Public Works Contracts in Ireland and the Emergence of NEC4

Key Contacts: |   Clare Cashin – Partner  | Michael Cahill – Senior Associate

The public works suite of contracts (“PWC”) was developed by the Government Construction Contracts Committee (“GCCC”) and has been in place for over fifteen years now. The introduction of PWC was based on a number of Government objectives, including:

• The transfer of risk from contracting authorities to the contractor.
• Greater cost certainty at contract award stage with contract awards to be made on the basis of a lump-sum fixed-price as much as possible.
• Greater certainty and familiarity with contracts for public works as the various forms of PWC are to remain un-amended unless special dispensation is sought from the GCCC.
• Clear and pre-determined circumstances that lead to contractor entitlements to additional time and money.
• The various forms of PWC are written in ordinary language and are designed to be easily understood, applied and interpreted by contracting authority employers, contractors and design teams.

The PWC suite of contracts includes associated procurement documentation and is mandated for use by public bodies procuring construction or engineering works or projects where over 50% of the project value is funded by the exchequer.

While the PWC has become the default form of contract for public works projects in Ireland, in recent years, there has been an increased use of other forms of contract for public works, such the NEC4 contract (and its predecessor NEC3). Examples of such projects include:

•  Luas Cross City line utility diversion works;
•  Cork Airport runway reconstruction works;
•  Haulbowline Island steel slag tip remediation works; and
•  Public lighting energy efficiency retrofitting projects by various county councils in Ireland.

We examine below the reasons why public contracting authorities may prefer the use of the NEC4 contract.

NEC4 contract – an introduction

The NEC4 contract (and its predecessor, NEC3) has, for many years, been the primary form of contract for public works in the UK.

According to the ‘NEC4 Delivering better project outcomes’ paper, the NEC4 is designed to:

• Stimulate good management of the relationship between the parties to the contract and, hence, of the work included in the contract;
• Be used in a wide variety of projects, for a wide variety of types of work and in any location; and
• Be a clear and simple document, using language and a structure which are straightforward and easily understood.

The main types of NEC4 works contracts are the Engineering and Construction Contract (“ECC”), the Engineering and Construction Short Contract (“ECSC”), and their related subcontract forms. The structure of the NEC4 contract is very flexible in that it provides a number of options for the form of contract that can be used to suit the project in question.  These options are:

Option A: Priced contract with activity schedule

Option B: Priced contract with bill of quantities

Option C: Target contract with activity schedule

Option D: Target contract with bill of quantities

Option E: Cost reimbursable contract

Option F: Management contract

Once the appropriate option has been selected, the ‘core clauses’ of the NEC will apply along with the selected ‘secondary option clauses’. The secondary option clauses include provisions for things such as sectional completion, liquidated damages, performance bonds, retention, bonus for early completion; these secondary option clauses provide flexibility in designing the appropriate contract. Furthermore, these optional clauses are already drafted and compatible with the NEC4 contract which will reduce the need to develop further contract drafting.

Some of the other key characteristics of the NEC4 contract are that:

• It contains a clause requiring the parties to act “in a spirit of mutual trust and co-operation”. This promotes a collaborative approach as opposed to an adversarial approach between the parties to the contract.
•  It contains an ‘early warning’ process that is designed to try and prevent or pre-empt possible matters that may arise in the future which could impact on price and/or programme. Where a party to the contract becomes aware of such a matter it must notify the other party immediately and the parties will then meet to seek solutions, make and consider proposals and decide on the course of action that may be taken to avoid or reduce the effect of the matter.This mechanism goes beyond standard contractual clauses relating to co-operation and liaison in that there are implications for not raising issues through the mechanism.
•  Detailed quality management provisions are included which are not found by default in many other standard industry forms of contract.
• There are clear and precise processes for evaluating changes to the work scope and any delays and determining the effect of same within a set timescale.
•  It splits the ‘client side’ contract administration role into two separate roles – the supervisor and the project manager. The supervisor’s role primarily relates to checking compliance (with the works information) and the project manager carries out all other contract management and administration functions under the contract.
•  The use of ‘secondary option clauses’ provides greater flexibility to contracting authorities. For example, NEC4 Option C is known as a ‘target contract’ that contains a ‘pain / gain mechanism’. This means that a tenderer tenders a ‘target price’ and should the actual costs of the project exceed the ‘target price’ then the financial risk/pain is shared between the contracting authority and the contractor. However if the actual costs are less than the ‘target price’ then the financial gain is also shared amongst the parties. The aim of this is that both parties to the contract are incentivised with regards to financial risk and reward.

PWC vs NEC4

The PWC has been the primary form of contract used in Ireland for public works projects since its introduction in 2007. Therefore its key clauses and the operation of same are well known in the Irish market. There are, however, some constraints to the PWC, including the rigidity of its drafting, with clauses to remain unamended. As noted above, the availability of a menu of ’secondary option clauses’ from which an employer can select to supplement the core forms of NEC4 contract provides greater applicability to a wide range of works projects.

The NEC4 also allows for a ‘pain / gain’ mechanism meaning risk is shared to a greater extent than under the PWC where the risk allocation ensures there is an optimal transfer of risk to a contractor. While the PWC has undoubtedly served public contracting authorities well, its pro-Employer risk allocation can often create an adversarial relationship between contracting authorities Employers and their contractors.

As noted above, the NEC4 contract contains some key clauses that distinguish it from other forms of contract available in the market – the ‘early warning’ mechanism and its process for evaluating cost and time implications of compensation events are notable. NEC4 also provides for an optional ‘Y(IR)1 clause’ for use in Ireland to ensure that NEC4’s ‘core clause’ payment and dispute resolution provisions comply with the Construction Contracts Act 2013.

Conclusion

While the PWC remains the tried and tested form of contract to be used in Ireland for public works projects, a noticeable trend has emerged where public authorities are seeking to use the NEC4 contract, as has been commonplace in the UK. There are noticeable differences between the PWC and NEC4, with the latter emphasising its commitment to collaboration and risk sharing. Given the current price uncertainties and unpredictability in the construction industry, those in the Irish market will need to familiarise (or re-familiarise) themselves with the NEC4 contract sooner rather than later.

For further information in relation to this article please contact Clare Cashin or Michael Cahill.