NEC Contracts & Options Explained

The New Engineering Contract – commonly known as the NEC – is a formalised series of contracts created by the UK Institution of Civil Engineers. It forms a ‘box set’ of contracts and guidance notes that covers all types of procurement processes, including works, services, and supply.

NEC contracts facilitate the implementation of sound project management and procurement principles and practices, as well as defining legal relationships.

What is an NEC contract?

From the outset, the NEC suite of contracts has been designed to follow three key principles:

• A collaborative approach between parties – reliant on good working relationships.
• The flexibility to work in a range of commercial situations
• The use of clear and easily understood language and structure.

Since its introduction, the Institution of Civil Engineers has continued to update, adapt, and redraft the suite of contracts to stay in line with development across the industry and changes in operational approaches. The latest of these revisions was the introduction of NEC4 in 2017.

NEC contract types

NEC contracts are suitable for procuring a range of works, services and suppliers and offer major cost and time-saving benefits, as well as enhancing quality.

Works: Construction, refurbishment and decommissioning of structures. Developments could include houses, schools, hospitals and leisure facilities, as well as infrastructure covering transport, energy, water, waste and industry.

Services: Engineering, architectural, project management and consultancy works. Contracts can also cover support services, such as facilities management.

Supply: High-value goods and services such as cranes or complex plant, as well as low-risk items such as building materials and products or personal protective equipment.

NEC contract options

Within the Engineering & Construction Contract (ECC), for works –, there are six different main options for procuring work. These operate in various ways with pros and cons that enable clients to make the most informed decision.

NEC Option A

Priced contract with activity schedule – often used on projects such as infrastructure, buildings, highways and process plants. This option contains a priced lump sum contract linked to a contract programme with an activity schedule. Each activity on the schedule is then allocated a price. This is a simplified payment process, with greater cost certainty but for contractors, there is no provision for part payment – only for completed activity.

NEC Option B

Priced contract with bill of quantities – Compared with Option A, the main difference is the use of a bill of quantities (BoQ) – similar to that of a Joint Contracts Tribunal (JCT). It can be used on projects such as infrastructure and buildings. The BoQ will contain project specific measurements derived from drawings and specifications.

Each measurement will then be linked to a rate. There is greater cash flow flexibility for all parties. Where there are multiple elements of work into a singular rate, it can be difficult to assess how much of the work is complete.

NEC Option C

Target contract with activity schedule – is an open-book contract set against a target contract price, more commonly known as the target price. It requires full transparency on Defined Cost to be in place during the administration of the project.

This option encourages parties to work more collaboratively – success and failure is shared, which can reduce disputes. However, some share ranges can be disproportionate, and care should be taken to avoid financial risk.

NEC Option D

Target contract with bill of quantities – similar to Option B as both use a BoQ, but with slight changes. And like Option C, financial loss and gain is shared by both parties, however a BoQ is used to make up the price of the works.

NEC Option E

Cost reimbursable contract – allows the client to pay the actual cost of the contractor’s work on an open-book basis – but this places a large financial risk on the client. It can be useful where emergency work is required, however there is less cost certainty for the client and an inability for parties to accurately plan cashflow.

NEC Option F

Management contract – is intended for construction management-type procurement and can be combined with other option clauses and choice of sub-contract to provide for a tailored risk management approach. Option F is also a cost reimbursable contract (see Option E) where the financial risk is taken largely by the client.

How does NEC help your projects?

The overall aim of NEC contracts is to make successful project delivery more attainable, and the process within it more collaborative and transparent.

From the outset, the mission of the NEC has been ‘to provide clarity, flexibility and stimulate good management’ which has been reviewed and adapted through its four versions to keep up with feedback and trends.

NEC contracts are endorsed by both governments and industry bodies and have been proven to help deliver large-scale projects, while adhering to the critical Construction Playbook principles. The various NEC options can suit a range of needs and can be used in any economic sector and any jurisdiction for the best project performance.

Part of keeping your contracts running smoothly is not only choosing the option that works best for your project but opting for a tool that can keep track of the journey. Sypro’s Contract Manager helps teams keep all their contracts in one place, to help streamline operations.

All users can fully interact within the digital space, for positive collaborative working, able to keep on top of changes and risks at every turn.

The move from NEC3 to NEC4

The NEC3 suite of contracts was initially launched in 2005 and fully revised in 2013 in line with the NEC’s 20th anniversary.

Throughout the 12 years that NEC3 was in place, user member feedback was collated on an ongoing basis. This list of feedback ultimately led to the requirement of a redraft, resulting in the release of NEC4 in 2017. Our strategic lead Dr Stuart Kings was one of the nine drafters for this fourth edition of the contracts and also co-authored NEC4: Practical Solutions.

While the NEC suite of contracts is used internationally, a number of the changes introduced in 2017 were also to keep abreast of the latest legislation in the UK.

It is important to note that due to the nature of many projects within the built environment, there will always be a long transition phase between contract editions. For example, Hinckley Point C utilises NEC3 and will do for the duration of the scheme, which is set to complete in 2029.

What are the main differences between NEC3 and NEC4?

The differences from NEC3 to NEC4 can be summarised in four points:

• More contract types available
• Greater clarity in guidance and language
• Commercial simplification to avoid disputes
• Application of common amendments to NEC3 to make NEC4 fit-for-purpose

NEC4: Encouraging clarity

Under NEC4, the biggest theme is commonality and clarity – ensuring that confusion, issues and disputes are minimised.

New contract types

A number of new contract types were created with the introduction of NEC4, including the ‘Design, Build and Operate Contract’ and the ‘Alliance Contract’, which pertains to operations carried out by Joint Ventures (JVs).  Later in 2021, the ‘Facilities Management Contract’ was also introduced specifically for the procurement of facilities management services.

One of the biggest changes in NEC4 was a dramatic improvement in guidance notes, which is now separated out into more digestible guides specific to each contract.

Within the NEC4 box set, you receive one copy of Volume 1: How to establish a procurement and contract strategy and Volume 3: Selecting a supplier guide, which provide the high-level guidance for the wider suite. Meanwhile, there is one copy for every single contract type for Volume 2 and Volume 4, which cover preparing and managing the contracts.

Previously, all guidance was covered in one single, non-chronological book. Now with the targeted guidance specific to each contract type, there is easier and greater understanding on how to use and manage the contracts, which ultimately leads to less issues.

Language changes

Many of the amendments in NEC4 are through small yet powerful language changes. For example, the use of ‘Employer’ has been changed to ‘Client’.

These small changes in language also encourage best practice, aligning with the principles lined out by The Construction Playbook and the gold standard in procurement. For example, Clause 13.2 now prompts the scope to specify a specific communications system, such as our Sypro Contract Manager. Through this specification, it puts the need for all communications to come through that – and only that – system for 100% clarity on project progress.

This move to better utilise digital software solutions is specifically to minimise contract miscommunication, which is one of the biggest causes for dispute in the construction industry.

Lastly, one overdue change is a move away from the standard use of ‘he’ and ‘him’ towards more general neutral terms, reflecting the greater diversity of the modern day.

Engineering and Construction Contract: Commercial simplification

Examining the ECC specifically, with lots of percentage uplifts and rates, this was fairly commercially complex under ECC3, opening up the opportunity for disputes on how elements are to be applied.

To combat this, ECC4 has seen vast simplification to ‘Definition of Costs’ and many of these more ambiguous uplifts have been stripped back to minimise disputes.

Engineering and Construction Contract: Project Manager responsibility

During its creation, the NEC3 and NEC4 drafters worked closely with each other to discuss the key changes required. One such area was on the feedback regarding early warnings, which ultimately needed more clarity around Project Manager responsibilities.

This saw the creation of the Early Warning Register. Clause 15 sets out explicitly what should have been happening under NEC3, including the requirement for the Project Manager to prepare a first Early Warning Register within one week of the starting date and hold an ‘early warning meeting’ within two weeks of the starting date.

Application of common amendments to NEC3

During the drafting process for NEC4, extensive research was carried out into the common amendments people made to NEC3. From there, the team of drafters examined how best to incorporate these common amendments into NEC4, ensuring that it really did suit what it was required to do.

These changes were either incorporated within core clauses of the contract, or were introduced as Secondary Options. Several of these Secondary Options have proved to really modernise the contracts:

X21 allows the contractor to propose specific savings to the whole life cost of the scheme, prompting clients to examine what provides the best value overall, rather than simply the lowest price.

X22 prompts early contractor involvement, which also reflects one of the key principles in The Construction Playbook. This taps into the expertise that lies within the supply chain is brought on board to work with the client, to ensure that what is being procured is achievable throughout the whole process.

X29 supports, incentivises, and demonstrates carbon reduction initiatives on future builds across the sector. With the government’s net zero targets continuing to creep ever closer, this embedding of climate initiatives within the NEC4 contract will allow greater accountability of meeting expectations.

Want to develop your understanding of NEC contracts?

To learn more and register for the sessions that will help you, go to our NEC Walk-In webinar page.