NEC contracts are used extensively in the South African public sector. The Construction Industry Development Board (CIDB) Act and its standards for uniformity in construction procurement seek to bring about standardisation and uniformity in construction procurement documentation, practices and procedures for all state entities. In doing so, the CIDB recommends the NEC standard form contract as one of the preferred prime contracts for use in the public sector. The recent developments with regard to the NEC suite of contracts are therefore of importance to South Africa.
On 22 June 2017 the NEC will release its next generation of NEC contracts – the NEC4. The NEC team announced this as a positive development which builds upon the content of the NEC3 to achieve further improvements to the efficiency and outcome of projects and work programmes.
The NEC4 revises the full suite of NEC3 contracts and introduces two new contracts: NEC4 Design, Build and Operate Contract (DBO) and the consultative NEC4 Alliance Contract (ALC).
On 5 April 2017 the NEC4 Contract Board introduced the new suite of contracts and explained why and how the NEC4 was developed.
It was revealed that the NEC4 aims “to support the changing requirements of users, stimulate good project management and improve clarity and simplicity”. This will be done by “encouraging success” and not just the “consequences of failure”.
The NEC4 DBO will combine responsibility for the design, construction, operation and maintenance to support operational requirements from a single source. Although not new to other standard form contracts used in South Africa, this is a welcome addition to the NEC suite. We see this new addition as servicing South Africa’s increased demand for integrated project solutions for large complex projects extending into the operational phase.
The NEC4 ALC will target multi-party integrated teams working together to achieve the client’s objectives by sharing in risks and benefits. Traditionally construction contracts placed significant emphasis on the consequences of failing to meet the project completion date at the agreed contract price. The focus was risk allocation between contracting parties. You either gained or profited at the expense of your counterpart – leading to inefficient, costly and counter-productive solutions.
The NEC4 ALC is incentive based. Parties agree to work together as one integrated team promoting cooperative decision-making, risk sharing and financial transparency. Ideally this means less blame and limited, or no, disputes. This type of contracting may gain favour in South Africa with state-owned entities in the rail, energy and water sectors (all of which have vast internal knowledge, skills and capacity to influence or participate in the development and delivery of the project) working in collaboration with private sector parties. The use of the NEC4 ALC must, however, be based on a strategic procurement analysis with a good understanding of which contracting model is most likely to best deliver value for money against commercial objectives.
Some new features in the NEC4 include:
- New information modelling (BIM) option, which provides additional clauses to support the management of information model requirements. This will be of particular interest to the South African building industry, where technology is adopted to encourage and investigate new approaches for building design.
- New Contractor’s design and build option allowing IP ownership and licence to use material.
- New procedures to reach agreement on the final amounts due under the contract. The Project Manager will now issue a final assessment of payment due to the Contractor within four weeks of the defects certificate.
- New consensual dispute resolution allowing for senior representatives of each party to reach an amicable resolution. This will become mandatory for South Africa, where Option W1 is commonly used.
- New Option W3 offering recourse to a dispute avoidance board (DAB) to encourage and support parties resolving disputes consensually. Any decisions by this new DAB will not be binding and the provisions for adjudication will fall away.
- The client can now specify which collateral warranties will be required and under what form. The contracts also now allow for: assignment; bribery and corruption clauses; and confidentiality and quality management – negating the need for Z clauses to cover these areas.
- The term “Employer” is replaced with “Client”; “Works Information”, “Goods Information”, and “Service Information” with “Scope”; and the “Early Warning Register” is replaced with a “Risk Register”.
Many of these new features are optional, allowing flexibility for South African users. We encourage the transition to the NEC4 given the gaps it fills and its ability to effectively address the emerging market opportunities and issues in alliance contracting.