Since Sir Michael Latham commended the NEC contracts as a “genuine tool for best contractual practice” for both clients and supply chain alike, much has been expected of projects managed on NEC contracts.
The NEC3 form of contract is widely used on privately funded as well as publicly funded projects, across many sectors and from simple construction projects to the most sophisticated and technically complex projects. It has been used (or is being used) on high profile projects such as the Olympics, Heathrow Terminal 5 and the Channel Tunnel Rail Link.
Has it been the success it was expected to be? Has it promoted a change in the way projects are managed? Does it result in reduced scope for disputes?
Problems on the horizon
A successful project is usually considered to be one that is high quality, completed on time and on budget. If a project programme and budget changes, success is often measured on how this change is managed. NEC contracts are designed to ensure change management is a smooth process and there are no “surprises” upon completion.
All forms of contract have processes and procedures for dealing with change. Success is, in reality, dependent upon the commitment, experience and skill of the project team in addressing change. NEC contracts haven’t changed this, they simply provide more structure and more detailed processes for dealing with change (with a view to stimulating good management). However, under NEC contracts the failings of project teams can be considerably magnified. Without the necessary experience, skill and commitment the positives of NEC contracts – flexibility, simplicity, stimulating good management – of NEC contracts can quickly become negatives.
We have recently begun to see increased problems with projects on the NEC3 form of contract. What explains this increase in problems?
- The change in mindset required in complying with NEC3 weighed against the appearance of being “contractual”.
- Inexperience of managing a project on NEC3 terms.
- The credit crunch and liquidity problems in the construction sector (the increased likelihood of cash flow problems arising).
- The legal uncertainties and ambiguities inherent in NEC3.
- Reduced and stretched workforces having to deal with an adminstratively burdensome contract.
- The increased use of NEC3 by both the public and private sector.
The current economic climate
In times of economic growth and stability it may have been acceptable to compromise the risks and issues arising on NEC3 projects. Indeed, the lack of legal certainty and clarity in NEC3 may well explain why interpretation of some of the more ambiguous terms in NEC3 have not yet been tested in the Courts. In the current economic climate this is likely to change.