NEC Contract Management Training for Gammon – Session 1

BK SURCO TRAINING
NEC CONTRACT MANAGEMENT TRAINING

FOR

GAMMON CONSTRUCTION LIMITED

12th November 2020 1

NEC Contract Management Training for Gammon – Session 1

NEC CONTRACT
MANAGEMENT TRAINING
(Session 1)
Presented by Dr. Brenda Yip
Important Notes
This presentation the accompanying notes and the statements expressed as part of the presentation have
been been prepared and presented by BK SURCO Ltd for information purposes related to training workshop
presentations only and are not a replacement for independent professional advice which should be sought in
respect of any situation where specific advice related to NEC projects is required.

Copyright of these workshop notes, is the property of BK SURCO Limited and they may not be reproduced in
any way or used in any public display without the written permission of BK SURCO Limited.

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NEC Contract Management Training for Gammon – Session 1

Agenda – Session 1

1. NEC Background
2. Primary Characteristics
3. NEC Collaborative Philosophy
4. NEC Suite of Contracts
5. ECC Structure and Key Documents
6. Target Cost Contracting
7. Summary and Q&A

3
NEC Contract Management Training for Gammon – Session 1

Agenda – Session 1

1. NEC Background
2. Primary Characteristics
3. NEC Collaborative Philosophy
4. NEC Suite of Contracts
5. ECC Structure and Key Documents
6. Target Cost Contracting
7. Summary and Q&A

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NEC Contract Management Training for Gammon – Session 1

Background

NEC – New Engineering Contract

Published/Owned by Thomas Telford Ltd. (ICE)

www.neccontract.com

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NEC Contract Management Training for Gammon – Session 1

Why NEC?

• Challenges to Construction Industry:

 To minimise time overrun
 To minimise rising cost
 To minimise dispute
 To improve efficiency

• Contracting models of
collaborative partnerships

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NEC Contract Management Training for Gammon – Session 1

NEC History (1)

…. 1980’s Worldwide dissatisfaction with the performance

of traditional building and engineering
contracting ……

» 1985: Development of a new form of contract

approved by ICE Legal Affairs Committee

» 1991: Consultative Version Published

» 1993: NEC First Edition Published for Use

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NEC Contract Management Training for Gammon – Session 1

NEC History (2)

 1994: Latham Report (UK): “Constructing the Team”

 1995: Second Edition (ECC) Published incorporating

Latham recommendations

 1998: Second Edition Amended

 1999: ECSC Published (Short Contract)

 2001: Tang Report (HK)– “ Construct for Excellence”

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NEC Contract Management Training for Gammon – Session 1

NEC – Some Key Influences

» Latham Report 1994 – Constructing the Team
 NEC2 – Incorporating Mutual Trust and Collaboration
 Widespread Adoption of NEC in UK
 ‘ Knowledge Based Engineering’

» Egan Report 1998 – Rethinking Construction

 Efficiency Savings, Integrated Project Design and Delivery

» Tang Report 2001 – Construct For Excellence

 Project Partnering, Target Cost,
 Security of Payment legislation
 Integrated pre-contract planning and design
 Increased application of IT in projects

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NEC Contract Management Training for Gammon – Session 1

Tang Report 2001 “Construct for Excellence”

109 Recommendations to improve:
 the way industry participants interact
 the way projects are delivered
 the way risks are shared
 ethical standards

Led to:
 adoption of partnering
 alternative procurement
 systematic risk management
 dispute resolution
 NEC pilot schemes in HK

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NEC Contract Management Training for Gammon – Session 1

NEC History (3)

 July 2005: Third Edition Published (NEC 3)

 2008: UK office for Government

Procurement endorsed NEC

 April 2013: Third Edition Amended

- Professional Services Short Contract
- BIM guides

 June 2017: Fourth Edition Published (NEC 4)

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NEC Contract Management Training for Gammon – Session 1

Agenda – Session 1

1. NEC Background
2. Primary Characteristics
3. NEC Collaborative Philosophy
4. NEC Suite of Contracts
5. ECC Structure and Key Documents
6. Target Cost Contracting
7. Summary and Q&A

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NEC Contract Management Training for Gammon – Session 1

Primary NEC Characteristics

1. Flexibility:
» Multi Disciplinary – Engineering/Building Works
» Employer or Contractor design or hybrid
» Choice of Pricing Options/Payment Method
 Lump Sum, Target Cost, etc.
» Modular Contract Form (Pick and Mix)
 Core clause, primary/ secondary options, etc.
 Choice of Risk Profile
 Interlocking contracts throughout the supply chain

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NEC Contract Management Training for Gammon – Session 1

Primary NEC Characteristics

2. Clarity and Simplicity:

» Simple, concise and ‘plain’ English, common terminology

» Modular format with options

» Simple clause structure with no cross referencing

» Guidance notes and flow charts

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NEC Contract Management Training for Gammon – Session 1

Primary NEC Characteristics

3. Stimulus to Good Management:
» Clear allocation of function and responsibility

» Timely and clear decision making – certainty

» Proactive risk management procedures/ meetings

» Effective management of project Programme

» Incentivisation for good performance

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NEC Contract Management Training for Gammon – Session 1

NEC Defined Terms GCC

• Employer / Client (NEC4) • Employer / Supervising Officer

• Project Manager • Engineer / Architect
• Supervisor • Clerk of Works / Building Services
Inspector
• Works Information / • Employer’s Requirement / Scope of
Scope (NEC4) Works / Specification / Drawings
• Working Areas • Site / Designated Off-site Areas
• Price for Work Done to Date • Interim Payment
• Early Warning • Risk Management
• Compensation Event • Variation / Client’s responsible
event
• Equipment / Plant and Materials -
• Defined Cost / Disallowed Cost -

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NEC Contract Management Training for Gammon – Session 1

Agenda – Session 1

1. NEC Background
2. Primary Characteristics
3. NEC Collaborative Philosophy
4. NEC Suite of Contracts
5. ECC Structure and Key Documents
6. Target Cost Contracting
7. Summary and Q&A

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NEC Contract Management Training for Gammon – Session 1

NEC Collaborative Philosophy

» Promotes good working relationship and fair dealing
between contracting parties:

» Clause 10.1 of all NEC3 Works Contracts states

“The Employer, the Contractor, the Project Manager

and the Supervisor shall act as stated in this
contract and in a spirit of mutual trust and co-
operation.”

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NEC Contract Management Training for Gammon – Session 1

NEC Collaborative Philosophy

» Clause 10 of all NEC4 Works Contracts states

10.1 The Parties, the Project Manager and the
Supervisor shall act as stated in this contract
10.2 The Parties, the Project Manager and the
Supervisor act in a spirit of mutual trust and co-
operation.”

» The drafting of NEC Contracts provide an enabling

platform and framework to facilitate project collaboration

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NEC Contract Management Training for Gammon – Session 1

What is the NEC Philosophy?

NEC is a modern-day family of contracts that facilitates the
implementation of sound project-management principles and
practices as well as defining legal relationships.
Key to the successful use of the NEC is users adopting the desired
cultural transition.
The main aspect of this transition is moving away from a reactive
and hindsight-based decision-making and management approach to
one that is foresight based, encouraging a creative environment
with pro-active and collaborative relationships.

NEC Procurement and Strategies Guide

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NEC Contract Management Training for Gammon – Session 1

Agenda – Session 1

1. NEC Background
2. Primary Characteristics
3. NEC Collaborative Philosophy
4. NEC Suite of Contracts
5. ECC Structure and Key Documents
6. Target Cost Contracting
7. Summary and Q&A

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NEC Contract Management Training for Gammon – Session 1

NEC Suite of Contracts

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NEC Contract Management Training for Gammon – Session 1

NEC4 Suite of Contracts (1)

 Engineering and Construction Contract (ECC)

 Engineering and Construction Short Contract (ECSC)

 Engineering and Construction Subcontract (ECS)

 Engineering and Construction Short Subcontract (ECSS)

 Professional Services Contract (PSC)

 Professional Services Short Contract (PSSC)

 Professional Services Subcontract (PSS) – NEC4 only

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NEC Contract Management Training for Gammon – Session 1

NEC4 Suite of Contracts (2)

 Term Service Contract (TSC)

 Term Service Short Contract (TSSC)

 Term Service Subcontract (TSS) – NEC4 only

 Design, Built and Operate Contract (DBOC) – NEC4

only

 Supply Contract (SC)

 Supply Short Contract (SSC)

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NEC Contract Management Training for Gammon – Session 1

NEC4 Suite of Contracts (3)

 Framework Contract (FC)

 Adjudicator Contract (AC) – NEC3 only

 Dispute Resolution Service Contract (DRSC) – NEC4

only

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NEC Contract Management Training for Gammon – Session 1

NEC3 Suite of Contracts includes..

» Procurement and Contract Strategies

» Guidance Notes

» Flow Charts

» How To Guides

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NEC Contract Management Training for Gammon – Session 1

NEC4 Suite of Contracts includes..

» Vol 1. - Establishing a Procurement
and Contract Strategy
» Vol 2. – Preparing an Engineering and
Construction Contract

» Vol. 3 – Selecting a Supplier

» Vol. 4 – Managing an Engineering

and Construction Contract

» Flow Charts (Website Download)

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NEC Contract Management Training for Gammon – Session 1

Practice Notes for NEC ECC

for Public Works Projects in Hong Kong

• Pre-tender Stage

• Tender Stage

• Contract Stage

• Knowledge Sharing
among NEC Users

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NEC Contract Management Training for Gammon – Session 1

Agenda – Session 1
1. NEC Background
2. Primary NEC Characteristics
3. NEC Collaborative Philosophy
4. NEC Suite of Contracts
5. ECC Structure and Key Documents
6. Target Cost Contracting
7. Summary and Q&A

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NEC Contract Management Training for Gammon – Session 1

ECC Structure – NEC3

» Nine mandatory Core Clauses

» A selection of six Main (Primary) Contract Options

» Two Dispute Resolution Options

» Fifteen pre-drafted Secondary Clause Options

» Employer-drafted Z Clauses

» Schedule of Cost Components

» Contract Data

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NEC Contract Management Training for Gammon – Session 1

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NEC Contract Management Training for Gammon – Session 1

ECC Structure – NEC4

» Nine mandatory Core Clauses

» A selection of six Main (Primary) Contract Options

» Three Resolving and Avoiding Dispute Options

» Twenty-one pre-drafted Secondary Clause Options

» Client-drafted Z Clauses

» Schedule of Cost Components

» Contract Data

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 NEC4 (ECC) Structure in HK
NEC Contract Management Training for Gammon – Session 1

Contract Data Parts 1 & 2

Primary
Core Clauses 1 to 9 Options –
must

Mandatory
choose one
Resolving and Avoiding Dispute (W1 or W2)

Primary Option A Primary Option B Primary Option C Primary Option D Primary Option E Primary Option F

Priced Contract Priced Contract Target Contract Target Contract Cost Reimbursable Management
with Activity with Bill of with Activity with Bill of Contract Contract
Schedule Quantities Schedule Quantities

Secondary Secondary Secondary Secondary Secondary Secondary Secondary

Option X1 Option X2 Option X3 Option X4 Option X5 Option X6 Option X7
Price Adjustment for Changes in the Law Multiple Currencies Ultimate holding Sectional Completion Bonus for Early Delay Damages
Inflation company guarantee Completion

Secondary Secondary Secondary Secondary Secondary Secondary Secondary

Optional
Option X8 Option X9 Option X10 Option X11 Option X12 Option X13 Option X14
Undertakings to the Transfer of rights Information modelling Termination by the Multiparty Performance Bond Advanced Payment to
Client or Others Client collaboration the Contractor

Secondary Secondary Secondary Secondary Secondary Secondary Secondary

Option X15 Option X16 Option X17 Option X18 Option X20 Option X21 Option X22
The Contractor’s Retention Low Performance Limitation of Liability Key Performance Whole life cost Early Contractor
design Damages Indicators involvement

Option Z – Additional Conditions of Contract

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NEC Contract Management Training for Gammon – Session 1

NEC ECC Contract - Structure

Part One Nine Common or Core Clauses (10.0 – 90.0 Plus Sub-clauses)
Core Clauses

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NEC Contract Management Training for Gammon – Session 1

ECC Core Clauses

1. General
2. The Contractor’s main responsibilities
3. Time
4. Testing and Defects (Quality Management – NEC4)
5. Payment
6. Compensation events
7. Title
8. Risks and insurance (Liabilities and Insurance – NEC4)
9. Termination

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NEC Contract Management Training for Gammon – Session 1

NEC ECC Contract - Structure

Part One Nine Common or Core Clauses (10.0 – 90.0 Plus Sub-clauses)
Core Clauses

Option E Option F
Part Two Option A & B Option C & D
Reimbursable Management
2A - Main Option Priced Contract Target Contract
Contract Contract
Clauses
AS BQ AS BQ

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NEC Contract Management Training for Gammon – Session 1

The Main Contract ECC Options

Must select one primary option:
» Option A (Priced Contract with Activity Schedule)
» Option B (Priced Contract with Bill of Quantities)
» Option C (Target Contract with Activity Schedule)
» Option D (Target Contract with Bill of Quantities)
» Option E (Cost Reimbursable Contract)
» Option F (Management Contract)

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NEC Contract Management Training for Gammon – Session 1

Q1: Financial Risk/Reward Allocation?

Priced Contract Target Contract
Payment Mechanism?
Q2: Pricing Tool/

Activity Schedule
A C
Bill of Quantities
B D

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NEC Contract Management Training for Gammon – Session 1

Target Contract (Option C)

Client’s separate risk-
based contingency Contractor’s share (%
set at tender stage)
PAIN

GAIN
Final total of Prices (target) –

PWDD 2 (Cost +Fee)

Activity Schedule + CEs
(target) – Activity Schedule

PWDD 1 (Cost+ Fee)

Tender total of Prices

(a)
Client Pays

Initial Target Final Target Final Cost + Fee Final Cost + Fee
Underspend Overspend

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NEC Contract Management Training for Gammon – Session 1

Target Contract (Option D)

Client’s separate risk-
based contingency Contractor’s share (%
set at tender stage)
PAIN

Remeasured Quantities + CEs GAIN

Final total of Prices (target) –

PWDD 2 (Cost +Fee)

(target) – Bill of Quantities

PWDD 1 (Cost+ Fee)

Tender total of Prices

(a)
Client Pays

Initial Target Final Target Final Cost + Fee Final Cost + Fee
Underspend Overspend

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NEC Contract Management Training for Gammon – Session 1

Main Contract ECC Options

Option A: Priced Contract with Activity
Schedule
 Lump Sum
 Breakdown – Activity Schedule – smaller lump sums
 Contractor at risk on quantities of work
 Contractor at risk on pricing of Activity Schedule
 Interim Payments according to completed
activities/groups of activities

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NEC Contract Management Training for Gammon – Session 1

Main Contract ECC Options

Option B: Priced Contract with Bill

of Quantities

 Re-measurement
 Contractor paid on basis of actual quantities
 Contractor at risk on pricing BQ items (rates)

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NEC Contract Management Training for Gammon – Session 1

Main Contract ECC Options

Option C: Target Contract with Activity

Schedule
 Cost reimbursable plus pre-agreed Target
 Risk sharing on any cost overrun at pre-agreed rate
 Incentive sharing of any cost savings at pre-agreed rate
 Can encourage efficient cost management

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NEC Contract Management Training for Gammon – Session 1

Main Contract ECC Options

Option D: Target Contract with BQ

 Cost reimbursable Plus Target

 Risk/Incentive Sharing as in Option C
 Target Price according to actual quantities

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NEC Contract Management Training for Gammon – Session 1

Main Contract ECC Options

Option E: Cost Reimbursable Contract

 Fully Cost Reimbursable
 Employer at Risk of cost overruns on budget
 Contractor only at risk on “Disallowed Cost” (e.g.
wrongly paid sub-contractor, unsubstantiated costs)
 Limited Pre-contract documentation requirements

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NEC Contract Management Training for Gammon – Session 1

Main Contract ECC Options

Option F: Management Contract

 Cost reimbursable contract
 Contractor manages subcontractors/suppliers for fee
 Work carried out through subcontract work packages
 Employer at risk on increased fees on increased
subcontract cost

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NEC Contract Management Training for Gammon – Session 1

ECC Options
HIGH

E Target Cost
Employer Risk

with AS
F
Cost
Reimbursable
Contracts
D C Lump Sum/
Re-measurable
Contracts
Target Cost
with BQ
B
A
LOW Contractor Risk HIGH

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NEC Contract Management Training for Gammon – Session 1

NEC ECC Contract - Structure

Part One Nine Common or Core Clauses (10.0 – 90.0 Plus Sub-clauses)
Core Clauses

Option E Option F
Part Two Option A & B Option C & D
Reimbursable Management
2A - Main Option Priced Contract Target Contract
Contract Contract
Clauses
AS BQ AS BQ

2B - Dispute
Dispute Resolution Clause (Option W1, W2 or W3)
resolution

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NEC Contract Management Training for Gammon – Session 1

The ECC Dispute Resolution Options

Two/Three (NEC4) options which concern rules and
procedures for Adjudication and review by tribunal :
» W1 – Used where Adjudication is the method of DR and
where HGCR Act* does not apply
» W2 – Used where Adjudication is the method of DR
and where the HGCR Act* applies
» W3 – Used where Dispute Avoidance Board is the
method of DR and the HGCR Act* does not apply

» * UK Housing Grants, Construction and Regeneration Act (1996)

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NEC Contract Management Training for Gammon – Session 1

NEC ECC Contract - Structure

Part One Nine Common or Core Clauses (10.0 – 90.0 Plus Sub-clauses)
Core Clauses

Option E Option F
Part Two Option A & B Option C & D
Reimbursable Management
2A - Main Priced Contract Target Contract
Contract Contract
Contract Options
AS BQ AS BQ

2B - Dispute
Dispute Resolution Clauses (Option W1 & W2)
resolution
Part Three
Secondary X Options (pre-drafted options of which any/none may
3A – Secondary
be selected)
Option Clauses

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NEC Contract Management Training for Gammon – Session 1

The ECC Secondary Options (1)

» Option X1 – Price Adjustment for Inflation

» Option X2 – Changes in Law

» Option X3 – Multiple Currencies

» Option X4 – Parent (Ultimate Holding – NEC4)

Company Guarantee

» Option X5 – Sectional Completion

» Option X6 – Bonus for Early Completion

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NEC Contract Management Training for Gammon – Session 1

The ECC Secondary Options (2)

» Option X7 – Delay Damages

» Option X8 – Undertakings to the Client or Others

(NEC4)

» Option X9 – Transfer of Rights (NEC4)

» Option X10 – Information Modelling (NEC4)

» Option X11 – Termination By Client (NEC4)

» Option X12 – Partnering (Multiparty Collaboration

– NEC4)
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NEC Contract Management Training for Gammon – Session 1

The ECC Secondary Options (3)

» Option X13 – Performance Bond

» Option X14 – Advanced Payment to the Contractor

» Option X15 – Limitation of the Contractor’s liability for

his design to reasonable skill and care (Contractor’s
Design -NEC4)

» Option X16 – Retention

» Option X17 – Low Performance Damages

» Option X18 – Limitation of Contractor Liability

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NEC Contract Management Training for Gammon – Session 1

The ECC Secondary Options (4)

» Option X20 – Key Performance Indicators

» Option X21 – Whole Life Cost (NEC4)

» Option X22 – Early Contractor Involvement (NEC4)

» Option Y(UK)1 – Project Bank Account

Y(UK)2 – HGC&R Act
Y(UK)3 – Third Party Rights

» Option Z – Additional Conditions of Contract

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NEC Contract Management Training for Gammon – Session 1

NEC ECC Contract - Structure

Part One Nine Common or Core Clauses (10.0 – 90.0 Plus Sub-clauses)
Core Clauses

Option E Option F
Part Two Option A & B Option C & D
Reimbursable Management
2A - Main Option Priced Contract Target Contract
Contract Contract
Clauses
AS BQ AS BQ

2B - Dispute
Dispute Resolution Clause (Option W1 & W2)
resolution
Part Three
Secondary X Options (pre-drafted options of which any/none may
3A – Secondary
be selected)
Option Clauses

3B – Secondary
Z Clauses Secondary Z Clauses / Employer drafted special conditions

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NEC Contract Management Training for Gammon – Session 1

Z Clauses – Special Conditions of Contract

» Employer may wish to amend standard provisions of
NEC to suit project objectives by adding Z clauses
» Additional contract terms required by the Employer
which are not covered by the NEC standard terms
» Also used where amendments are required to suit
particular Employer requirements, e.g. government (
» Where local law requires certain contract requirements
» Similar to GCC special conditions of contract
» Hong Kong Government – Library of Standard
Amendments (available online)

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NEC Contract Management Training for Gammon – Session 1

NEC ECC Contract - Structure

Part One Nine Common or Core Clauses (10.0 – 90.0 Plus Sub-clauses)
Core Clauses

Option E Option F
Part Two Option A & B Option C & D
Reimbursable Management
2A - Main Option Priced Contract Target Contract
Contract Contract
Clauses
AS BQ AS BQ

2B - Dispute
Adjudication Clause (Option W1 & W2)
resolution
Part Three
Secondary X Options (pre-drafted options of which any/none may
3A – Secondary
be selected)
Option Clauses

3B – Secondary
Z Clauses Secondary Z Clauses / Employer drafted special conditions

Part Four Pre-drafted Cost Component Schedules (Defines Reimbursable

Costs)

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NEC Contract Management Training for Gammon – Session 1

Schedules of Cost Components

» A set of rules to define those components of
Contractors cost which are included in Defined Cost
(11.2.23)
» Defined Cost less Disallowed Cost (11.2.25) plus Fee
(11.2.8) is the basis of valuing the Price for Work
Done to Date (interim payments) for cost
reimbursable contract Options C-F
» Defined Cost less Disallowed Cost plus Fee is the
default method of valuing Compensation Events
(compensable changes) for all contract Options A-F

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NEC Contract Management Training for Gammon – Session 1

Schedules of Cost Components

» Two Schedules
» Schedule of Cost Components (SCC)

 for Options C to F to assess PWDD and the default

method for evaluating Compensation Events
» Shorter Schedule of Cost Components (SSCC)
 for Options A & B used as the default method for
evaluating Compensation Events

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NEC Contract Management Training for Gammon – Session 1

NEC ECC Contract - Structure

Part One Nine Common or Core Clauses (10.0 – 90.0 Plus Sub-clauses)
Core Clauses

Option E Option F
Part Two Option A & B Option C & D
Reimbursable Management
2A - Main Option Priced Contract Target Contract
Contract Contract
Clauses
AS BQ AS BQ

2B - Dispute
Adjudication Clause (Option W1 & W2)
resolution
Part Three
Secondary X Options (pre-drafted options of which any/none may
3A – Secondary
be selected)
Option Clauses

3B – Secondary
Z Clauses Secondary Z Clauses / Employer drafted special conditions

Part Four Pre-drafted Cost Component Schedules (Defines Reimbursable

Costs)

Part Five Contract Data Parts One and Two 60

NEC Contract Management Training for Gammon – Session 1

Contract Data
» CD Part 1 - completed by Employer for tender documents:
 primary and secondary options selected
 details of Employer/Client, PM, Supervisor
 Works and Site information
 Start, Finish, key dates, etc.
 Secondary option information

» CD Part 2: completed by Contractor for tender submission:

 Contractor’s key people
 tender price
 fee percentages/ data for schedule of cost components

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NEC Contract Management Training for Gammon – Session 1

Agenda – Session 1

1. NEC Background
2. Primary Characteristics
3. NEC Collaborative Philosophy
4. NEC Suite of Contracts
5. ECC Structure and Key Documents
6. Target Cost Contracting
7. Summary and Q&A

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NEC Contract Management Training for Gammon – Session 1

What is a Target Contract? (1)

» Cost reimbursable contract arrangement where the
Contractor is paid ‘cost +fee’ as defined in a series
of contract rules, with parties also sharing cost
savings and cost overruns against pre-agreed target

» It incorporates cost management and incentivisation

mechanisms through gain share / pain share and
value management provisions. This allows the
parties to share the benefits of project risks and
opportunities

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NEC Contract Management Training for Gammon – Session 1

What is a Target Contract? (2)

» Some costs are non-recoverable or disallowed
» Other costs are shared between projects
» Other costs may be included in OH&P (Fee)
» Cost reimbursable contracts should contain detailed
rules for what cost is recoverable
» For the NEC ECC this is provided in the SCC and SSCC

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NEC Contract Management Training for Gammon – Session 1

Why Use a Target Contract? (1)

» For projects of high risk and complexity, which otherwise
suffer from poor performance and cost overruns when using
traditional contract forms, which often seek to transfer risk to
Contractor for limited/no cost. These contractual
arrangements will also often lead to disputes
» To manage costs and create savings against an agreed cost
target (gain-share). Emphasis is on early identification and
mitigation of risk and maximising efficiency through
proactive and collaborative management

» To engage the talent and expertise of the whole project team

to secure efficiency improvements in delivery of the project
through alternative design and construction solutions

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NEC Contract Management Training for Gammon – Session 1

Why Use a Target Contract? (2)

» Identifying and Mitigating risks
 realistic Target Cost, remove guesswork
» Utilizing Contractor Expertise
 methodology-driven or specialist projects

» Maximizing Efficiency
 combine contractor/consultant knowledge and
expertise to improve project outcomes

» Proactive and Collaborative Management

 Teamwork creating win-win scenarios

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NEC Contract Management Training for Gammon – Session 1

Advantages of Target Contracting

Advantages Advantages
Advantages of Target Cost Contracting to Employer to Contractor

 clear understanding of and responsibility for

 
risks known at contract award
 joint management of works 
 increased management effectiveness and
efficiency through collaboration 
 incentivisation of both parties to perform for
their mutual benefit  

 reward for improved performance and

innovation 

 share in savings from Contractor’s improved


performance

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NEC Contract Management Training for Gammon – Session 1

Advantages of Target Contracting

Advantages Advantages
Advantages of Target Cost Contracting to Employer to Contractor

 significant reduction in claims  

 reduction in non-productive management 
time (e.g. claims recovery costs)
 avoidance of confrontation on highly  
complex works
 increased confidence in working methods 
 increased cooperation from designers on
buildability issues 

 mitigation of risk  
 greater predictability of outturn cost  

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NEC Contract Management Training for Gammon – Session 1

Tendering Target Contracts

» Pricing the Work

 Contractor divides the total tender price into two

parts:
1. the “Target Cost” and
2. the “Fee”
 Target Cost and Fee are adjusted separately during
the course of the project.

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NEC Contract Management Training for Gammon – Session 1

Forecasts of the total Defined Cost

» Clause 20.4 ( NB only in Options C&D)

The Contractor prepares forecasts of the total Defined

Cost for the whole of the works in consultation with the
Project Manager and submits them to the Project
Manager. Forecasts are prepared at the intervals stated
in the Contract Data from the starting date until
Completion of the whole of the works.

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NEC Contract Management Training for Gammon – Session 1

Subcontracting for Cost reimbursable Contracts

» Guidance Notes p43-45
 Where Options C-F used it is common for PM to
require more oversight of subcontract procurement
such as
• minimum number of tenderers
• Selection criteria
• PM involvement in procurement/appointment
 NB See Govt Practice Notes P110-116 for extensive
procedures on procurement and subcontracts

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NEC Contract Management Training for Gammon – Session 1

Defined Cost - Schedules of Cost

Components
» The two schedules provide definitions of reimbursable
items of cost ( Defined Cost) and those included in
Contractor’s fee for NEC Main Contract Options C to F
for all payments calculated on a cost basis

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NEC Contract Management Training for Gammon – Session 1

Disallowed Cost Options C and D

» Clause 11.2 (25)
 Disallowed Cost is cost which the Project Manager decides
• is not justified by the Contractor’s accounts and records,
• should not have been paid to a Subcontractor or supplier in
accordance with his contracts,
• was incurred only because the Contractor
• did not follow an acceptance or procurement procedure
stated in the Works Information or
• did not give an early warning which this contract required
him to give
and the cost of…

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NEC Contract Management Training for Gammon – Session 1

Disallowed Cost Options C and D

» Clause 11.2 (25) (cont) … and the cost of
• correcting Defects after Completion,
• correcting Defects caused by the Contractor not complying with
a constraint on how he is to Provide the Works stated in the
Works Information,
• Plant and Materials not used to Provide the Works (after
allowing for reasonable wastage) unless resulting from a
change to the Work Information,
• resources not used to Provide the Works or not taken away from
the Working Areas when the Project Manager requested and
• preparation for and conduct of an adjudication or proceedings
of the tribunal.

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NEC Contract Management Training for Gammon – Session 1

Administration of Target Contracts

» The Contractor keeps these records (Clause 52.2)
 accounts of payments to defined cost

 proof that the payments have been made

 communications about the assessments of

compensation events for Subcontractors and

 other records as stated in the Works Information.

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NEC Contract Management Training for Gammon – Session 1

Administration of Target Contracts

» Open Book Accounting (Clause 52.3)
The Contractor allows the Project Manager to inspect
at any time within working hours the accounts and
records which he is required to keep.

» HK Govt Practice Notes ( p67 to 91) include 24 pages of

very detailed provisions for “Auditing, Financial Control
and Supervision System for Target Cost Contracts”

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NEC Contract Management Training for Gammon – Session 1

Administration of Target Contracts

» Value Management

 If the Contractor proposes a value engineering idea

that changes the Works Information to reduce the
Contractor’s costs, then the target is not changed

 In this manner, both Client and Contactor will share

in any savings due to the target cost share
mechanism

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NEC Contract Management Training for Gammon – Session 1

Summary of Main Changes to Target in HK

Govt Practice Notes
» The proposed changes are
important as a whole they:
 Amend the risk profile to the
Contractor’s disadvantage
 Fixed Pain/Gain Share at
50:50 with 10% cap on Pain
 Will increase adversarial
behaviors and reduce
collaboration

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NEC Contract Management Training for Gammon – Session 1

Agenda – Session 1

1. NEC Background
2. Primary Characteristics
3. NEC Collaborative Philosophy
4. NEC Suite of Contracts
5. ECC Structure and Key Documents
6. Target Cost Contracting
7. Summary and Q&A

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NEC Contract Management Training for Gammon – Session 1

BK SURCO TRAINING
NEC CONTRACT MANAGEMENT TRAINING

FOR

GAMMON CONSTRUCTION LIMITED

12th November 2020 80