FAQ: NEC Contract Documents and Contract Data

For some of these figures, there are almost industry standard figures to put in. For
instance, if using X15, the Contractor’s design, the period for retention of contract
documents should match the timescales of the statutes of limitation, so is either 6 or 12
years, while the minimum amount of insurance cover for not exercising reasonable skill and
care in design is either £5m or £10m depending on the size of the contract. The same figure
then reads across to the entry for Defects due to the Contractor’s design in X18, limitation of
liability.

However, it is important to realise that, in general, the higher the amounts put in, the more
risk is transferred to the Contractor if the contract goes wrong. This means the Prices will be
higher or some contractors will not bid. This in turn will be informed by the risks associated
with the specific contract and the size of those risks compared with the size and financial
strength of the Contractor. Consequently, a balance needs to be set between setting the
amounts high enough to give the Client redress in case of Contractor default and motivating
the Contractor to perform versus the cost of risk transfer and enforceability of actually
getting the redress. For instance, how often are delay damages actually deducted ?

The defects date is the amount of time from Completion of the whole of the works that
the Contractor has a contractual obligation to come back and correct notified Defects. It is
typically a year, but sometimes longer and Defects cannot be notified after the defects date.
After this, the statute of limitations applies under general contract law.

The defects date is the amount of time, following Completion, that the Contractor has to
correct the Defect from when it is notified. This is typically two weeks, but can vary from
one to four weeks. The first defects correction period starts on Completion of any section.
Often, the Client enters a number of defects correction periods for different categories of
Defects. For example, those that stop the operation of the asset have a defects correction
period of one day or “as soon as practicably possible”.

Firstly, you need to check that the tendered total of the Prices, as entered into Contract Data part two, matches the sum of prices in the activity schedules or bill of quantities as it is these sums that count and give ‘the Prices’!

Selecting a Contractor on the Prices alone assumes that nothing changes during the contract i.e. there are no compensation events, which is almost unheard of. Consequently, you need to build up a realistic risk-based model of the value of compensation events broken down – or is that built up from – the various cost components in the Schedule of Cost Components to which the relevant rates and percentages tendered by the different contractors are applied. This will give an adjustment to the Prices which, when added to the tendered Prices, gives what is often called ‘the adjusted tendered total of the Prices’. This figure is then used for the financial part of the assessment when comparing different contractors’ tenders.

Failure to take account of these tendered rates and percentages typically results in high rates and percentages being tendered which, on entering the contract, cannot be changed.
Failure to have a realistic model often results in contractors playing games with these figures in order to look good at tender, but then do rather too well when compensation events occur.

Finally, note that under the cost-based options, the effects of high rates and percentages is magnified even more as they apply to the work in the original Scope, not just to work in compensation events. For example, under a target cost contract, it is always in the Contractor’s interests to ‘inflate’ the fee percentage as a proportion of component of the tendered Prices and ‘deflate’ the estimated cost of doing the work.

Yes. Simplifying*, if the Contractor is incurring costs within the Working Areas, then it can be reimbursed them directly as Defined Cost to which the fee percentage is then applied. (Under options A and B, Defined Cost is only reimbursable when compensation events occur, while for C to F, it applies to this and original work). On the other hand, if a cost is incurred outside the Working Areas, then it is treated as being not directly reimbursable – i.e. not a Defined Cost – and in the Fee.

Contractors therefore want as much area as possible to be referenced as working areas as this gives the potential to have more costs reimbursed directly and more Fee paid to them: a double upside !
Consequently, before entering the contract, the Client should make sure that the areas referenced satisfy the criteria of clause 11.2 (20) in which the term ‘Working Areas’ is defined. If not, the areas should be removed from the entry.

_{* The simplification is that persons and rates for manufacture and fabrication outside the Working Areas and design outside the Working Areas are excluded from the following statements}

The answer is only do this when you are happy that it is to the standard of an Accepted Programme, otherwise you lose the ability to use the incentive in clause 50.5 – withholding a quarter of the Price for Work Done to Date (PWDD) – to ‘encourage’ the Contractor to develop and submit such a programme for acceptance. Contractor’s should want to submit a good comprehensive programme to demonstrate they have understood the project, can produce a good quality programme to a good standard and also meet the contractual requirements.

However, it is arguably unfair on a contractor tendering in competition to develop a tender
programme to this level and quite hard as Subcontractors will not be under contract either.
Consequently, many Clients ask for a tender programme that is capable of being developed
into the Accepted Programme and define in the Instructions to Tenderers what they mean
by this. Having selected the Contractor, they then work with the Contractor to develop it to
a state where it can be incorporated into the contract via this entry in Contract Data part
two. Failing this, they continue working with the Contractor so that it can be accepted
before the first assessment date, thus avoiding the need to enact the quarter of the PWDD
sanction.

If the reason for selecting the Contractor is the quality of its design submission, then the answer is ‘Yes’. If the Contractor’s outline design is not referenced from Contract Data part two, then while the Contractor still has to satisfy your requirements, as expressed in the Scope referenced from Contract Data part one, it arguably has no obligation to do it as per its outline design as it is not incorporated into the contract. The counter-argument is that it was part of their offer. Avoid the argument and have it referenced from Contract Data part two!

Our view is that the NEC is deficient in this respect. We suggest that, via a ‘Z’ clause, any reference to “Scope provided by the Contractor for its design” is changed to “Scope provided by the Contractor”. Then in the Contract Data, you have two entries, one for “Scope provided by the Contractor for its design” (as there is currently) and one “Scope provided by the Contractor for its methodology”. The methodology, expressed in sufficient detail, is then referenced from the second entry and it becomes a contractual obligation to follow that methodology.