The Hong Kong construction industry can expect a period of uncertainty and change, as the Government has adopted the use of the NEC3 forms of contract over more traditional forms of construction contracts.

Traditional Form of Construction Contract

The traditional construction contract serves one principle purpose, and that is to allocate risks between the employer and the contractor. A traditional contract determines the rights and liabilities of the parties when there is a problem. As a result, most people put the contract into the drawer after it is signed, only to be taken out if a dispute arises.

NEC3 Contract

The NEC3 contract is conceptually very different. The purpose of the contract is to set out procedures for parties to identify risks as early as possible, and to resolve problems together. The fundamental basis of the NEC3 contract is that the parties work together in the spirit of ‘mutual trust and cooperation,’ and it is envisaged that the contract is used as a project management tool, with parties working collaboratively, in a non-adversarial manner, to mitigate and manage risk, and so enhance efficiency.

NEC3 in Hong Kong

Considering the widespread use of NEC3 for government contracts in the UK, the Development Bureau decided to trial NEC3 in public work contracts. In 2009 the Drainage Services Department (“DSD”) launched the first Hong Kong pilot project - the HK$50M Fuk Man Road nullah improvement works. This project was a success, and so in 2012 the DSD launched the Government’s second pilot, the HK$272M village sewerage project in Sha Tau Kok, New Territories. By 2013 there were 26 pilot NEC3 projects in the pipeline, as well as pilot projects under the CLP and the Jockey Club. The largest of these pilots was awarded in February 2013, the HK$2.97 billion contract for the design and building of Tin Shui Wai Hospital. Impressed with the performance of the NEC3 on these projects, the Development Bureau issued a directive that the Works Departments should adopt the NEC3 form in all public works contracts put out for tender in 2015/16, as far as possible.

2014/2015 should then have seen a significant number of NEC3 projects take off, however, there was a substantial fall in the number of construction projects, due in no small part to filibustering at LegCo. Although the Development Bureau’s directive got off to a slow start, as public works begin to come through in 2016, we can expect to see more Government contracts using NEC3, which will begin to answer the question as to whether the Government was correct in deciding to place so much faith in a new and largely untested method of contracting in Hong Kong.

Why is this such a radical move?

  • NEC3 is a completely new concept. People in the construction industry will need time to learn how to utilise the contract during the course of the works as a project management tool, and project staff will require training as to how to use the contract;
  • It is important for Contractors and Employers to change their attitude towards contract administration. An adversarial approach will not work under NEC3, but attitudes may take time to change;
  • Sufficient resourcing is one of the keys to NEC3. Because it is a project management tool, it is time intensive, and so requires more people to actively manage the project. However, in the current construction market, there is a serious shortage of staff and workers;
  • NEC3 is written in simple language; it uses the present tense, short and non-legalistic wording and it avoids crossreferences. This is to make it more user-friendly, but may have the effect of creating legal uncertainties;
  • NEC3 calls for more contemporaneous decision making and dispute resolution. In the UK, where adjudication is statutory, most disputes under NEC3 are resolved by way of adjudication. But in the UK adjudication is a tried and tested tool, whereas it is yet to be implemented in Hong Kong, which leaves a question mark over whether parties will be able to resolve disputes effectively during the course of the works;
  • Multi-layer sub-contracting is common in Hong Kong. This means that to some extent the main contractor relies on the performance of the sub-contractors and carries the risk of their failure. Therefore if the sub-contractor does not adopt the same philosophy and regime, the NEC3 mechanism could fall apart

Conclusion 

It will be difficult to measure the ‘success’ of the NEC3 Government projects over the next two years, because most large infrastructure projects will take longer than that to complete, so we cannot know if a project has been completed within budget and on time. NEC3 may prove to be more suitable to large civil engineering projects where risks are more complicated and uncertain. Proactively managing these risks collaboratively, rather than allocating risk, may aid efficiency of projects, and the Hong Kong Government, and the MTRC as major civil infrastructure projects owners, are the types of organisations that can commit the level of resources that the NEC3 requires.