NEC4: Engineering and Construction Contract Option C: Target Contract with Activity Schedule

Product Information

For items which contain multiple elements of work built into a singular rate, it can be difficult to assess the % of work complete. Theagreedcumulativecostisthendeductedfromtheamountpreviouslypaidunderthecontract. Thisamountisthenpaidtothecontractor. Activity Schedule – A list of activities (prepared by the contractor), which they expect to carry out while providing the works. Each activity is linked to a price (prepared by the contractor) to be paid by the client. Although this contract is often referred to as “Cost Plus,” contractors should not get complacent and think Option E means a blank chequebook for works. The terms within the contract should set out clearly what is and isn’t to be reimbursed to the contractor.

So the warning note under Option C is that while cost management is important to interim valuations and cash flow during the project the proper and accurate management of value, in terms of identifying, pricing and agreeing change is also vital to a successful project outcome. Bill of Quantities (BoQ) – A document that lists specific measured items of work identified by the drawings and specifications. Each item will be allocated a price. The NEC4 Design, Build and Operate Contract (DBO) allows the procurement of a more integrated whole-life delivery solution. It combines responsibility for design, construction, operation and/or maintenance, procured from a single supplier.A new clause 74 gives the contractor the right to use client materials, but only to "provide the works". That right can also be made available to a subcontractor. Core Clause 8: liabilities and insurance Another example is the treatment of defects. Under NEC standard forms, the cost of correcting defects before completion is generally only disallowed when it is caused by failure to comply with a constraint. Some clients have used amendments to expand the scope of disallowing costs incurred in relation to defects. This ignores the fact that the costs of correcting defects will affect the contractor’s share, so there is already an incentive in place to reduce such costs and it is effectively a shared risk under ECC target-cost options. A clear understanding of what Defined Costs are, what Disallowed Costs include and crucially what is included and excluded within the Fee are vital in maintaining the profitability of a project.

Target cost contracts can be beneficial where the scope of work is not fully defined or where the risks anticipated are greater than usual.

Key points

NEC is famed for its use of short, plain English, and the new contracts incorporate changes in terminology. They are now gender neutral with some considered changes in emphasis. For example, the 'employer' is now the 'client', and 'works information' is now the 'scope'. This creates consistency across the suite. The repair and indemnity provisions at clauses 82 and 82 have been replaced with a new recovery of costs clause 82. The waiver of subrogation has now been extended to cover both parties, following on from the SSE v Hochtief decision where it was held that insurers had the right to pursue a joint insured. Core Clause 9: termination These options offer a framework for tender and contract clauses that differ primarily in regard to the mechanisms by which the contractor is paid and how risk is allocated and motivated to control costs. This option contains a priced lump sum contract. The lump sum contract is then linked to a contract programme with an activity schedule. Each activity on the schedule is then allocated a price. The new 'dividing date' concept at 63.1 is interesting. It tries to clarify the confusion which currently exists about when you shift to using forecast, rather than actual, costs; and will also be used for identifying the relevant accepted programme. Clause 65 introduces a new process for proposed instructions aimed at allowing more flexibility; while the well-known clause 65.2, which prevents revisions to a compensation event if the forecast is wrong, has been amended to allow for changes if the contract explicitly says so. Core Clause 7: title