Proc. Instn Civ. Engrs, Civ.

Engng, 1997, 120, May, 7481 Paper 11154 Written discussion closes 15 June 1997

Best practice with the New Engineering Contract

J. C. Broome, BEng, MAPM The Institution of Civil Engineers published the first edition of its New Engineering Contract (NEC) in 1993 and a second edition came out in 1996. The rate of take-up continues to increase with, in addition to civil projects, the NEC fast finding favour in the process and building sectors. This paper is based on detailed interviews with 81 individuals involved with 28 NEC-procured projects. It takes the reader through the necessary or desirable changes in the contract process which should be made to achieve the best results, and concludes by summarizing some of the benefits that use of the NEC has produced.

This paper presents some results of research carried out by the project and construction management group at the University of Birmingham into the efficacy of the New Engineering Contract 1 (NEC), now published in its second edition as the NEC Engineering and Construction Contract 2 (ECC). The purpose of the research is twofold: firstly, to provide detailed feedback to the NEC panel for use in developing the family of documents, and secondly, by comparing characteristics of different projects, to develop models of best practice. A researcher of project management has two practical problems in coming to proven conclusions. Projects, or in this case contracts, are unique and therefore there is no control for direct comparison. The researcher cannot observe two identical contracts with the same objectives, constraints, technical content and personnel, but under two different conditions of contract. Management is done by people, and projects involve social interaction between people. For a given set of circumstances people will perceive things differently, react differently and as a result draw different conclusions from the same experience. Consequently the researcher, when asking questions, will receive different accounts of what has happened and, when asking for peoples views, varying strengths of opinion. For these reasons it is extremely hard to prove something in the scientific or engineering sense. However, the research methodology aimed partially to overcome these problems. From a literature review and discussion-style

interviews, over 150 different parameters and classifications on which the NEC could be tested were identified from which a questionnaire was developed. Some of the questions measured the financial and time performance of the project, but the majority were in the form of attitudinal statementsthey attempted to measure the strength of the interviewees opinions and asked them to

Jonathan Broome is a researcher in the project and construction management group of the School of Civil Engineering at the University of Birmingham

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NEW ENGINEERING CONTRACT compare their experiences on an NEC contract with the normal conditions of contract they would work under. The control was their experience of the construction or engineering industry to date. The significance of their opinions was evaluated by looking at a sufficiently large sample size. However, as attitudinal statements have significant limitations,3, 4 after each reply interviewees were then asked for the richer qualitative details on why they had this view and what experiences caused them to take it. The findings of this paper are predominantly, but not exclusively, based on the use of the questionnaire. The 81 interviewees (Fig. 1) have had significant involvement in 28 different NEC projects of various disciplines (Fig. 2). The award values range from 500 000 to over 60 million (Figs 38). From the research it has become apparent that the principal features and events which lead to a high likelihood of success of a construction project will have already occurred or be in place within the first month of starting the contract. Success is crudely defined as increased profitability and perceived employer satisfaction for the contractor and an increased likelihood of the project achieving its aims of time, cost and quality for the employer. This paper aims to present, from observation, what the principal characteristics of a successful NEC/ECC project are. Some of these characteris-

Consultants 17% Contractors 37% Clients 41% Subcontractors 5%

Fig. 1 (above). Employment of interviewees (sample size = 81) Fig. 2 (left). Main disciplines of contracts researched (sample size = 28) Fig. 3 (below). Coffer wall in the central area of Heathrow Airport constructed after the collapse on the Heathrow Express Link (courtesy of Balfour Beatty Civil Engineering Ltd)

Building = 6

Process/plant = 4

Civils = 18

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BROOME Fig. 4 (right). Earthworks for the new J. C. Kau Sai Chau public golf course being constructed on an island in Hong Kong (courtesy of Royal Hong Kong Jockey Club) tics are specific to the use of the NEC system, while others reflect generally accepted principles of good project management which have been encouraged by the NEC system. The paper assumes a basic knowledge of the ECC, which can be gained from reading the contract and accompanying guidance notes.

Contract strategy
The ECC offers six main contract strategies, of which the employer has to choose one. To date, the most widely used main options have been the priced contract with activity schedule (option A) and the priced contract with bill of quantities (option B). See Fig. 9 for composition of research sample. The theoretical advantages which the use of option A should give seem to be materializing in practice. The advantages and disadvantages of option A are as follows. Any significant level of contractor design is more easily accommodated as design can become an activity. If design is not finalized at tender, then it may be impracticable to prepare a bill of quantities. Contractors have to plan the job before they prepare their activity schedule. Because they start from a blank sheet, they tend to prepare a more thorough tender, giving greater confidence and possibly a lower final total price. However, this is more costly for contractors, as they have to take off the quantities individually. As payment is linked to completion of an activity or group of activities, the cash flow requirements for both parties are more visible. In order to receive payment as planned, the contractor has to complete an activity by the assessment date. Consequently, the contractor has to programme realistically and is motivated to keep to that programme during construction. Throughout the contract the payment document (activity schedule) meshes with the time, method and resource document (accepted programme). The assessment of the effect on actual cost of a compensation event is easier with activity schedules than with bills of quantities. This is because any change in resources or methods associated with an activity can be compared with those stated in the accepted programme before the compensation event occurred. However, in situations where both parties would be happy to use a bill rate to assess a compensation event, the advantage of rapid agreement is lost. Assessment of the amounts due to the contractor is easier and involves fewer person hours. This and the preceding point may well account

Fig. 5 (below). Bundwall on extension to ash storage facility at Drax Power Station (courtesy of National Power plc) Fig. 6 (bottom). Airside picture of nearly completed new terminal building at Southampton Airport (courtesy of Warings Contractors Ltd)

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NEW ENGINEERING CONTRACT for a general feeling among participants on completed projects that the total administrative and management input from the contract date to settlement of final account is slightly less under option A compared with a conventional contract form, and slightly more under option B. Therefore, while option B can be (and has been) used successfully, the use of option A may well give a greater likelihood of success. The author therefore suggests that option B should be used when specific circumstances warrant it and not just because bills of quantities are traditionally used on contracts of that nature. The author has also noticed a general shift among more experienced users towards option A. The option most commonly used outside A and B has been the target cost with activity schedule (option C). In most cases, the employer had decided that a target cost strategy was appropriate and then selected the NEC as the only standard contract form available of this type. The activity schedule rather than the bill of quantities option for target cost was selected, since target costs contracts are generally used where there is a high level of risk or when an early start on site is required. The latter implies that the contractor has to do a significant amount of design and hence the use of activity schedules. The particular emphasis of the remainder of this paper is on the use of the ECC on option A and B contracts, although many of the points also apply to other options.

Contract documentation
When preparing an ECC specification, the minimum differences between conventional and ECC practice are the relocation of the specification material into the works information, site information and the contract data changing the terminology in existing specifications to the terminology used in the ECC, for example from engineer to project manager or supervisor as appropriate and from construction plant to equipment. However, a view often expressed is that the NEC system will highlight any shortcomings and deficiencies by project participants, whatever side of the industry they originate from, as the definitions of roles, risks and processes are much tighter than in other forms of contractor in the words of one employer, there are no hiding places in the NEC. This is especially true in the preparation of the contract documentation, which is often cited as the main cause of delays and inefficiencies, and hence claims and disputes, whatever the conditions of contract used.5 Four general guidelines given to the author by interviewees are as follows.

Make sure, as far as possible, that the information given will not change during the construction phase. This is a generally accepted principle of good project management. Do not state similar things in slightly different ways in different places of the specification and drawings. Instead, cross-reference them to one place. This helps to avoid the tendency to alter the text in only one place later on and introduce ambiguities. Avoid subjective statements such as in the opinion of and to the satisfaction of. It is better to state a standard based on the designers best judgement at the current time than include a potential source of argument. At every stage of the preparation and review of the specification and drawings, designers should ask if it is clear to the contractor what has to be done. If unsure, they should either state their requirements as a performance specification or find out more information and produce a precise description. If they cannot do either, they should omit that component of the design from the works information, but include a contingency in the overall estimate for the project. A few employers have rewritten their contract documentation into language similar to the ECC and to guidelines available from the Plain English Campaign.6

Fig. 7. South elevation of new Bio-sciences building at Leeds University (courtesy of Franklin Andrews)

Attitudes and education

There is strong evidence that those projects which are run in the spirit and intent of the NEC, and by its procedures, lead to a more successful outcome than those where traditional attitudes and practice prevail. Therefore all participants need to be educated in what the spirit, intent and procedures of the contract are, as well as the reasons behind them. Education can start at the tender stage.

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BROOME Employers should inform contractors why they are using the ECC (having first asked themselves) and what the advantages to the contractor are. The introduction of the ECC can be a strong signal that employers wish the nature of relationships to change. Employers have found that when the above has been done, the quality of tenders is higher. Because of the relative newness of the NEC family of contracts, the majority of personnel on both sides of the industry will be unfamiliar with it when they are assigned to a project. Some employers give a talk to all staff who will be involved in the running of the contract. Some contractors have done this internally and have produced guides for their employees on what they have to do to conform to the contract and site procedures. When trialling the NEC, organizations on both sides of the industry have selected their more professional individuals who are more suited to a cooperative style of management. This raises the question of whether it is the education, the personnel or the NEC/ECC which causes greater cooperation. Research elsewhere has shown that good project management leads to cooperation.7, 8 The authors view, based on the research observations, is that the ECC, by stimulating good management, helps preserve and enhance cooperation but training and good personnel create the initial conditions for it to flourish. in the ECC than in other contracts. What a programme is required to show is stated comprehensively in clause 31.2 and includes method statements and resource levels. The following points should be borne in mind when preparing a programme. A quarter of the price for work done to date is withheld until a programme which shows this information is presented to the project manager. The project manager can assess a compensation event directly if the latest programme does not contain the necessary information the latest programme is not acceptable to the project manager (and there is a contractual reason for not accepting it) the contractor does not submit a quotation within the specified timescale. If the project manager does assess a compensation event, the assessed effect on the contractors actual cost and delay to planned completion is likely to be less than the contractors assessment would be. This is because the project manager can only judge the contractors quotation or make an assessment on the basis of the information available when the quotation is or should have been submitted. Once the project manager accepts a programme, the employer is committed to providing things such as possession of parts of the site, completion of work by other contractors, equipment, tests and access by dates shown on the programme. Failure to do so is a compensation event. This clarifies the responsibility of the contractor to provide the works and enables the contractor to drive the contract forward. Only four contractors that the author interviewed said they realized this at the start of their contract. One contractor which did realize the importance of the accepted programme installed programming software on site and updated the programme fortnightly. On two contracts, the contractors expected profit increased by 34% of turnover and in both cases, completion was achieved within the original programmed date and the final account was settled by the original completion date, despite extensive problems on one contract. The site agent stated that in 10 years in that position the only two contracts where this had been achieved were NEC ones.

Tendering
The aim of the authors of the ECC was to draw a clearly distinguishable financial line between the work that the contractor tendered for and for which it is responsible and any other events for which the employer is responsiblethe compensation events. The contractor, in preparing a tender, should bear this in mind. Many project managers and contractors have expressed the view that it is much harder for a contractor to make up for a low bid through variations and claims on an NEC contract compared with other forms of contract. This has been observed on a number of contracts. Contractors which have not paid sufficient attention to the following two items have had difficulty in recovering the additional costs to which they are entitled the programme to be submitted either with the tender or within a stated period after the contract date and which, if accepted by the project manager, becomes the accepted programme the cost data for use with the schedule of cost components which is included as part of the tender in part II of the contract data.

Cost data for the schedule of cost components

The cost data for the schedule of cost components are required to be tendered in part II of the contract data. A number of contractors have admitted, with the benefit of hindsight, that they had not taken enough time to understand and

Accepted programme
The programme is given much higher priority

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complete it. Consequently, some of the figures entered have been unrealistic. If they are too high, the contractor may not win the contract or will be making money on compensation events at the employers expense. If too low, the contractor will be losing money on changes and when this is later realized, it may well affect the contractors motivation to collaborate. Employers should therefore also look closely at these figures.

Because changes and variations are assessed and agreed as the contract progresses, more administrative and management time is spent during the contract period, rather than once the contract has been completed. Both employers and contractors should staff the contract accordingly and monitor the level of compensation events to make sure that a backlog in assessing compensation events and preparing quotations does not build up with the result that periods for reply cannot be met.

Fig. 8. New Eurolounge transit building at Gatwick Airport (courtesy of Kyle Stewart)

Staf fing and authority levels

One of the aims of the ECC is to define precisely the roles of the principal project participants. To satisfy the specified timescales within the ECC, most of the decision-making authority has had to be driven down to project level. On large projects the authority of the project manager has been delegated into sectional areas. When, on occasions, the project manager has to refer upwards for a decision, the employer must ensure that the decision can be made within the times stated in the contract. The ECC requires that all delegations of the project managers and supervisors authority are clearly stated and communicated to the contractor.

Communications
The ECC has tight timescales for notification and reply and a logical and structured approach to information flows. Virtually all the contracts observed have had a system of pro formas either in place or rapidly put in place once work on site had begun. This can be developed using the flow charts with reference to the project characteristics. However, because of the tight timescales within the ECC, there is little time to come to a decision by written correspondencemost decisions will have to be arrived at by face-to-face discussion. However, any communication that is to have a

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BROOME activity and which will result in additional cost (for example an additional 2 h use of a piece of equipment which is hired on a daily basis does not necessarily increase the contractors costs) the change, if any, to the overall duration of the contract the change in actual costs related to each of the last three points. The author asked a number of experienced NEC participants to critique this approach. The general response was that they would have found it useful, particularly at the start of a project they were involved in. Adoption of this approach should save time, decrease the likelihood of acrimony developing and assist users in overcoming two common situations found on projects. The first is when a series of independent and minor compensation events occur which, if only one occurred, would have a minimal effect on time, but when a number occur start to have a significant effect. An example would be when an unexpected service crosses a new trench which is being dug and delays the works by a few hours. The contractor is entitled to additional costs for the extra work in moving the service and for the completion date to be extended by a few hours. However, it would be impracticable for the contractor to present a full and rescheduled programme for acceptance by the project manager. If five or six unexpected physical obstructions occur, each of a few hours duration, then the activity would take one to two days longer. In practice, project managers and contractors have agreed to wrap up these minor time effects whenever a new programme is due for submission. If the completion date is extended, then the contractor is paid its additional time-related costs. The other situation is when the full extent of a problem is not known. For instance, the contractor might come across an unexpected soft spot in the ground, yet the size and therefore consequences of it are unknown at the time of discovery. The project manager may instruct the contractor to dig trial holes so that the size of the soft spot becomes known. This would be valued using records. The contractor is instructed to provide a quotation once enough information is known. This quotation would include the change in actual cost of the work already done, as well as the forecast actual cost of completing the additional work. A stated assumption could be that the soft spot has a certain depth and that if this is exceeded then an additional compensation event resultsthe employer takes the risk. Alternatively, the contractor could take the risk (and be paid a premium for it). Additionally, when a compensation event occurs under the ECC, the project manager has the option of asking the contractor for a quotation to keep to the original completion date, for a leastcost solution or to price different technical solu-

Option B = 7

Option A = 16 Option C = 5

Option A Priced contract with activity schedule. Option B Priced contract with bill of quantities. Option C Target contract with activity schedule.

Fig. 9. Options under which contracts researched were let (sample size = 28)

contractual standing has to be in a form which can be read, copied and recorded (ECC, clause 13.1). It is suggested by the author that the system of pro formas should direct people to write down and state the decisions and actions that have been taken, not to discuss the problem or solution. It should extend down to include subcontractors in the decision-making process. A monitoring system should be set up to ensure that the timescales are adhered to.

Compensation event procedure

On the basis of comments made to him by interviewees, the author considers that generally not enough time is spent agreeing the underlying principles on which the compensation event is to be assessed, before the detailed cost and time implications are worked out and agreed. This can result and has resulted in wasted staff time. If the project manager wants accurate and realistic quotations, then the contractor should be supplied with sufficiently detailed information on which to base that quotation. The author has attempted to formalize an approach which has evolved on some projects for the assessment of compensation events and suggests the parties agree, in order the cause of the compensation event the desired solution and any conditions or assumptions behind this the change in the contractors method of working the additional risks in this new method and who takes them the changes in the total quantity (amount multiplied by duration) of labour, equipment, plant and materials that are directly involved in the

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NEW ENGINEERING CONTRACT tions. In order to choose between alternative quotations and risk allocations, the project manager should be aware of the employers priorities concerning time, cost and quality for the contract, as well as the employers attitude to risk. On recorded work, the only profit that contractors should make from compensation events is from the profit in the fee percentage. However, contractors are entitled to include risk in their quotations and the following two strategies have been adopted by some. Prioritizing the assessment and agreement of work that has not yet been done. Once the cost and time implications of the compensation event have been agreed with the project manager, contractors then have the incentive to work efficiently and possibly increase their profit. The employer gains by having a fixed quotation and potentially paying less. Quote for disruption. If a compensation event occurs on a current activity, the effect on progress may be hard to quantify because of knock-on effects. The project manager and contractor have then negotiated a sum over and above the actual cost of doing the work for the compensation event. This figure is based on the risk of disruption and an estimate of the cost of putting the project back on the original programme should the disruption occur. This is a relatively subjective figure and requires the project manager to see risk from the contractors point of view. The project manager can then compare this figure with the overall cost of a delay to the employer. greater certainty of completing the project to their time and cost objectives, as they have been able to use that knowledge, by way of the mechanisms in the NEC, to influence the outcome. A strong view is that the final account is settled much sooner after completion, often within two months if not faster. Contractors have almost universally commented on having a much better cash flow (as they receive money quicker for work done) and hence increased profit. Participants have commented on the greater degree of cooperation and openness compared with normal contractsthis lack of conflict and dispute is reflected in the relatively fast settlement of the final account and few referrals to an adjudicator. A number of contractors have said that they could not see the contract in which they were involved achieving completion as early as they did under any other form of contract, owing predominantly to the increased emphasis on planning and working with the employer. This has also led to an increase in their profit margin. Lastly, the effect of the ECC in highlighting any deficiencies and shortcomings should, if viewed constructively, lead to a steady improvement in the professionalism of engineering and project management personnel and organizations. While stressing that it is hard to distinguish between the effects of the use of the NEC and the effects of good personnel and project management in general, participants have attributed these outcomes largely to the former. The contracts that have achieved these objectives have displayed many of the considerations outlined in this paper.

Acknowledgements Conclusions
In the words of one project manager experienced on NEC projects, You need to hit the ground with your feet running, because where you get hit hardest is in the early stages. This is because, in the early stages, there is likely to be the greatest uncertainty (for instance, as the ground is opened up), yet the site organization will be least set up to deal with it. Well-prepared works and site information will reduce uncertainty and possible changes, but this is true under any conditions of contract. On an ECC contract, a more appropriate contract strategy can be selected. Participants will help themselves if they have the right people with the right authority, educated in the spirit, intent and procedures of the ECC, and an accepted programme and pro formas in place on site at the start of the contract. Whereas different individuals who have been involved in contracts run under the NEC family of contracts have varying strengths of opinion, some common benefits are emerging. The parties to a contract feel they have greater knowledge of the likely financial and time outcome of the project at any time during its duration. With this knowledge employers and their project managers have The author would like to thank the EPSRC, National Power plc and, more recently, London Underground Ltd for their financial support, and many other companies for the time they have given for this research.

References
1. INSTITUTION OF CIVIL ENGINEERS. The New Engineering Contract. Thomas Telford, London, 1993, 1st edn. 2. INSTITUTION OF CIVIL ENGINEERS. The NEC Engineering and Construction Contract. Thomas Telford, London, 1995, 2nd edn. 3. OPPENHEIM A. N. Questionnaire design and attitude measurement. Heinemann, London, 1966. 4. BLUMER H. Symbolic interactionperspective and method. Prentice Hall, Englewood Cliffs, New Jersey, 1979. 5. AUSTRALIAN CONSTRUCTION SERVICES, DEPARTMENT OF ADMINISTRATIVE SERVICES, et al. Strategies for the reduction of claims and disputes in the construction industry a research report. Queensland, Nov. 1988. 6. CUTTS M. and MAHER, C. The Plain English story. Plain English Campaign, Stockport, 1986. 7. AL-SEDAIRY S. T. Management of conflict: public sector construction in Saudi Arabia. Int. J. Project Mgmt, 1994, 12, No. 3, 143151. 8. MOHSINI R. A. and DAVIDSON C. H. Determinants of performance in the traditional building process. Construc. Mgmt Econ., 1990, 10, 343359.

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