NEC Launches Consultation on New Collaborative Contract Form – have your say!

I’ve been looking through the draft NEC4 ALC model form of contract, and these are my initial reactions.

The NEC Contract Forms have become a key feature of the UK – and increasingly international – construction industry over the past 20 years. The NEC was introduced as an attempt to make contracts more user-friendly and collaborative in nature. I was not convinced how well they do this – they always seemed to have quite a steep learning curve to me – but the industry seemed to like them, and the UK government strongly encouraged their use.

Project Alliances have been slowly growing in popularity since emerging in the late 1980’s. But the NEC never had a standard from designed for a project alliance, as an alternative to the UK’s PPC2000, the Australian Governments Project Alliance Agreement, or CD300 IPD Agreement in the US.

Until now.

NEC has just launched a consultation on the NEC4 Alliance Contract (ALC), and I have had an initial look through. This took some effort, because I don’t find the NEC’s approach to writing very user friendly, even though I am actually quite contract-savvy!

Whilst a great step in the right direction, I have some reservations on my first reading of the draft, which I will be feeding into the consultation process. My main concerns are…

1. It perpetuates the myth that Project Alliances are complex,

and they take significantly more effort than more traditional approaches, and so should be limited to more major, more complex projects and programmes.

This is not my personal experience, nor that of published alliance case studies from the UK, Australia, Finalnd and the USA (where alliancing is more usually known as IDP – Integrated Project Delivery).  Alliancing can be – and has been – successfully used on projects as small as £5M in value, or even less.

A project alliance should use less resource, take less time, and deliver better results than fixed-price or reimbursable approaches.  But this only happens if you stop managing projects and their associated contracts in the way you always have done.  If you simply add an alliance approach over the top of a traditional organisation and set of management processes, of course it will be a bureaucratic burden – but that isn’t an inherent problem with the Project Alliance method!

2. It doesn’t cleanly split cost and fees.

A core principle of a project alliance is the alignment of the financial interest of all the members of the alliance – client and supply members. Once the project is underway, the only way for the supply members to make more money should be to make the project successful. But I’m not sure the draft NEC4 ALC does this.

At a simple level, an alliance splits payment into three parts:

  1. Cost,
  2. A contribution to corporate Overheads, and
  3. Profit

First, the draft NEC4 ALC allows agreed cost rates to include more than pure costs, in particular in the day rates for employees. Also the overhead fee is calculated as a percentage of the costs.  Each of these means that a supply member gets more income if they put more work through their books, and vice versa. This immediately conflicts with the alliance principle that work is allocated on a ‘best for project’ basis.

For example, if a designer realises that it would be better for the project if a sub-contractor did the detailed design rather than them, the designer’s employer would reduce the amount they charged the project, which would then reduce the overhead contribution they received.  Overheads are not variable costs, mostly they are fixed costs, so the nett impact of this is a reduction in profitability for this supplier, even though they did what was in the alliance’s best interest.

My view is that the best way to manage the payment to alliance members is the CFV method. (Cost, Fixed, Variable).

  • Costs have to be pure cost, as discussed above.
  • If there is to be a contribution to corporate overhead, it should be fixed (in money)
  • The variable fee (usually seen as profit), is linked to the overall success of the project, and all supply members earn more or less of this at the same rate.

3. The Variable Performance Fee is tied to cost and savings.

If clients really believe that cost is only one component in defining value, they should put their money where their mouth is.  Whilst the draft ALC does tie the variable fee to project performance measures, using a “Performance Table”, it seems that this is used as a multiplier to savings against the budget cost, ie

Variable Fee = (Savings) x (Performance Against other KPI’s)

So if the partners bring a project in ahead of schedule in a way the client can benefit from, and achieve other never-seen-before levels of performance, but the cost is on budget, or slightly over, then it seems the client gets all the benfit and the supply chain get none.

Tying the performance fee so directly to the budget can also reward non-collaborative behaviours during the definition (pre-construction) stage, when the budget is set. There is always tension between client and supplier over the target cost, but if you allow performance fees to be paid relatively independently of cost, I think you build a stronger, and more open team.  Client’s concerns about not having the budget to pay performance fees that are not funded by savings can be easily addressed.

 

Those are my main thought after my first read through, and I will be sending them to the NEC, along with my more detailed comments. If you believe in the power of more collaborative contracts, I suggest you get a copy, and contribute your thoughts to the consultation, which runs to the end of November 2017.

NEC is here to stay, and this contract will have a great role to play in how the industry develops in the UK and internationally over the next decade, so please let them know your thoughts.  As it stands, I think there are better model forms out there than this draft NEC4 ALC, although I don’t think any is perfect.

My recommendation to clients is still to write a bespoke contract – it is a lot easier than most people think.  If you must use a standard from (hopefully with modification), than take a look at PPC2000, or CD300.  But if you are required to use NEC, then this new form will make establishing an alliance much easier, and of course you can always customise it using Z-clauses.

 

You can contribute to the NEC4 ALC consultation here.

And you can watch a recording of the webinar NEC held on 28 June below.

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