R E S E A R C H

COBRA ‘98

Response to the new engineering contract - a review of

experts’ observations on this radical new contract

M A Lavin and K F Potts, University of Wolverhampton

ISBN 1-873 640-23-4

 Response to the New Engineering Contract
- a review of experts’observations
- on this radical new contract
M.A. Lavin and K.F.Potts
School of Engineering and the Built Environment
University of Wolverhampton
Wulfruna Street
Wolverhampton WV1 1SB

Abstract required based on sound management

The New Engineering Contract (NEC) is a
radical new form of construction contract
containing many new procedures and
methods. Despite its recommendation by
Sir Michael Latham in 1994, many parties,
particularly in the building sector, are
reluctant to use it mainly because of their
unfamiliarity with its terms.
The NEC has been developed based on
principles of sound project management.
It requires the parties to act in a spirit of
mutual trust and cooperation - the very
same philosophy that is required under a
partnership arrangement.
This paper seeks to identify the key
characteristics of the NEC and review the
industry’s initial reaction to it based on an
extensive literature search. It is the first
stage in a Ph.D. research project
examining the effectiveness of the NEC
undertaken by the first author with the
second author as Director of Studies.
Further research will involve the
identification of the main causes of
disputes on construction projects and the
identification of the effectiveness of the
NEC in managing these areas.
Keywords
New Engineering Contract, attitude survey
1.0 Introduction
Sir Michael Latham in his report
“Constructing the Team” (1994)
considered that endless refining of
existing conditions of contract would not
solve adversarial problems. He
considered that a new approach was
principles. He went further stating that the
“the approach of the New Engineering
Contract is very attractive” and he
recommended that it should be used by
government departments.
The NEC was first issued as a
consultative document in 1991, followed
by the 1st edition proper in 1993. The
document was reissued in 1995 under the
title The Engineering and Construction
Contract 2nd edition (ECC).
The ECC is essentially a family of
interlocking documents, including
subcontract and professional services,
suitable for a variety of uses and
contracting methods and contains a
number of secondary options for
contractual flexibility.
The principal objectives of the NEC
drafting team were to design a contract
which was flexible, clear and simple and
was a stimulus to good project
management (Perry, 1995).
2.0 Initial reaction
Many early reviewers responded
favourably to the publication of the NEC
and applauded its radical approach.
Mugurian (1991) for example commented
that the form brought “a great draught of
fresh air and new thought into this most
difficult of subjects” and Cottam (1991)
thought “there is clearly much which is
good about the NEC”. Both authors
agreed that it would help reduce disputes
but did not believe it would eliminate
them. Webster (1991) remarked that “it is
a sensible revision to standard forms and
a brave step forward”.

Cobra 1998 Conference

One commentator Chappell (1991) felt the
idea of a simple and flexible contract was
a good one. Unfortunately in his view the
authors had followed this concept too
closely and consequently the NEC was
needlessly complex in execution, as were
some of its provisions. He felt that the
NEC would only work if the philosophy of
team effort was embraced by all parties
and he found this difficult to visualise.
A few authors expressed serious doubts
about the form. Clarke (1993) discounted
the favourable comment of early users.
Whatever enlightened motives these
clients had in choosing the NEC he felt
that they were clearly out to make it
succeed, if only to prove that they had
made a sensible choice.
Webster (1991) summed up the views of
many in the industry. He acknowledged
that by using effective management
techniques, the parties concerned would
co-operate and work efficiently, which
would give rise to fewer disputes. He did
not however feel that this alone would
change ingrained adversarial attitudes.
Indeed he felt it inevitable that disputes
would occur “If relationships do
deteriorate, the loose drafting and
unfamiliar technology should give the
claims advisors of the parties
considerable scope for gainful
employment”.
2.1 Industry’s reaction to the
form
The initial reaction to the NEC from the
Federation of Civil Engineering
Contractors (FCEC) was to express
serious doubts that it would be much of an
aid to efficiency. Indeed it was thought
that it would increase the workload of
estimators and those preparing contract
documentation (Bill, 1987).
Wildgoose (1993) identified the industry’s
mixed reaction to the NEC. He felt that
some clients would be enthusiastic
because of their disillusionment with the
more traditional forms and the adversarial
relationships which they tended to
generate. On the other hand contractors
had reacted cautiously because their
systems and management procedures
have been built around the traditional
forms of contract in order to maximise the
financial recovery from a project.
This early skepticism was, according to
Barnes (1994), being replaced by positive
reactions from contractors who had
actually carried out work under the new
contract. Clients who had provided case
study material to support these claims
included BAA, National Power, Anglian
Water, Yorkshire Water and others.
3.0 Flexibility
Users of the NEC were given the
opportunity to decide upon a contract
strategy that was commercially
appropriate for the project in hand, instead
of being forced to adopt a single contract
strategy for all projects (Bill, 1987),
(Jones, 1992)
The form was suitable for use on
engineering, building, electrical and
mechanical work or any combination of
these. The level of design responsibility
allocated to the contractor could be varied
between 0% and 100% within a priced
contract with activity schedule or with bill
of quantities, a target contract with activity
schedule or bill of quantities, a cost
reimbursable contract, or a management
contract.
Further flexibility was achieved through
the mechanism of a core text together
with appropriate optional secondary
clauses. Thus the emphasis was placed
on the client allocating the risks and
thinking through his contracting strategy in
advance of the works (Cox & Thompson,
1996)
The question of design responsibility was
discussed by both Meara (1995) and
Cornes (1991). Meara (1995) admired how
the contractor’s design responsibility and
its extent was clearly defined within the
works information document
(specification); “all too often within
contracts where both employer and
contractor are responsible for a part of the
design the exact demarcation between the
respective responsibilities is blurred”.
Cornes (1991), on the other hand
questioned why the contractor’s design
responsibility was clearly defined, but
significantly, not the obligation this
imposed. In effect statutory warranties are
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imposed on the contractor because the
contract was silent on the matter.
Consequently the design warranty was
one of fitness for purpose, insurance
cover for which Cornes advised was
commercially impossible to obtain.
4.0 Clarity
Throughout the NEC simple language has
been used and precise definitions given
for the activities each party must follow.
There is easy reference to a particular
subject area because the core text is
arranged into separate subject areas, such
as time, payment and insurance.
The amount of text has been kept to a
minimum and there is no confusing cross-
referencing system. Likewise there is no
use of the words “fair”, reasonable” and
“opinion”. The authors of the NEC believe
that these measures permit easier
understanding of the text and will reduce
the incidence of disputes. The absence of
legal jargon and the identification of nine
subject areas was applauded by Mugurian
(1991) and Chappell (1991). They both
reasoned that the clear division of function
and responsibility eliminated the need for
cross referencing and the use of simple
language brought clarity.
Beside the use of simple language, the
NEC was reduced to the minimum by
omitting anything not considered
essential. However Baird (1994) warned
that this meant that the contract did not
cover every eventuality. Subjects not
catered for, but required, should be
included in the “works information”.
However several commentators were
unhappy about the use throughout of
simple English and the present tense
(Meara, 1995), (Cottam, 1991), (Cornes,
1991), which they felt was at the expense
of good grammar and clarity. They
considered that the avoidance of words
and descriptions in common use meant
that the form lacked any legal certainty on
interpretation. According to Cornes,
(1991) and Cottam (1991) the lack of
cross referencing made the form difficult
to understand as a whole. In particular
they stressed the importance of properly
completing the Contract Data section
(appendix), which defined the contract
information and specified the performance
parameters required. Unless the parties
understood and connected the contract
provisions with the Contract Data section
they were unlikely at tender stage to
provide the correct information - which
could lead to conflict at the post-contract
stage.
Following reviews of projects based on the
NEC Broome (1995) advised that the
compensation events clause had caused
most of the problems. He considered that
the guidance notes were deficient and by
inference the core text was unclear.
Nevertheless he maintained that generally
at site level the NEC was found easier to
use than the traditional contract forms.
5.0 Guidance Notes
One notable feature of the NEC is the
provision of Guidance Notes. The ECC
Guidance Notes comprise 113 pages of
diagrams and closely typed text. The
Introduction states that their purpose is to
provide a background to the NEC, explain
why certain provisions are included and
provide guidance for the user. There is
also a declaration that no part of the
Guidance Notes or the Flow Charts form
part of the contract and should not be
used for legal analysis.
The notes themselves provide guidance
on contract strategy, tender documents
and their preparation as well as a clause
by clause explanation of the contract.
There are seven appendices which
include sample forms of tender, form of
agreement and a worked example of the
Contract Data. Barnes (1991a) viewed
the guidance notes as essential because
of the form’s novelty and confirmed that
anything not considered essential to the
NEC had gone into the notes. He
acknowledged that because of the
contract’s brevity the notes themselves
might become the subject of a dispute.
Mugurian (1991) thought that the
Guidance Notes were an excellent idea.
He commented that the courts had
complained about the lack of explanatory
notes from the authors of traditional
contract forms. Without this guidance
judges were left with no indication of the
drafters’true intentions and were left with
unenviable task of second guessing their
motives. The size of the Guidance Notes
was commented on by Meara (1995) and
Chappell (1991), which is larger than the
NEC itself. They thought the document
unnecessarily copious and considered that
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a first-time user might find them difficult to
follow and understand.
6.0 Stimulus to good project
management
The Guidance notes to the ECC 2nd
edition state that the contract is based
upon two principles:
1. foresight applied collaboratively
mitigates problems and shrinks risk
2. clear division of function and
responsibility helps accountability and
motivates people to play their part
Barnes (1991b) and his team believed this
would promote a spirit of co-operation and
foresight and “still provide a commercial
incentive for the contractor”. In addition,
every function was examined and
designed so that it contributed towards a
successful outcome for the employer, the
main contractor and the sub-contractors -
a common interest. The procedures set
down are fashioned so that people and
organisations are commercially motivated
to follow them. Then “we will have shrunk
the adversarial dimension” (Allen, 1991),
in other words removed most of the
grounds for dispute.
Nicholson (1992), confirmed the
explanations given by Barnes. In addition
he emphasised the importance given to
the early resolution of disputes. However
Cottam (1991) questioned whether people
would work in the manner intended.
The good management procedures are
identified by Cox and Thompson (1996)
as: active planning and programming,
early warning procedures, advanced
quotation and assessment, tight response
periods for administrative matters and
quick resolution of disputes. However Cox
and Thompson identify that the
administrative procedures may prove to
be a “burdensome (and expensive)
challenge for site management”.
6.1 Use of the Project Manager
The project manager is appointed by the
employer to manage the contract and act
on his behalf. Unlike the engineer under
the ICE 6th or an architect under JCT80
the role of the project manager is not
independent and he has no quasi-
abitrational powers. He is expected to be
a “hands on person”, site based and
available to make prompt decisions.
The conflict of interests under the
traditional contracts have been avoided by
dividing the engineer’s/architect’s duties
into four separate and clearly defined
roles of: designer, project manager,
supervisor and adjudicator.
Mugurian (1991) and Clarke (1993)
approved of these split roles, but Allen
(1991) warned that there would be
substantial rear-guard action to preserve
the role of the engineer (or architect) as
an even-handed arbitrator between
employer and contractor. Mugurian
(1991) commented that it was impossible
to reconcile the role of designer and quasi
- arbitrator under the traditional forms
because of “the requirement of his
professional indemnity insurance whereby
he is obliged to deny all negligence or
liability”.
Birkby (1993) emphasised the
considerable responsibility that the project
manager was now given and the need
therefore for a technically qualified
person, or failing this substantial technical
support. He would, for example, be
responsible for issuing instructions to
change the design and assessing the
contractor’s own design and the liability in
this respect was considerable.
7.0 Contract Data
The Contract Data section provides the
definition of the details of the contract
agreement and corresponds to the
appendix found in traditional forms. There
are two sections in the Contract Data.
Part One is completed by the employer
and is issued to tenderers; it contains the
names of the project manager, supervisor
and adjudicator together with the works
and site information. It also includes
details of the contract type and any
secondary options chosen.
Part Two is completed and returned by
tenderers as part of their offer and
contains the names and details of key
personnel, any data required for contract
options chosen by the employer, data for
the schedule of cost components including
the fee and overhead percentages.
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The majority of commentators welcomed
the amount of detail which the contract
data schedules required from both parties.
Baird (1994) stated that the thought and
care necessary to properly complete the
Contract Data would provide both parties
with a “much greater awareness of what
the contract actually means and requires
of them”.
Mugurian (1991) and Wildgoose (1993)
agreed with this view and commented that
it should ensure that misunderstandings
are less likely to occur. At the very least,
they believed, it would provide a useful
checklist for both parties to follow.
Baird (1994) warned that the schedules
must be prepared by skilled and capable
people. Cottam (1991) felt the contract
required “a bewildering amount of
information to be supplied” and in his
experience practitioners had not always
correctly completed the simple appendix
to the ICE contract. Obviously if Cottam’s
(1991) views prevail then the likelihood of
disputes would not be diminished.
8.0 Core clauses
The “pick and mix” concept of core text
with the addition of appropriate optional
clauses was not a new concept, although
it had never before been included in a
standard contract form (Chappell, 1991).
Parry (1995) cautioned that disputes are
less likely when and contract type is
selected which ensured the minimum of
compensation events, which as Broome
(1995) confirmed, are the major cause of
dispute when using the NEC. If the
project design was unfinished at tender
stage, the employer should consider a
management (Option F) or a cost
reimbursable (Option E) contract rather
than a lump sum contract (Option A and
B). Completing the design, then issuing
changes as Compensation Events was, in
principle, wrong. Parry (1995) advised that
when using the NEC for building projects,
where significant numbers of variations
are commonplace, the design should be
“substantially complete” if a lump sum
contract was envisaged.
The ECC substantially revised core clause
8 “Risks and Insurances”. It is now far
more straightforward and easy to
understand; however it is brief and given
the importance attached to this area
needs careful consideration before use.
The principle behind the clause is that the
employer’s risks are stated and all other
risks are the contractor’s. Mugurian (1991)
believed that the clause now clearly
defined the risks allocated to each party
“The risks ..... are now for the first time in
any conditions of contract
comprehensively and accurately defined”.
9.0 Compensation Events
Compensation Events are events which if
they occur through no fault of the
contractor, compensate for the time and
cost effect of the event. The contractor is
required to prepare a quotation for a time
and cost assessment of the event. If the
quotation is accepted by the project
manager it remains a firm price,
regardless of the actual time and cost
outcome. This arrangement for dealing
with compensation events benefits both
parties. The employer gains price and
time certainty. The contractor gains as it is
his own forecast of the time and cost
impact which forms the basis of
reimbursement. This radical approach to
the valuation of changes was praised by
the great majority of commentators.
Mugurian (1991) believed “this is an
excellent way of dealing with the financial
consequences of changes or unforeseen
consequences of changes, including
delays”. Cottam (1991) also considered
that this approach benefited the contractor
and employer alike.
Opinions amongst reviewers differed on
what was meant by the term
“Compensation Event”. Knowles (1991)
explained that it was a new name for
“claim”, whilst Chappell (1994) described
it as a variation, extension of time and
loss and expense claim rolled into one.
The assessment procedure, according to
Wildgoose (1993), sought to diffuse the
“traditionally adversarial nature of such
matters”, but he wondered if problems
would occur when assessing large
numbers of Compensation Events.
Broome (1995) had found that some
clients avoided this by grouping
compensation events together for
assessment purposes. Bolton (1993),
advised that Contractors and employers
had commented positively about the NEC,
especially the joint assessment of time
and cost. However he found that
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contractors were less keen on the level of
detail required
10.0 Programmes
The NEC requires the submission of the
contractor’s first programme within the
time specified in the Contract Data
(appendix). Failure to do so results in the
retention of one quarter of any payments
due. Revised programmes are submitted
at regular intervals, the effect of a
compensation event is assessed based on
the latest accepted programme.
Wildgoose (1993) and Chappell (1994)
both viewed these arrangements as a
refinement of familiar procedures. The
emphasis was on ensuring that both
parties possessed a current programme.
The requirement to give early warning of
problems provided a valuable
management tool that should assist in
developing a team approach “rather than
merely historical data to be used only in
the analysis of claims” (Chappell, 1994).
11.0 Training
Several commentators highlighted the
need for adequate staff training before the
NEC was used (Birkby, 1993; Meara,
1995). Obviously the form was new and its
procedures needing explaining, but staff
should also become familiar with the
form’s novel characteristics and the roles
and responsibilities of the parties
involved, which were often different from
traditional practice. It was particularly felt
that the Contract Data section which
required completion at pre-tender stage,
and the provision of quotations for
Compensation Events, were two
procedures which required an in-depth
knowledge of the form and considerable
care in preparation.
Chappell (1994) maintained that the form
would not be simple to use and advised
everyone intending to use the form to
spend time getting to grips with it; “it is not
just a legal document enshrining rights
and duties”. Besides the philosophy of
teamwork and the detailed tendering
process, he highlighted the exclusion from
the core text of anything not considered
essential, which is one reason for the
form’s relatively short length. Users will
need to identify the excluded subjects and
where necessary include them in the
works information (specification)
document. Baird (1994) also warned of
this problem and provided a list
(incomplete) of possible subjects for
consideration.
Broome’s (1995) investigations into the
use of the NEC found the need for
participants to receive training was a
“massive undertaking”. His conclusion, the
same as Meara (1995) was that
contractors would be unwilling to invest in
staff training until such time as use of the
NEC became widespread. The likelihood
of this happening, has to some extent,
increased with Sir Michael Latham’s
recommendations that the NEC should be
widely used.
Another author (Baird, 1994) with
experience of using the NEC confirmed
Broome’s (1995) observations on training.
But he argued that any training costs
incurred would be offset by better
management practices and a better
understanding of the risks involved. This
should reduce the incidence and “the
effect of claims which have arisen in the
past as a result of poor initial definition or
attention to detail in the contract
documentation”.
12.0 Conclusions
The initial response from experts within
the construction industry on the NEC was
generally favourable. Many thought the
use of simple language and the adoption
of management techniques which
encouraged cooperation and teamwork
would reduce the likelihood of disputes,
although some writers felt that this alone
would not change ingrained adversarial
attitudes.
At site level, users generally found the
NEC easier to use than the traditional
contract forms, with most of the problems
arising over compensation events.
However adequate staff training was
considered essential before using the
form, because of its novel characteristics
and different roles and responsibilities of
the parties.
The exclusion of anything not considered
essential from the core text was
highlighted and the need for including
every other relevant issue in the Works
Information; this being a potential area of
ambiguity and hence dispute.
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A general reluctance to change to a
radically different contract was main
obstacle to be overcome. Some
commentators welcomed the new roles of
the engineer or architect with the
introduction of the project manager.
However they warned that engineers and
architects are unlikely to recommend a
form of contract which considerably
reduced their own authority and workload.
Bibliography
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Wildgoose I (1993), Building Law Digest,
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Cobra 1998 Conference