Why Are NEC Contracts Key to Project Delivery?

The New Engineering Contract (NEC) is a family of contracts designed to facilitate effective project management for the respective Parties, created by the Institution of Civil Engineers. The principles of the NEC suite of contracts are designed to assist all parties in cooperating and working constructively, thereby preventing disputes and confrontations.

The Principles of the NEC contracts

• Written in plain, present-tense English, making it easy for everyone to understand and apply.
• Encouraging proactive communication and good management practices throughout the project lifecycle.
• Designed to suit projects of any size or complexity, supporting strong working relationships between all Parties.

What are the NEC contract types?

The main NEC contract types are organised into works, services, and supply categories, with options for standard, short, and subcontract formats. Key examples include the Engineering and Construction Contract (ECC) for works, the Professional Services Contract (PSC) for services, and the Short Contract for works that are straightforward and require minimal administration.

Contract Types by Purpose (Examples)

Works Contracts – Associated with construction-type operations, such as major infrastructure projects, healthcare, and education institutions:

• Engineering and Construction Contract (ECC)
• Engineering and Construction Short Contract (ECSC).

Services Contracts – For professional services, long-term facilities and maintenance:

• Professional Services Contract (PSC)
• Term Service Contract (TSC)
• Facilities Management Contract (FMC)

Supply Contracts – Relates to purchasing goods, materials, and plant:

• Supply Contract (SC)
• Supply Short Contract (SSC)

For each of the different contracts listed above, each comes with its own set of guidance notes and flowcharts, which should aid understanding of the intent of the drafted clauses.

Contract Formats

Standard Contracts – For the majority of projects.

Short Contracts – Designed for lower-complexity, lower-risk projects to be more accessible.

Subcontracts – Specific forms for use by a Contractor to subcontract work to a Subcontractor.

NEC Main Contract Options

The main contract options apply to all contracts (except short and supply forms), but not all are applicable; only within the Engineering and Construction Contract (ECC) can you find the choice of all six options for acquiring work. The Client chooses, depending on the optimum pricing mechanism/risk profile that best suits the Client’s needs.

Option A: Priced contract with activity schedule. This is commonly considered as a lump sum/fixed price type of contract. Used when the Client can provide the Contractor with a complete set of unambiguous requirements. Activity Schedule used to assess the interim payments – Contractor paid based on completed items in line with their Activity Schedule.

Option B: Priced contract with bills of quantities. The Client produces the bill of quantities (BoQ), and the Contractor is paid based on the actual quantities of work completed. The bill of quantities only outlines the amount of work, not the type or quality to be performed. Errors/omissions in the BoQ will be treated as a compensation event; risk is therefore with the Client.

Option C: Target contract with activity schedule. This is the target cost contract with work based on activity schedule, where financial risk is shared depending on any underspend or overspend against the target cost. This is the most collaborative of all the contract options, as there is a benefit for both Parties to work together to try to come under the target price.

Option D: Target contract with bill of quantities. The same concept as Option C applies here, the difference being that the target cost is based on the quantities of work completed, regarding the BoQ.

Option E: Cost reimbursable contracts. Used when immediate work is required or where risk would be too great for a Contractor to price.  Any costs incurred during the works are reimbursed to the contractor. Therefore, the Client bears the financial risk. The only risk a Contractor has is the adequacy of their fee percentage, disallowed costs and delay damages.

Option F: Management contract. Like Option E, this is a cost-reimbursable arrangement where the Client carries the financial risk. It’s particularly suited to complex projects or those requiring specialist Contractors, as it allows work to begin before all packages are procured, making it ideal when time and flexibility are core components.

The New Engineering Contracts’ transition from NEC3 to NEC4

In June 2017, NEC introduced the NEC4 suite of contracts. Developed through two decades of user insights and industry experience, NEC4 was designed to enhance collaboration and streamline project delivery both in the UK and internationally.

Despite NEC3 being developed to prevent disputes and conflicts between Parties, the issues it aimed to resolve still interrupted the successful progress of construction projects and programmes. Consequently, NEC4 was established to improve clarity, introduce new forms of contract, and add new features, while evolving from the familiarity of NEC3.

Building upon the improved simplicity of the contracts, NEC4 now includes the equivalent of two books of “guidance notes” to accompany the contracts. For example, the ECC includes two key guides — “Planning an ECC Contract” and “Managing an ECC Contract”, with similar versions available for other forms like the PSC and TSC. The Planning guide focuses on preparing the contract (e.g. contract data and Scope), while the Managing guide explains how to administer it in practice and explains each of the clauses.

Understandably, the shift from NEC3 to NEC4 has not been an instant process. Some long-running projects still use NEC3 across public sector organisations in the UK and Hong Kong, and in several international government and private companies.

Key changes introduced to NEC4

The most obvious change that came with the formalisation of NEC4 was the new contract types. These consist of:

• Design, Build and Operate Contract (DBO) – For projects that combine design, construction, and long-term operation and maintenance from a single supplier.
• Alliance Contracts – For clients who want to integrate multiple Parties into a single, collaborative contract to deliver large, complex projects.
• Facilities Management Contracts – Introduced in 2021 to address facilities management services procurement, allowing for more integrated strategies.

Changes to Terminology

Another noteworthy change was the shift in terminology. The term “Employer” used to describe the party for whom the works are being carried out was changed to “Client” (the organisation that commissions the project). Similarly, “Works Information” has been replaced by “Scope” in NEC4, simplifying communication and making it clearer for all Parties involved.

Strengthened Early Warning Procedures

The early warning process also saw refinements aimed at promoting proactive management. The ‘Risk Register’ is now called the ‘Early Warning Register’, and a new Early Warning Interval was added to encourage regular meetings and continuous issue monitoring throughout the project.

Accompanying these major additions were a mixture of functional and procedural updates to improve project delivery and automation:

• Introduction of Contractor’s Proposals (value engineering) to encourage efficiency (clause 16).
• A new Final Account Procedure, helping projects reach commercial closure more effectively.
• Potential deemed acceptance of the programme if it is not responded to within the required time (clause 31.3).
• Several new secondary options providing greater flexibility for complex projects.
• The contract is now written in gender-neutral language.
• A formal requirement for a Quality Plan to be issued for acceptance clause (clause 40.2).
• Clearer guidance on assessing compensation events against the Accepted Programme (clause 63.5).

NEC Contract Management, Simplified

The NEC contract has evolved progressively over the years, laying the groundwork for coherent project participation between Parties. Choosing a contract management software to manage these contracts elevates this cooperative attitude to a new level, but selecting the right system for your project is even more crucial. That’s why Contract Bee has come in to streamline communication, ensure compliance, and keep every Party connected. A reliable contract management system allows organisations to utilise the full potential of NEC contracts, particularly in the ever-advancing construction industry.