The Hong Kong Institute of Surveyors

What Role Do We Play in NEC Contracts

From a QS Perspective?
8 March 2016
Sr Hayman Choi, Director

Agenda
NEC3 Forms of Contract
Recent Application in Hong Kong
Some basic principles (with focus on ECC)
Roles and Duties (with focus on ECC)
Observations in some pilot contracts
Looking forward

Recent Application of
NEC in HK

Public Sector
HK Government in trial use of NEC since 2009
DEVBs Directives in Sept 2013
Extended pilot on NEC in public works (incl. D&B)
contracts to be tendered in 2015 & 2016 as far as
possible
At least 1 consultancy agreement for trial by each
works department per annum starting from 2014

Public Sector
No. of Government pilot NEC as at end Dec 2015:
Works contracts
3 ECC target cost contracts completed
31 on-going contracts
ECC priced contracts x 11
ECC target cost contracts x 9
TSC priced contracts x 11
Consultancy agreements
4 on-going PSC contracts
ECC: Engineering & Construction Contract
TSC: Term Service Contract
PSC: Professional Services Contract

Public Sector

New Directives from DEVB in Feb 2016:

Use of NEC in public works (incl. D&B) contracts
CONTINUE after 2016 as far as possible
At least 1 consultancy agreement for trial by each works
department per annum keep going
Works departments requested to adopt target cost
options for suitable works contracts >HK$ 1 billion

Private Sector
Use of NEC in:
CLP
MTRC
Hong Kong Jockey Club
Hong Kong Academy

Some key NEC

Principles
(with focus on
ECC)
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NEC3 Family of 12 Forms of Contract

1. Engineering and Construction Contract (ECC)
2. Engineering and Construction Subcontract
3. Engineering and Construction Short Contract
4. Engineering and Construction Short Subcontract
5. Professional Services Contract (PSC)
6. Professional Services Short Contract
7. Term Service Contract (TSC)
8. Term Service Short Contract
9. Framework Contract
10. Supply Contract
11. Supply Short Contract
12. The Adjudicators Contract

NEC good management required

by all
Collaborative mind-set + behaviour
ECC 10.1: Employer, Contractor, PM & Supervisor shall
.act as stated in this contract
.and in a spirit of mutual trust and co-operation
our project with joint management

Accepted Programme
Timescale for actions
No surprises: early warning
Sort it NOW for compensation events (CEs) and other issues

Ongoing & better forecast of time & cost

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ECC Main Options

Pricing Doc.
Contact
Type

Main
Option

Priced
Target

Activity
Schedule (AS)

Bill of
Quantities (BQ)

A
C

B
D

No specified
pricing doc.

Cost
Reimbursable

E
F

Management

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Options A & B Priced Contract

Option A
Lump sum contract with priced AS
Milestone payments (AS = milestone schedule)
CEs assessed by Defined Cost NOT AS prices unless
with prior agreement

Option B
Re-measurement contract with priced BQ
Measured workdone payments priced by BQ rates / prices
CEs assessed by Defined Cost NOT BQ rates / prices
unless with prior agreement

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Options C & D: Target Contract

Option C
Priced AS Initial target cost (ITC)
Payments on Defined Cost + Fee subject to pain / gain share
Final target cost = ITC + adjustments for CEs & others

Option D
Priced BQ ITC
Payments on Defined Cost + Fee subject to pain / gain share
Final target cost = ITC + adjustments for CEs, remeasurement of BQ & others

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Gain Scenario

Final TOP

Final PWDD

Contractor
50%
Employer
50%

Final PWDD

Pain
Share

110%

Final TOP

Contractor
50%
Employer
50%

Final PWDD

Final TOP

Gain
Share

Under pilot ECC

target contracts

Pain Share

Pain / Gain Share Mechanism

Pain Scenarios

Gain
Share Share
range: up
to 110% of final target cost (total of the Prices - TOP)
Example
Share % - Employer : Contractor = 50 : 50 within share range
PWDD Price for Work Done to Date

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Contractors
Remaining pain

105%
Employers pain
capped

Option E: Cost Reimbursable Contract

No specified pricing document
total of the Prices just a budget
Payments on Defined Cost + Fee
No pain / gain
Not adopted in Government pilots so far

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Option F: Management Contract

Contractor generally manages works only
Most works through Subcontractors
Contractor may tender prices for work done directly by him
Normally Contractor recovers Defined Cost + Fee
Not adopted in Government pilots so far

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Defined Cost
Beware: Different definitions for Options A/B, C/D, E and F
In short:
Amount defined in contract as reimbursable to Contractor
including:
Contractors costs incurred / to be incurred and
Sums calculated using rates and % as stated in contract
Less: Disallowed Cost in Options C to E

Costs at open market / competitively tendered prices

(ECC 52.1)

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Payment on Defined Cost in

HK Pilot Target Contracts
ECC 52.1
If not Defined Cost then
treated as included in Fee

Fee =

Contractors costs
People
Equipment
Plant & Materials
Others stated in
Schedule of Cost
Components

fee percentage# x Defined Cost

Payments to
Subcontractors

Defined Cost

# HK Government Pilot version

Price for Work Done to Date (PWDD)# =

Total Defined Cost paid + Fee

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Compensation Events (CEs)

Happened events stated as CEs in the contract

Not arising from Contractors fault, and
Give financial and/or time compensation to Contractor

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CE Process & Timescale

Contractor aware of event

PM notifies

max 8 wk

PM instructs quote

Contractor notifies

3 wks

1 wk

PM says no

yes

PM silent?
C notifies;
PM has further 2 wks;
otherwise deemed acceptance

PM to assess

Contractor quotes
2 wks

PM replies

accept not agree and

Implement CE

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CE Financial Assessment
Change to the Prices (ECC 63.1)
actual Defined Cost of the work already done,
forecast Defined Cost of the work not yet done and
resulting Fee

Rates / prices in AS / BQ can be used if agreed by PM &

Contractor
Quotations to include for risk allowance (ECC 63.6) and
not revised if forecast is wrong (ECC 65.2)

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Roles and Duties in NEC

(with focus on ECC)

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ECC Roles of Contract Administration

Employer

Project Manager (PM) /

PMs delegates*

Supervisor /
Supervisors delegates**

Supporting Staff

Supporting Staff

Key Duties

To carry out all contract

administration duties other than
that performed by Supervisor

**

Key Duties

To check works and issue Defects

Certificate

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PMs Financial Duties

Payment assessment and certification
CE assessment
Financial forecasts
Target cost / cost reimbursable contract administration
Subcontract tender procurement
Subcontract account finalization
Stock management

Other financial supports e.g.

Risk reduction process
Accepted and Uncorrected Defects

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Subcontract Tender Procurement

ECC requirements - PMs acceptance for:
Proposed Subcontractor
Proposed Subcontract Conditions

In HK pilot target contracts - PMs further acceptance for:

Contractors subletting procedures
Pre-tender estimates & list of proposed tenderers
No. of tenderers < minimum no.
Recommended tender other than lowest conforming tender
PMs involvement is essential to ensure
competitiveness and adequate check &
balance

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Subcontract Account Finalization

ECC requirements:
Not specified but reflected from coverage of Defined Cost &
Disallowed Cost

In HK Pilot Target Contracts:

Checking and assessment of subcontract payments as
Defined Cost
Workdone
Adopted rates
Proof of payment Proof of Defined Cost
PMs involvement is essential to ascertain all paid amounts
as Defined Cost

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Stock Management
ECC requirements:
Not specified but reflected from coverage of Disallowed Cost

In HK pilot target cost contracts:

Checking of:
Wastage of Materials and Plant
Availability & utilization of resources
Credit value upon disposal of unused resources e.g.
Materials and Plant
PMs involvement is essential to ascertain all paid amounts
as Defined Cost

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Who to Perform Financial Duties?

PM / PMs delegates
With or without QSs as support

QS as PMs delegate
With PMs power on delegated actions

So should QSs have a role to play in running NEC

contracts?
Definitely YES !
QSs technical competency best
suits to perform the financial duties !

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So What do we need to perform?

Understanding of NEC principles and how they operate
Need for training
Proper mind-set and behavioural change towards
collaborative working
More effective and timely communication Sort it now !
Deployment of adequate resources during construction
Offset by saving in staffing due to earlier account
finalization?

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Observations in Some Pilots

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Observations in some pilots..

Speedier settlement of CEs
earlier account finalization
Concerns over inaccuracy in forecast Defined Cost
Learning curve for forward pricing approach
More collaborative working with PMs & Contractors
engineering staff
Proper use of PMs assumptions (ECC 61.6)

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Observations in some pilots..

More workloads for PMs and Contractors teams (incl.
QSs ) during construction
NEC application (e.g. risk management and CE
assessment)
For target cost contracts:
Defined Cost payment assessment
Subcontract tender procurement & account
finalization
Stock management

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More Observations..
Saving in construction costs in target cost contracts
Cost Savings Design
Shorter construction period saving in preliminaries

Gain is beautiful but pain can be.

Beware: No payment after pain cap has reached in
target cost contracts

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More Observations..
Challenges in Defined Cost assessment - e.g.
Reasonableness of staff salary, allowances and bonus
Purchase or hire option for Equipment

Initial working tension between PM and Contractor

Unfamiliarity with PMs active involvement in
Contractors operation
Need mind-set & behavioural changes from
confrontational to collaborative working

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NEC Contracts
Looking Forward.

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Looking Forward..
Expected more and more NEC contracts in public
sector
Extent of impact on private sector still unknown
Yet QS profession inevitably exposed to more and
more NEC contracts
Increasing demand for competent financial
administration and monitoring services in NEC
contracts

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But NEC is not easy.

Mutual Trust
One Team
1. Mind-set & behavioural change
confrontational collaborative
2. More effective & timely communication
3. More right resources earlier for:
Sort-it-now approach
Other NEC requirements

Co-operation
Our Project

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So what should we do then?

To enhance technical competency from
conventional approach to NEC approach
To undergo mind-set and behavioural
change towards collaborative working

To meet the demand andchallenges !

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Thank you

Any questions
hayman.choi@mottmac.com

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