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NDSV’s NEC 3 & 4 FOR newbies tip series

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NDSV’s NEC 3 & 4 FOR newbies tip series

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25th May 2022

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Free legal advice may sound like the start of another lawyer joke, yet here we are: we’ve developed an easy-to-follow ‘NEC 3 & 4 FOR NEWBIES’ series designed to see you build – rather than billed – more by the hour. That’s because less legalese can mean less legal fees when advice is quicker to decipher.

The contract management process can be complicated and time-consuming; more than that though, it can distract you from delivering projects on time and within budget. The good news is that at NSDV, we’re all about getting to the point without viciously poking you with it.

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If you’re a Contractor or Employer, and if you like the idea of having your contracts simplified whilst being afforded protection against extremely costly contract inefficiencies, come and chat with us. In the meantime, here’re six tips to consider when using our government’s favoured contract.

TIP #1. UNDERSTAND THE PRICING MECHANISM

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The NEC 3 or 4 is one contract with five pricing options, the most common being A or B. Option A is a lump sum contract used for design and build work. Option B is a remeasurement contract based on a bill of quantities, where the employer deals with the design.

For Option A, the contractor must align its activity schedule with its cash flow; the contractor is only paid once the activity is completed, and they carry the risk of a change in quantities.

Check: For cash flow purposes, contractors may break down the activity schedule into activities to be completed and claimed for monthly.

For Option B, the employer assumes the risk of a change in quantities; the contractor simply prices the bill of quantities and is paid monthly based on quantities worked, multiplied by rate.

Check: Small print matters; employers can shift the risk of the quantities onto the contractor in the bill. Check its preamble to learn who carries that risk, and whether missing or unpriced quantities are assumed to be included elsewhere.

NEC 3 or 4 is the Governments’ contract of choice; being able to successfully navigate it is as essential as their services.

TIP#2. SELECTING THE RIGHT X-CLAUSE TO LIMIT LIABILITY 

During the tender phase, the Employer circulates a completed Contract Data Part 1 document to the Contractor, who in turn must complete Contract Data part 2 before a tender is submitted.

CHECK: When responding to the tender, the Contractor must still scrutinise the Contract Data part 1 (the part the Employer completed) as it contains X-clauses to the contract which are binding and could significantly impact your project.

The purpose of X-clauses is to limit and/or allocate risk and there are 15 possible X-clauses to choose from.

TIP: Contractor’s often do not realise that they are entitled to negotiate, delete, or include additional X-clauses instead of accepting the clauses that the Employer has chosen. Knowing this is the difference between being left vulnerable to unanticipated risks or being prepared for what may come.

X2 – Changes in Law, is particularly interesting. Here’s why.

Before 23 March 2020 and before The Government passed the Disaster Management Regulations in response to Covid-19, clause X2 seemed rather irrelevant.

Like a good hand sanitiser, X2 has since risen in importance as it determines which party carries the risk in the event of a change in legislation. 

CHECK: If X2 is selected, then the Employer is liable to the Contractor for any increase in prices and/or time as a result of the change in legislation which plays out as a compensation event.

DOUBLE CHECK: If X2 is not selected, then the Contractor carries the risk resulting from a change in legislation. Simply put, the Contractor will be delayed and responsible for the accrual of penalties.

TIP#3. LOW ADMIN = HIGH PEOPLE COSTS

How to quantify a Contractor’s Compensation Event in relation to your People Costs

NEC3, in its infinite wisdom, tried to simplify the way in which Contractor’s claims were quantified. Their intentions were noble, in that they wanted to ensure that the Contractor was in the same position as before the Compensation Event occurred.

Yet the road to hell, it seems, is paved with incomprehension.

By trying to simplify the procedure, they introduced definitions such as Defined Cost, Fees, Shorter Schedule of Cost Components, and People Percentage Overheads. Construction veterans have never even heard of these terms.

What they should’ve simply said was that the Contractor is entitled to claim actual demonstrated costs.

So, what are actual demonstrated costs in relation to people?

Contractors are entitled to claim for 3 categories of people:

People who are directly employed by the Contractor and whose normal place of working is within the Working Areas

People who are directly employed by the Contractor and whose normal place of working is NOT within the Working Areas but who are working in the Working Areas and

People who are not directly employed by the Contractor but are paid for by him or her according to the time worked while they are within the Working Areas

1 and 3 are relatively straightforward, as they involve the Contractor’s site team dedicated to the on-site project, as well as any consultants that may be hired by the Contractor to work on site. 

2 is where it can get tricky, as it’s often harder to prove. It refers to the Contractor’s resources who are typically based at a head office, but have to come to site as a result of the compensation event.

That trickiness notwithstanding, the Contractor can claim for the total cost to company (People Costs) for the duration that its People resources will be involved in the compensation event, or for standing time as a result of the compensation event.

PRO TIP: The Contractor MUST provide documented proof of these costs. The simplest form of proof would be payslips and timesheets to demonstrate the loss the Contractor has incurred as a result of the compensation event, as well as either an employment contract or letter from HR demonstrating that they have been allocated to the project being claimed for.

Make sure that you have a method of recording and filing your People Costs in a manner that can be easily recalled for the quantification process. If I had a walrus, elephant, warthog or narwhal for every Contractor not able to prove their People Costs due to poor administration, I’d donate them all to the Johannesburg Zoo – on the condition that they rename it Tuskany.

If you’re not sure where to begin, a good starting point is the Shorter Schedule of Cost Components, unless you’ve agreed with the Project Manager to use the Activity Schedule or Bill of Quantities.

TIP#4. CONTRACTOR VS EMPLOYER \ WHO PAYS FOR ACCELERATED WORK ON A JOB?

The Contractor Pays for Impending Delays

If the Contractor’s progress reflects that he or she won’t complete the works by the Completion Date agreed on in the Accepted Programme, the Project Manager can simply request that the Contractor provide a Revised Programme showing how the Contractor is going to meet the Completion Date. 

Top Tip: Unlike standard form contracts, NEC stipulates that the Project Manager cannot instruct the Contractor to accelerate or use its best endeavours to catch up on deliverables of the programme. If the Employer wants the ability to instruct the Contractor to speed up the job, it must have done so via a Z Clause. However, the “solve” for the Employer lies in the fact that they’re able to impose delay damages should the Contractor complete the project late.

In circumstances where the Contractor’s progress is lagging due to some fault of their own, he or she will be responsible for managing the cost of making that time up; failing that, they’ll likely be liable for delay damages. There are, however, rare situations in which a Contractor can’t be held responsible for a lack of progress. Good examples include Lockdown Level 1 – when even lifting a spade could get you into trouble – or when it’s revealed that the site is actually over a cursed burial ground where interred pet cats are brought back to life with terrifying consequences.

Well, we did say rare.

The Employer Pays for Rushing the Job

It’s when the Employer wants the Completion Date to be moved earlier than the date originally agreed upon that things get financially interesting for the Contractor. It’s one of the only times they get to name their price when carrying out additional work under the Acceleration Instruction.

Top Tip: The Project Manager must instruct the Contractor to submit a quotation for an acceleration to achieve a Completion Date before the Completion Date originally stipulated in the contract. The Contractor’s quotation does not have to be in accordance with the Defined Cost-plus fee as is the case for compensation events. 

The Contactor can charge any amount they deem reasonable, including an allowance for risk to accelerate the works. However – and before you start flicking dollar bills from the deck of your yacht ­like they were the shameful vestiges of a 420 Doritos binge– the Contractor must still act within “a spirit of mutual trust and cooperation”. *

Contractors beware! A Project Manager cannot instruct the Contractor to accelerate in this scenario. She or he can only instruct the Contractor to provide a quotation. If the Employer agrees with the cost of acceleration, then the Project Manager must accept the Contactor’s quotation and issue the instruction.

TIP#5. ACCESS TO SITE: RATHER SAFE(TY FILE) THAN SORRY

From both the Employer and the Contractor’s point of view, the Starting Date should always be on or before the Access Date. These dates are set out in the Contract Data. However, the Employer is also entitled to impose condition precedents for site access. Condition precedents are contractual requirements that must be met, in this case, before the Contractor will be allowed to access site or parts of the site and to commence site-based activities.

A common, although, often overlooked, condition precedent for site access is the approval of a health and safety file and all associated documentation. A health and safety file is a record of information relevant to the management of construction health and safety for a particular project or a specific part of the project, and draws the parties’ attention to the significant health and safety risks that need to be addressed for the duration of the project activities.  The health and safety file serves as proof of compliance with specifications in accordance with the Occupational Health and Safety Act, 1993 and the Regulations of 2014.

Top tip: The preparation and submission for approval of a healthy and safety file can be time consuming, and it is important to be aware of this. Additionally, certain Employers (such as SOEs and parastatals) require an actual hard copy of the heath and safety file. It can take time to print and compile the physical file too, so it is important to be aware of whether or not a hardcopy is necessary to avoid wasting time unnecessarily.

In some cases where a health and safety file must be approved by the Employer before site-based activities can commence, partial approval will not be sufficient. This means that even if the Contractor is ready to access the site, they’ll be kept waiting at the gates like Joker at Wayne Manor until such time as the health and safety file is found to be complied. The very serious consequence is that the time for completion starts to run, whether the Contractor has access or not. 

A further aspect to think about is the agreed contractual time period the Employer has to approve the health and safety file, being the period for reply. The ‘period for reply’ is stated in italics and it is therefore an identified term. Identified terms are shown in the Contract Data, which has to be completed at the tender stage by the Employer (part one) and the Contractor (part two). The period for reply has to be filled out by the Employer in Contract Data part one. Although the clock starts ticking from when the health and safety file is received, the Employer can take the full period for reply to approve or reject the file, which can add to the delay in accessing the site for the Contractor.

Demystifying condition precedents such as the approval of the health and safety file can be difficult, but not fully understanding what is required can lead to far great difficulties for the Contractor.

TIP#6. WEATHER THE CONTRACTOR OR EMPLOYER BEARS THE RISK

The El Niño Southern Oscillation climate pattern – and more specifically the current La Niña phase, which is expected to neutralize in Southern Africa from April to June 2022 – has resulted in wetter-than-normal weather conditions in Southern Africa from December to February over the past two years. This has had contractors and employers alike factoring in the associated weather risks when entering into and applying NEC contracts.

The NEC contracts entitle an award of both time and money for a successfully claimed compensation event, which include cumulative rainfall and the number of days of rain over 5mm. Most other standard form contracts differ from the NEC approach to the risk allocation in regard to adverse weather. In broad terms there is a less scientific and historical threshold for adverse weather and the contractor will be awarded time but not money for delays and disruptions. This places greater risk at the feet of the employer as he or she will be liable for weather which is found to be generally disruptive to the works.

In NEC contracts, clause 60.1 (13) stipulates that “only the difference between weather measurement and the weather which the weather data shows to occur on average less frequently than once in ten years is taken into account in assessing a compensation event”. Simply put, this means that a contractor can only claim a compensation event for weather which is worse than the more-scientific once-in-ten-year average.  Accordingly, the employer is at risk for weather which exceeds the high threshold of the once-in-ten-year average.

Top tip: A contractor can only claim the compensation event for the weather which occurs within the calendar month. It is important to note that weather which effects the site for a period overlapping consecutive months may not reach the required cumulative threshold of the once-in-ten-year monthly average. The notification period of eight weeks (a sub-contractor has seven weeks) under clause 61.3 starts only from the end of the calendar month in which the effect of the disruptive weather was known. Contractors and Employers should keep close attention to the location stated in the contract data in which weather will be recorded on site.

It is imperative for the contractor to understand how to mitigate risk with regards to adverse weather under the NEC contract. The contractor should make allowances for the once-in-nine-year weather event by including sufficient time-risk allowance in the works programme. Furthermore, the contractor should understand what constitutes average weather and what constitutes in excess of once-in-ten-years weather, and forecast accordingly. The average weather measurements should therefore be included in or attached to the contract data.

If you’re a contractor or employer in the construction field and would like us to double-check your liability or advise on the best course of action to mitigate delays and associated costs, come and chat to us at staude@nsdv.co.za.

Written by construction law specialist, educator, and director at NSDV, Cameron Staude, and the NSDV Construction Law team – all of whom love nothing more than demystifying construction contracts.

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