Before entering into contracts, most parties focus on identifying the “perfect” form of contract for their project, whether that is the Engineering and Construction Contract (ECC), Professional Services Contract (PSC), or the Term Service Contract (TSC).
However, what is often overlooked is the specific option (from options A-F) to be used. Why does this matter?
Well would you ever use petrol for a diesel car? No. Then the same principle should be applied when selecting options. If the correct option is not identified and incorporated in the contract, it will cause detrimental issues throughout the project.
So what are the options, how do they differ and which is the best one for your contract and ultimately the project?
NEC options A-F determine the payment mechanism applicable to the contract and set out whether there is a limit on the contract price, as well as how and when parties will be paid.
The table below sets out a summary of the main options A-F.
|A: Priced contract with activity schedule.||Option A is ideally suited to design and build, where the Contractor is the sole point of responsibility to the Client. The activity schedule is key, this consists of a list of activities prepared by the Contractor which they expect to carry out in providing the works, i.e. a breakdown of the work. This must cover the whole of the contract price, as the Contractor’s entitlement to interim payments is assessed on the basis of completed activities, and not against percentage complete. The more activities that are listed, the more regular the interim payments. This payment is subject to change if the works are varied or a compensation event occurs.|
|B: Priced contract with bill of quantities.||The Client prepares a list of work items and quantities, which include methods of measurements that a Contractor must follow. This list of works produced should be in sufficient detail to allow the Contractor to price the works. However, the Contractor will be paid on the basis of actual measurements of the works carried out.
Whilst Option A offers more flexibility to the Contractor than Option B to decide on the specific details, it also imposes greater risk on them. For example, if an issue arises at a later stage due to the activity schedule, then the Contractor will be liable for the information contained within it, and once again carrying out works at its agreed prices and its agreed programme
|C: Target contract with activity schedule.||Option C is used where the extent of the works to be done is not fully defined or where the expected risks are acknowledged to be greater. Unlike Options A and B, here the Contractor and the Client agree the target price and share the financial risk, meaning any loss or gain is shared in agreed proportions|
|D: Target contract with bill of quantities.||Option D is a target cost contract with a bill of quantities. To the extent the target cost is missed, then there should be pre-agreement as to how cost savings or overruns are to be shared. The timing and accuracy of the bill of quantities is critical.|
|E: Cost reimbursable contract.||Option E is used when an early start to construction is required, but the definition of the work is inadequate or incomplete, even as a basis for target price. For example, urgent building work projects that require immediate reconstruction, repair or replacement. By using this option, the parties agree levels of the Contractor’s overheads and profit. The Contractor carries minimum costs risk and the Client pays the Contractor the actual costs of the works, plus the agreed levels of overheads and profit. This is commonly used for emergency works, e.g., insurance.|
|F: Management contract.||Option F is used in rare circumstances by the Client due to its complexity and the risk involved. Here, the Management Contractor subcontracts the construction works, unless the contract data suggests otherwise. Whilst the Management Contractor is responsible for managing the works, the burden of the cost, and therefore the risk, remains with the Client. This is because the price remains uncertain, and can only be finalised when the design is completed and subcontractor procurement is concluded.|
As for which is the most appropriate option for the project, this depends on a variety of factors including:
- The specific type of project;
- The duration of the project;
- The requirements of both parties e.g., how would parties be impacted by a target contract, rather than a priced contract? and
- The documentation to be provided e.g., will the parties work on the basis of the activity schedule provided or bill of quantities?
Once an option is agreed, the next step is to agree specific details for payment, including the key dates and amounts to be paid at each milestone, and subsequently complying with these.
After all, both developers and contractors know the consequences of failing to comply with payment mechanisms, right?
The approach to be taken with and how to use NEC was discussed in our webinar on 23 July 2020 with Bill Barton. To view detailed notes from the webinar can be found here.
How can Barton Legal help?
At Barton Legal we have extensive experience in all the standard contract forms, including JCT as well as NEC, IChemE, and FIDIC.
We believe that an increased understanding of contractual terms and the roles and responsibilities of all parties ensures a successful conclusion to a project, which is why we always use plain English and ensure you understand and can apply the terms of your contract.
Our aim is to reduce legal gobbledegook and increase collaboration between parties to increase the prospects of completing your project on time and on budget
We place great emphasis in the early stages of the contract on understanding and preparing thoroughly, in order to avoid costly disputes later.
If you have any queries regarding any of these contracts or any form of construction dispute, please do not hesitate to get in touch by email email@example.com or call our office on 0113 202 9550.