New Engineering Contract (NEC) and Joint Contracts Tribunal (JCT)

3302 words (13 pages) Essay in Contract Law

05/08/19 Contract Law Reference this

Last modified: 05/08/19 Author: Law student

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The first NEC contract was drafted in 1993 with an aim to encourage collaboration and sharing of risk and reward within construction. (NEC, n.d.) Using plain language, it inspires good management and limit disputes between contractor and employer by introducing compensation events to promote risk prevention over blame delegation. (NEC, n.d.) There have been 4 iterations published; the most recent being the NEC4 in 2017. (ICE, n.d.) By this time the contract has proved itself in its procurement of the 2012 Olympics. As a result of the success ICE decided to solely endorse this form of contract from 2009.

The Joint contracts tribunal was formed in 1931 by the Royal institute of British Architects and is made up of seven members representing a wide range of interests in building and construction industries. They have been responsible for standard forms of contracts, guidance and other standard forms of documentation used in the construction industry. It focuses on ensuring risk allocation is balanced between parties, schedules and payment procedures. (Pinsent Masons, 2012) Unlike the NEC these contracts are only appropriate for those experienced in construction and risk analysis, that have appropriate in-house contractual procedures. (Pinsent Masons, 2012) The JCT form of contract has little provision for dealing with unknown risks arising throughout the project. (NEC, n.d.)

Key features of NEC and JCT

Both contracts encourage an authoritative figure that works with the contractor on behalf of the employer; in NEC a Project manager and in JCT a Contract administrator. The PM adopts an active role, connecting all parties practically; the NEC’s choice to open with a collaboration clause[1] promotes this united work ethic. (Shutte, 2016) This good management and active input from all parties is encouraged through the risk register[2] and compensation event procedures[3] (mentioned later) put in place by the NEC. (Close, 2011) The CA instead has an accounting focus and is not as proactive in leading parties; their roles include keeping the accounts and guiding parties through procedure. (Shutte, 2016)

In the case of expense disputes; the NEC uses a compensation event procedure which considers both time and costs together, with the ethos being that problems are solved in real time. (Jenkins, 2014) Compensation events also have a condition precedent nature, with denial of appeal if the contractor fails to inform the PM within 8 weeks. This time bar makes the resolving of risks an active part of the contract and a mutual interest between all parties involved. Conversely, JCT deals with cost and time matters separately and the contractor is obliged to notify the CA of relevant events/matters, however suffers no contractual consequence if they fail to do so.[4] (Weld, n.d)

NEC applies condition precedents to ensure compensation events are recognised early[5] (Dalton, 2011) Ensuring cost and time disputes are efficiently resolved so there is limited detrimental effects to the project. In JCT there is no time precedent for risks to be concluded, adopting a ‘pay later’ approach. (Shutte, 2016) The contract therefore resolves disputes in a final account procedure[6] in which adjustments to the contract sum are agreed and the final payment is confirmed. This process can be time consuming and adversarial, making the NEC ‘pay as you go’ angle more appealing to minimise disputes at the end of a project and ensure an efficient closing process. (ICE, 2017)

NEC promotes a risk register tool to aid in identifying risks and determine appropriate mitigation for each circumstance. The risk register is started at the outset of the contractual stage and compiled of risks identified in the contract data. The list can then be added to accordingly as the project progresses by means of the early warning[7] regime. The contract states that either the PM or Contractor must request a risk reduction meeting[8] to discuss risk mitigation, solutions beneficial to all, assigning roles and removal of risks from register if required. Early warning acts as an incentive providing an agreed pay/time sum efficiently for those involved in the dispute. JCT however works on standard allocation of risks, where the burden of risk is not shared but allocated to individuals. These risks are not actively dealt with therefore solutions are often achieved in a less timely fashion. (Ross, 2017)

Each form of contract is required to specify their preferred route of dispute resolution procedure. Under the goal of ‘mutual trust and cooperation’ the NEC encourages adjudication and then arbitration as their preferred practice (Rousel, 2010); this process avoids the courts by providing an experienced unbiased third-party member to consider the contractor and PM’s arguments and come up with a resolution. This method is ordinarily more efficient, cost effective and tends to cause less bad blood between the PM and contractor however it is binding, and parties must agree to whatever award is granted by the arbitrator. There is usually no option to appeal the final decision as the parties are assumed to have understood the risks. (Legal-dictionary, n.d) JCT conversely favours litigation, which can be preferable if the case has a law focus as an arbitrators’ role is based upon technical expertise surrounding the project. Litigation however is becoming less desired as it damages the continuity of the plan and can damage both sides reputation. (Rousell, 2010)

In summary; the PM role encourages a greater deal of cooperation within projects whereas the CA still poses a rift between employer and contractor. The compensation event procedure and time bar clauses have efficiency however there is evidence to suggest disputes arise from contract lexis (Coward, 2017). The lack of consequence for the CA if risks aren’t reported can cause disputes later in the process. Condition precedents and the risk register meetings promote a good relationship between the contractor and the PM and allow each to stay informed. The programme update process though is extremely complex and requires a highly organised and experienced PM for it to succeed. Finally, the push for arbitration can be positive in a continuing project but the case itself dictates whether the claim is more effective than if litigation were used.

From this we can see NEC is overall seemingly more positive due to the promotion of good practice in industry however discrepancies in wording can hinder projects and the step away from legalise is something to get used to. It is also important to note that an experienced and active PM can often make all the difference in NEC’s success.

Disputes

There are still a great deal of disputes in the construction industry with the UK average value of disputes at £26m in 2016 and 17. (ARCADIS, 2017) Time taken to resolve these has seen obvious increases over 2016 and 17. This highlights a need for better contract administration and more robust documentation, there is also a need for all parties to be more clear on their contractual obligations. A worldwide study conducted by ARCADIS in 2017 highlights the main causes of disputes are; incorrect distribution of contracts, poorly handled claims and a lack of understanding when it comes to contractual obligations. (ARCADIS, 2018)

The introduction of 4D BIM is an example of the kinds of technology that can aid in mitigating such disputes. 4D Building information modelling introduces the 4th dimension ‘time’ and allows CAD to show the project participants a predicted view of each stage in the construction process. (Patel, 2018) This allows all members of the project of what tasks, when and how they are carried out giving them an informed understanding of the plan. Seeing the project allows individuals to detect and circumvent problems such as an overcrowded work site; issues that are difficult to spot using the regular critical path method schedule. This early detection will reduce quick reaction rescheduling and workarounds will become less common meaning an overall reduction in disputes over time/cost loss. (NAVIGANT, 2016)

In the case of technology such as smart phones, virtual platforms and the internet of things. Sharing and access of information is becoming much easier. When considering contracts such as NEC4 with a continuously adapting programme in place, internet sharing of this information will allow all work members to have access to this information immediately, ensuring they remain informed of their roles in the project. (Dupay, 2015)

This very brief analysis suggests that the introduction of new forms of technology is a long process and requires testing in order to earn the trust of the industry. However, when used correctly, access to information and an increased awareness of site procedures will aid in the decrease of disputes once the industry becomes acclimatised to using technology.

Big data and the Blockchain

Advances in the storage capabilities of computational data and power and a drop-in sensor costs means that we can gather more data than ever before. Data regarding anything from utilities and building management systems to operational cost monitoring can all be used to understand the behaviour of a complex site. Smart technologies allow the collection and storage of big data and provide transparency through being accessible. They can analyse such data and determine how one change may influence others. Construction 2025 argues that live data will provide an insight into construction processes resulting in smarter more energy, work force and material efficient designs. (Designing buildings wiki, 2017)

Project Managers can use big data in every stage of the project. In the design stage, building design and modelling, environmental data and even social media can inform what and where to build. Analysing historical data can pinpoint where similar projects have failed, this makes the risk detection process much more accurate. (Burger, 2018)

During the building stage, weather, traffic and community activity can dictate appropriate times for construction activities. Sensors allow machine use to be monitored and the PM can conclude optimum leasing times for equipment in order to reduce fuel usage and ecological impact. (Burger, 2018) Environmental impacts can be considered such as noise levels and particulates in the air, this is extremely useful in built up areas where standards must be met. For example, the tideway tunnel must conform to the Clean Air Act 1993 which requires monitoring of dust released into the air. (Thames Water, 2014)

Big data can also be used to monitor the performance of the build. Bridges can be monitored to detect if deflection becomes out of bounds, this information can then be fed back to BIM to schedule maintenance measures.

Blockchains are decentralised databases which securely records transactions in chronological order. (Hughes, 2017) Blockchains are both faster and more secure than traditional systems and much more cost effective. There are usually a wide number of companies involved in a project and typically there is a wait time on the sharing of documents and information. Whether it be contracts or changes to the programme made by the PM. Blockchain’s centralised system means that all this documentation is easily accessible to all members and wait times aren’t an issue. This allows management to spend more time focussing on the project than they would previously have spent transferring data. (Matthews, 2018)

Smart contracts and their implications

Development of blockchain technology is proposing smart contracts in which software can negotiate agreement terms, verify their fulfilment and executes these agreed terms. Although smart contracts are beginning to be talked about due to the success of blockchains in bitcoin, the idea was originally introduced 20 years ago. As a smart contract is programmed to process claims, it removes the need for a middle man/ lawyer making transactions more efficient and cost effective. But as the contract is imbedded in a blockchain, no one oversees the money leading to questions about virus protection and liability if errors occur. However, the smart contract has similar features to the blockchain in that it is immutable thus no one can tamper with the contract and they are distributed meaning everyone involved must validate the transaction for it to go ahead. (Tania, H n.d)

When dealing with risks during the project s there is a lack of confidence in the use of AI for decision making, with tech engineers pushing this alternative means of dispute resolution. (Hryniewicz, 2018) Perhaps due to fear of the unknown, many engineers when asked in a study of the opinion of stake holders on smart contracts said that in the case of resolving a dispute it is necessary for human interaction. (J, Martin & H, Escott, 2018) AI may limit the to and fro traditional disputes have, there is an argument that it is common practice to achieve trust through interaction. (Lewicki, 2003) However, some suggest that a fully automated system may lead to a greater degree of trust due to ease of sharing and security. This may pose difficulties when trying to integrate the NEC’s compensation event format into smart contract code. This in turn could pose confusion, such as who has the right to claim for compensation events and who is liable when such risks pose delays or cost impact. (Winfield, 2018)

References

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[1] Clause 10, NEC3

[2] Clause 11, NEC3

[3] Clause 61-65, NEC3

[4] Clause 2.4, JCT

[5] Clause 16, NEC3

[6] Clause 30, JCT

[7] Clause 16, NEC4

[8] Clause 16.2, NEC4

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