price PWDD (Interim Payments)

How about this? Still 50% pain share!? 200 180 160 140 120 100 80 60 40 20 0 Target Price PWDD (Interim Payments)

100% C’s share Understanding Target Cost Compensation Events/ re-measurement 110% Target Price PWDD Time 50/50 Share Range Amount Tendered Total of the Price Completion For case of a share range of 50/50 share up to 110% of the Total of the Prices

Understanding Target Cost Employer’s Share % Compensation Events 0% 110% Amount Tendered Total of the Target Price PWDD 2 Time 50% Completion

ECC – Option Analysis Option A – Priced contract with Activity Schedule B – Priced contract with Bill of Quantities C – Target contract with Activity Schedule D – Target contract with Bill of Quantities E – Cost reimbursable contract F – Management Contract Payment Completed activity / group of completed Actual work done based on quantity x rate Risk Allocation Additional Quantity Risk Similar to GCC Reimbursable of Defined Additional Quantity Risk/ Overall project risk shared Cost plus fee to a certain extent Reimbursable of Defined Cost plus fee Overall project risk shared to a certain extent All risk borne by the Employer Risks of the works borne by Employer Remarks Price-based Certainty of price depends on accuracy of design Cost-based Parties incentivized to drive down cost Cost-based Profit is guaranteed Hybrid of Cost and Price based.

Client’s risk and Flexibility ECC – Option Analysis E, F Reimbursable D – Target Bo. Q C – Target with Activity Schedule B Priced with Bo. Q A Priced with Activity Schedule Contractor’s incentive and Risk

NEC – Options Analysis • Activity Schedule Type – Less efforts at Design Stage because no BQ is needed • Target Cost Type – Risks are being shared between the Employer and Contractor incentivize the two to work together towards the target cost • Price-based Contract – More cost certainty and risks are transferred to the Contractor • But in all case, compensation events are supposed to be based on market or, subject to agreement, tendered prices!

Professional Services Contract • Main Options ▫ ▫ Option A - Priced contract with activity schedule Option C – Target contract Option E – Time based contract Option G – Term contract

Term Services Contract • Main Options ▫ Option A - Priced contract with price list ▫ Option C – Target contract with price list ▫ Option E – Cost reimbursable contract

SECONDARY OPTION CLAUSES (OPTIONAL) • Option X 1 – Price adjustment for inflation • Option X 2 – Changes in Law • Option X 3 – Multiple currencies • Option X 4 – Parent company guarantee • Option X 5 – Sectional Completion • Option X 6 – Bonus for early Completion Usually Adopted in HKSAR Government NEC Contract Not used in HKSAR Government NEC Contract but there is an ACC with similar effect • Option X 7 – Delay Damages • Option X 12 – Partnering • Option X 13 – Performance Bond • Option X 14 – Advanced payment to the Contractor • Option X 15 – Limitation of Contractor’s liability for his design • Option X 16 – Retention • Option X 17 – Low Performance damages • Option X 18 – Limitation of liability • Option X 20 – Key Performance Indicators (not used with X 12)

Exercise on Secondary Clause