The NEC, panacea for employers?

In the second of his articles on the legal of contracting, Chris Binnington this month examines the pros and cons of using the New Engineering Contract, and why a number of many large corporations are using it in South Africa.

When the NEC suite of documents was launched in England in the early nineties, ESKOM, in 1993, took the brave decision to move away from their 333 series of contract documents and introduce, what at the time, and indeed still today, was a major new way of regulating the contractual arrangements between the parties by adopting the NEC contracting system.

NEC to dominate?

By 1995 when the 2nd edition of this innovative suite came to the market and the title of the principal document in the suite was changed to the Engineering and Construction Contract (ECC), the suite of contracts had already made major inroads into the UK contracting scene. Now, in 2005, with publication of the 3rd edition of the suite imminent, it has become, without doubt, the dominant document in the UK. Its use in South Africa has also seen steady growth and major employers such as ESKOM, SASOL, AMPLATS, PBMA and ABSA, as well as utilities such as Umgeni Water have all taken the decision to adopt its use.

Although they are unlikely to admit it, FIDIC, the International Federation of Consulting Engineers, publishers of the world’s dominant suite of contracting documents for large infrastructural projects involving international financing, were certainly beginning to feel the heat of NEC competition and, in 1999, published a new suite of competing documents. A number of clauses in the FIDIC suite have been drawn from the NEC documentation at least as far as content is concerned.

A suite of contracts

So what is it about the NEC which has prompted such a disturbance in the international pond of contractual documents?

To answer this question one needs to know something about the NEC suite. Firstly it is a suite of contracts and it provides within the suite a range of procurement options which are simply unmatched by any other single source of contract documents Secondly it introduces a number of innovative contractual aspects designed to promote co-operation between the parties and to lessen the impact of the traditional adversarial approach taken by most other forms of contract. Thirdly the approach taken to the management of change is without doubt one of the more radical features, allowing contractors to price for change based upon open market competitively tendered price principles rather than the traditional approach of basing prices on the original tendered prices. Fourthly it promotes the status of the programme to be the dominant control document and actively encourages contractors to show time risk allowances for each activity and to show terminal float which float now clearly belongs to the contractor!

Whilst the success of the suite is due to a combination of factors, the four elements highlighted above are, in this writer’s opinion, the keys to that success.

Not for sissies

However, as against the positive aspects highlighted above use of the suite is not for sissies! In the first instance it is written in a style which most legally trained commentators will immediately feel uncomfortable with, the document being written in the present tense. The almost total absence of the directory word “shall appears twice in the first clause and never again) leaves the reader frequently uncertain as to what is in fact intended by the clause and the style of drafting often creates uncertainty rather than providing clarity of intent.

Ease of use

It is also a complex system of regulating the obligations and rights of the parties and it most certainly cannot be implemented without users committing to training. Indeed most major employers train prospective contractors and sub contractors before expecting them to bid on the document.

Is it then a panacea for employers in their quest for a better way of contracting? The answer to that question is the lawyers standard answer it all depends” – For employers who are regularly in the market place and who are used to dealing with sophisticated contracts utilising the services of sophisticated contractors the answer is probably YES. For employers in a once off contracting situation who are not interested in developing longer term relationships with their construction professionals and contractors then the complexity of the document probably militates against its use. However, if it is a large once off contract, an investment in the document by way of training and assistance for both contracting parties could well be beneficial.

At the end of the day it must be remembered that whilst the quality of contract documents goes a long way towards the success of a project, it is people that build projects and not con tract documents. A clearly defined scope of work combined with an adequate budget giving rise to prompt payment will alleviate most of the problems encountered in the construction industry. NEC does however offer those employers with large and ongoing capital budgets a range of procurement options and an ability to incentivise contractors to achieve objectives in a way which most other forms of contract do not even come close to achieving.