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
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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……
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Recent Application of
NEC in HK
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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
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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
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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
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Private Sector
• Use of NEC in:
• CLP
• MTRC
• Hong Kong Jockey Club
• Hong Kong Academy
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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
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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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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
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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:
• 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)
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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 =
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
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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
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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) /
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
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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
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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”
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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
 PM’s 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
 PM’s involvement is essential to ascertain all paid amounts
as Defined Cost
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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 !
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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 PM’s & Contractor’s
engineering staff
• Proper use of PM’s assumptions (ECC 61.6)
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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
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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 PM’s active involvement in
Contractor’s 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 and……challenges !
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Thank you
Any questions…
hayman.choi@mottmac.com
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