NEC3 An Alternative For Procurement

NEC3 is a family of standard contracts developed for the Institution of Civil Engineers in the United Kingdom.  They are increasingly being promoted in New Zealand as a modern and more progressive alternative to NZS 3910, particularly for more complex or long term projects.

The NEC3 family includes an engineering and construction contract, a professional services contract, and a term service contract, as well as various subcontracts and supporting contracts.  Many also come in both long and short forms.

Each contract is structured in the same way and uses the same clauses where possible.  They may be used alone, but they are also designed to be used in combination with each of the different parties in a more complex project, thereby ensuring that the client's relationship with each of those parties links together. 

The NEC3 contracts are flexible.  They offer options which enable the client to choose from a series of fundamentally different structures for managing and incentivising the contractors involved in the project.  In the engineering and construction contract, the options range from a fixed price contract to a cost reimbursable contract and a management contract.  There are also "target" options which enable the contractor to share in positive performance incentives and a "partnering" option, both of which can be used to create a form of alliance contracting.

Added to the structure options are a series of optional clauses offering choices on issues such as liability, advance payments, bonds and guarantees, and sectional completion to name a few. 

One of the stated aims of the NEC3 contracts is to stimulate good management of the project.  In particular they are claimed to be based on the belief that "foresight applied collaboratively mitigates problems and shrinks risk".  They clearly allocate the risks between the parties, but at the same time attempt to reduce the likelihood of these risks occurring by including procedures designed to ensure that the parties are made aware of the possible risks as early as possible.  The parties are then required to meet to find the best way of reducing or avoiding each risk as soon as they are made aware of it.

Where the risk is on the employer, the contractor is expected to present different quotations outlining a series of options from which the employer can choose, depending on the employer's priorities.

Some criticise NEC3 for having too many meetings and processes which just serve to increase the administration of the contract.  However, for long term contracts such as maintenance contracts and contracts where the exact work required is not so clear, frequent meetings will most likely be required anyway.  Procurement officers looking at projects of this kind should therefore consider the NEC3 contracts as an alternative.

However, even where an NEC3 contract is the better option, it is important to remember that it is a new and a very different agreement.  The NEC3 contracts have been written for use in any country, but even then, the writers could not avoid including a special section for certain contracts in the UK.  A similar section would be advisable to cover New Zealand's special requirements.  NZS 3910 specifically provides for the Construction Contracts Act and New Zealand's rules on health and safety plans.  It also includes special provisions designed to assist Council clients who might have a regulatory function affecting the project.  All of these may need to be provided for.

Parties adopting the NEC3 model must also be prepared to take a new approach.  The NEC3 contracts use different terminology from NZS 3910.  Both parties need to take the time to work out what is meant by each of the new terms.

There is also the requirement for both parties to adopt a more collaborative attitude to the project.  This will require a change in approach from both sides.  We recommend that NEC3 agreements be first adopted where the benefits of the collaborative approach outweigh any increases in the time and cost of the administration of the contract.  Once the client is familiar and comfortable with the processes provided for in the NEC3 contracts a decision can be made on whether this form should be adopted as the preferred standard. 

Our Commercial Services

For more information please contact:

John Ferner
Partner
t +64 9 979 2153
e: John Ferner

Chris Paterson
Partner
t +64 9 979 2173
e: Chris Paterson

Last updated: 26 March 2010

The contents of this publication are general in nature and are not intended to serve as a substitute for legal advice on a specific matter. In the absence of such advice no responsibility is accepted by Brookfields for reliance on any of the information provided in this publication.