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 1 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…… 2 Recent Application of NEC in HK 3 Public Sector • HK Government in trial use of NEC since 2009 • DEVB’s 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 4 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 5 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 6 Private Sector • Use of NEC in: • CLP • MTRC • Hong Kong Jockey Club • Hong Kong Academy 7 Some key NEC Principles (with focus on ECC) 8 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 9 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” 10 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 11 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 12 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 13 “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 14 Contractor’s Remaining pain 105% Employer’s 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 15 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 16 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: • Contractor’s 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) 17 Payment on Defined Cost in HK Pilot Target Contracts ECC 52.1 If not Defined Cost then “treated as included in Fee” Fee = Contractor’s 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 18 Compensation Events (CEs) • Happened events stated as CEs in the contract • Not arising from Contractor’s fault, and • Give financial and/or time compensation to Contractor 19 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 20 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) 21 Roles and Duties in NEC (with focus on ECC) 22 ECC Roles of Contract Administration Employer * Project Manager (PM) / PM’s delegates* Supervisor / Supervisor’s 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 23 PM’s 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 24 Subcontract Tender Procurement • ECC requirements - PM’s acceptance for: • Proposed Subcontractor • Proposed Subcontract Conditions • In HK pilot target contracts - PM’s further acceptance for: • Contractor’s subletting procedures • Pre-tender estimates & list of proposed tenderers • No. of tenderers < minimum no. • Recommended tender other than lowest conforming tender PM’s involvement is essential to ensure competitiveness and adequate “check & balance” 25 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 PM’s involvement is essential to ascertain all paid amounts as Defined Cost 26 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 PM’s involvement is essential to ascertain all paid amounts as Defined Cost 27 Who to Perform Financial Duties? • PM / PM’s delegates • With or without QSs as support • QS as PM’s delegate • With PM’s power on delegated actions So should QSs have a role to play in running NEC contracts? Definitely YES ! QS’s technical competency best suits to perform the financial duties ! 28 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? 29 Observations in Some Pilots 30 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 PM’s & Contractor’s engineering staff • Proper use of PM’s assumptions (ECC 61.6) 31 Observations in some pilots….. • More workloads for PM’s and Contractor’s 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 32 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 33 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 PM’s active involvement in Contractor’s operation • Need mind-set & behavioural changes from “confrontational” to collaborative working 34 NEC Contracts Looking Forward…. 35 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 36 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” 37 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 and……challenges ! 38 Thank you Any questions… hayman.choi@mottmac.com 39