NEC Contracts Flashcards
What are the 7 types of contract
A - Priced contract with Activity Schedule
B - Priced contract with BOQ
C - Target cost with activity schedule
D - Target cost with BOQ
E - Cost reimbursable
F - Management contract
G - Term contract
Discuss Option A contract
A - Priced contract with Activity Schedule
- Background:
o Maximum risk for contractor
o Payment is made only upon completion of activities and associated defects
o Important to ensure activity schedule is broken down adequately to ensure required cashflow is achieved - Pros:
o Greater cost certainty for client
o Simple payment process – easy to confirm an activity is complete - Cons:
o No provision for part payment. If there is an issue completing an activity, no payment is made until it is complete.
o Client needs to assess the tendered price to ensure they are getting value (with a target cost, they will gain back money if the tender price was too high, so less risk)
Discuss Option B contract
B - Priced contract with BOQ
- Pros:
o Better cash flow – interim payment made based on % completion of items in the BoQ (i.e. install 5no posts, 3no complete, pay that amount)
o Easy to track changes – if 5no posts allowed in BoQ, and 7no were required, this is easily identified.
o Risk is more split:
Client takes risk for the quantities in the BoQ (less contractor risk).
Contractor takes risk with the rates (need to cover everything) - Cons:
o Higher degree of design development required by the client (to inform BoQ)
o For multiple elements of work in a single rate, it can be difficult to assess % work complete
Discuss Option C contract
C - Target cost with activity schedule
- Background:
o Payment made on a monthly basis for the Price for Work Done to Date (= Defined Cost + Fee) minus previous payments.
o Pain / gain at project completion. Calculated by comparing the Defined Cost (+ Fee) at completion against the Target Cost. Pain/gain split based on predefined boundaries. - Pros:
o Target cost incentivises collaboration as both parties share in the success or failure of the project.
o Better cash flow for contractor compared to Option A (interim payment). - Cons:
o Share of pain/gain is settled upon completion. The client must continue paying the contractor until completion, regardless of whether they are over the target cost. This could cause money stream issues for the client.
o If share ranges disproportionately favour the client, this could introduce significant risk to the client.
o More complicated to calculate the due payment
Discuss Option D contract
Option D – Target cost with a BoQ:
- Pros:
o Target cost incentives.
o BoQ quantities risk sits with the client. - Cons:
o Target costs cons.
o Unlike Option B, it is not a re-measurement contract. If there is an error in the quantities stated within BoQ, the price won’t be amended. Potential to cause financial loss (to either contractor or client).
Discuss Option E contract
Option E – Cost reimbursable:
* Background:
o Contractor paid all their incurred Defined Costs + an agreed Overhead and Profit %
- Pros:
o Ability to set up a contract quickly and with little or no scope definition - Cons:
o Significant cost risk to the client
o Inability for both parties to plan their cashflow
Discuss Option F contract
F - Management contract
- Background:
o Tailored for the management contractor procurement route
o Works subbed out to subcontractors who are employed / managed by a main contractor on behalf of the client. - Pros:
o Can be used by an inexperienced client to sub out responsibility for procurement and management - Cons:
o All the cost risk sits with the client
o Requires high levels of trust between organisations
Discuss Option G contract
G - Term contract
- Background:
o Used on a PSC contractor to appoint consultants
o Uses a priced task schedule – similar to an Activity Schedule. Consultant provides costs against each task.
o As and when the Employer wants to call-off some of the services, they issue a Task Order for a specific task only.
o Used when the Employer can define the type of services they require, but not the quantity. - Pros:
o Allows flexibility in procurement - Cons:
o Not suited to high complexity
What is the role of an NEC Supervisor?
Under UK law have to ‘do as stated in the contract’ and be impartial
Role is to check Contractor’s compliance with Scope and any Contractor’s design that has been accepted by the PM
Main role is to notify Defects
They accept nothing!
What is a defect?
Something not in accordance with the Works Information
Part of the works not in accordance with the contractor’s design which the PM accepted*
Part of the works not in accordance with the law
What are defined costs?
- Cost of items in the Schedule of Cost Components (PLANT & PEOPLE)
- Payments made to Subcontractors for their work BUT you do NOT take account of deductions made for Defects, missing Key Dates etc.
- Minus Disallowed Costs
51.1 – All contractors costs not included within the Defined Cost are treated as included in the Fee.
The Fee is intended to cover profit and any “off-site overheads”. Two fees, one for the Contractor (direct fee) and another for the Subcontractors (subcontracted fee). Not NEC4.
Schedule of Cost Components + Subcontractor Payments – Disallowed Costs
What are disallowed costs?
Amounts not justified by accounts / records
Costs incurred because a required EW was not submitted
Defects after Completion
Defects cause by non-compliance by Contractor
Anything not used to Provide the Works (could be plant/material but an allowance is made for reasonable wastage)
Costs relating to Adjudication
Important timescales
- 25.3 – 4no weeks from meeting a Key Date for the PM to assess the additional costs
- 31.3 – 2no weeks for PM to accept the programme
- 51.1 – PM certifies (confirms) payment within 1no week of each assessment date (assessment date is the date (each month or so) that due payment is calculated)
- 51.2 – Certified payment is made within three weeks of the assessment date
- 61.3 – 8no weeks to notify a compensation event once it has been identified
- 61.4 – 1no week for the PM to respond to a CE
- 62.3 – Contractor submits quotations within 3no weeks of instruction
- 62.3 – PM replies to a quotation within 2no weeks of receipt
What is an activity schedule?
- List of activities that need to be completed with price for each
- Commonly used on D&B contracts.
- Bidder takes risk on quantities.
- Need well defined Scope to produce a good activity schedule
What is a BOQ?
- Measured quantities of items identified in drawings with rate for each item e.g. £ / m of drainage
- Client takes the risk of the quantities.
- In order for the client to build up their part, they will normally require a developed design. Common for design to be completed beforehand. Therefore more suited for use on a traditional contract.
