Construction

02 Sep 2010

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NEC3 and NZS 3910: Chalk and Cheese?

The NEC3 suite of contracts arrived in New Zealand promising its users a brave new world of contracting that would benefit both the Contractor and the Employer. No longer are contracts to be put in the bottom drawer and hidden away but are to be part of an essential management tool in the running of a successful project.

This article follows on from an earlier article "NEC3 in New Zealand - A Legal Perspective". In this article we consider whether the much used New Zealand standard NZS 3910:2003 and the NEC's Engineering and Construction Contract (ECC) are really chalk and cheese. Can NEC offer a brave new world of contracting in the New Zealand construction industry? We look at some of the key differences between the two standard forms of contract.

Pricing Mechanisms

There is no doubt that the ECC offers a greater choice of payment structures than NZS 3910:2003. Under the ECC there are 6 main payment options ranging from lump sum, cost reimbursable to target cost with a pain/gain share mechanism. NZS 3910:2003 does not offer a target cost payment option, its main payment options are lump sum, measure and value and cost reimbursable.

The cost reimbursable option under NEC3 is more comprehensive than under NZS 3910:2003. Under NEC3 the definition of "Defined Cost" is far more detailed than the definition of "Net Cost" under NZS 3910:2003. For the cost reimbursable option under NEC3 "Defined Cost" does not include, amongst other things, costs incurred because the contractor did not give an early warning, and costs that should not have been paid to a subcontractor or supplier.

The wide array of payment options is one of the main reasons that the ECC is an attractive alternative for principals.

Contract Administration

Under NZS 3910:2003 an Engineer is appointed by the principal to administer the contract. The Engineer has two roles, firstly as an expert adviser and representative to the principal and secondly as an independent certifier. When giving directions to the Contractor and issuing payment schedules, the Engineer is acting solely as a representative of the principal, and does not have to act independently when undertaking these roles. However, when valuing work and issuing certificates he must act impartially and independently of either party.

The dual role of the Engineer under NZS3910:2003 poses a challenge where an employee of the principal is appointed as Engineer to the contract, as is the case in many contracts procured by local authorities. Can an employee really act independently of his employer?

Under the ECC the Project Manager is not expressly required to act independently, but he is required to act in a "spirit of mutual trust and co-operation". Despite the absence of an express term requiring the Project Manager to act independently, he is still required to act impartially when acting as a certifier.

The Project Manager under NEC3 has a more hands on role than the Engineer under NZS 3910:2003. Under the ECC the Project Manager and contractor work together to see the works through to completion. For example the Project Manager is to discuss with the Contractor different ways of dealing with a compensation event and both the Contractor and the Project Manager are to give early warnings to each other of any matters with a delay, cost or performance implication. Although in practice a competent Engineer under NZS 3910:2003 may be as actively involved in the project, these processes are not a contractual requirement of NZS 3910:2003 as under the ECC. The philosophy of the NEC3 contracts is that they are not to be placed in the bottom drawer once signed but are an integral tool in the success of the project.

Variations and Extensions of Time vs Compensation Events

The way the two contracts deal with variations and extensions of time is where they most differ.

NZS 3910:2003

Changes in the scope of works are instructed as a "Variation" by the Engineer under NZS 3910:2003. The term "Variations" also includes a number of "deemed" Variations, such as late issue of instructions, unforeseen physical conditions etc. For all Variations the Engineer considers separately the cost and time implication of the Variation. The Contractor is required to notify a claim for an extension of time or a Variation within a specified time frame after the event or as soon as reasonably practicable thereafter. The words "or as soon as reasonably practicable" diminish the effect of the notice requirement so that there is no real effective time bar for bringing a claim.

ECC

The ECC treats "Variations" and "extensions of time" very differently to NZS 3910:2003. Gone are the terms "Variations" and "extensions of time", in their place are "compensation events". Compensation events are specified events that may give rise to a claim for a change to the Prices and the Completion Date.

ECC imposes an obligation on the Contractor to notify the Project Manager of an event which constitutes a compensation event within 8 weeks of becoming aware of the event. If the Contractor does not notify an event within this time frame then he is not entitled to any change in the Prices or the Completion Date. This time bar does not apply to events that the Project Manager should have notified, e.g. an instruction by the Project Manager changing the scope of the works.

Valuation of the change to the Prices as a result of the compensation event is another significant difference to the process under NZS 3910:2003. Under the ECC changes to the Prices are assessed on the basis of the actual Defined Cost of work already done and a forecast of the Defined Cost for work not yet done. If this forecast later proves to be incorrect there is no change to the assessment, the philosophy being that the parties want finality on the effect of the compensation event not an ability to re-assess it.

Any delay to the Completion Date as a result of the compensation event is dealt with at the same time as the assessment of the change to the Prices. This has the benefit that the time and cost implication of all compensation events are dealt with at the one time. Assessment of the delay to the Completion Date due to the compensation event is based on the length of time that planned Completion is later than the planned Completion Date as shown on the Accepted Programme. What this means is that if the contractor has terminal float on the Accepted Programme he retains the benefit of that float. If there are "key dates" specified in the contract then these key dates are also extended due to the delay caused by the compensation event.

Where the Contractor has failed to give an early warning, which an experienced contractor could have given, the event is assessed as if he had given the warning. This provision ensures compliance with the requirement to give early warnings of events that have a cost, delay or performance implication.

Works Information

The Works Information under the ECC is similar to the Specification under NZS 3910:2003, but the ECC assumes that the Works Information deals with a number of matters that under NZS 3910:2003 are dealt with in the General Conditions. This is an important difference as a principal under the ECC needs to ensure that the Works Information deals with all relevant issues that the core clauses state are dealt with in the Works Information. For example the core clauses of the ECC assume that the Works Information specifies matters such as circumstances where use of the works prior to completion is not deemed taking over the form of the performance bond and requirements for testing and inspection.

Other Differences

The way in which the two contracts deal with payment processes and disputes is very different due to the New Zealand Construction Contracts Act 2002. Our earlier article considers these issues.

Finally the terminology used in ECC is very different to NZS 3910:2003 and does take some time to get use to. The following table sets out the terms used in the ECC and the NZS 3910:2003 equivalent, if any.

Some examples of Simpson Grierson's NEC Experience:

• Transpower - Haywards Station Synchronous Condensers Refurbishment Contract based on NEC3 Engineering and Construction Contract (ECC)
• Christchurch City Council - Roading and Greenspace Maintenance Contracts based on NEC3 Term Service Contract
• Metrowater - Water and Wastewater Term Renewals Maintenance Contracts based on NEC3 Framework Contract with the Engineering and Construction Contract (ECC)
• Queenstown Lakes District Council - based on NEC3 Framework Contract
• Speaker at NEC Seminars in New Zealand

Authors

Michael Weatherall

Partner - Property & Infrastructure

DDI: +64 9 977 5097

Mobile: +64 29 977 5097

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Lisa Curran

Senior Associate - Property & Infrastructure

DDI: +64 9 977 5143

Mobile: +64 21 498 641

Email:

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