This blog post is by my colleague, Mr. Luc A.E. Bauwmans, PMP
Optimizing construction project performance using the New Engineering Contract Third Edition (NEC3)
Part 1: Partnering in construction contracting is still the subject of much debate. The simplest form of partnering occurs when two parties to a contract have aligned (some of) their objectives for the project that the contract is intended to execute. Lately more complex forms have emerged such as multi-party arrangements governing a number of single contracts on a project, incentivizing all partners when client objectives have been met.
Perhaps with the exception of Build-Own-Operate-Transfer contracts, used on large public infrastructure projects, most partnering approaches to construction contracting are of a tactical nature, and not all have been successful. It appears that successful long term, strategic partnering is still more the exception than the rule.
Partnering in construction contracting started getting earnest attention in the UK through the Latham report “Constructing the Team” of 1994. This report also recommended the use of the New Engineering Contract (NEC) which was released that same year, and proposed improvements to it. This gave rise to more research into partnering in construction on the one hand (see below: Bennet and Jayes 1995), and the updated NEC 2nd edition (1995) on the other.
While NEC 2nd edition was a great step forward toward tactical, project based partnering along the supply chain, it is the 3rd edition (NEC3) of 2005 that takes the step towards strategic partnering, with the addition of the Framework Contract and Term Services Contract, intended for contractual commitments in the longer term, and spanning many capital or operational projects.
In part 2, the paper then looks to identify the characteristics of NEC3 that support the principles of long term strategic partnering that would herald a new beginning in construction contracting. NEC3 is also a more flexible form of contract and is suitable for international use through its many combinations of options and “Contract Data” that allow customization of the document for engineering and construction related projects in all industries, across most legislatures around the globe.
The paper concludes that NEC3, for reasons stated, could be advantageous not just to the contracting parties, but could also help mitigate the effects of the current global economic crisis, particularly in high growth areas such as the Gulf Cooperation Council (GCC) countries, and the United Arab Emirates (UAE) in particular.
While the current economic crisis weighs heavily on construction industries everywhere, in super-fast developing countries like the UAE and some of its GCC partners, its impact is probably more prominent than in most other countries.
On 6 March 2009 Reuters Dubai reported that in UAE, US$ 263 Billion of real estate projects had been postponed awaiting more favorable economic winds. Others clients in the Gulf have since re-issued invitations to bid, in the (realistic) hope to receive more favorable offers from contractors in the changed climate, sparking the latter’s concerns about dwindling profits.
A vast number of projects are ongoing though, in some cases on account of policies that prevent unfinished projects being abandoned, and a recent forecast of project expenditure for the Emirate of Abu Dhabi has in fact shown an increased figure for 2009, compared to 2008.
For the purpose of this paper this somewhat categorizes construction contracts into two main categories, awarded and not yet awarded, and the (post-) crisis approach to those categories would differ substantially.
Many a client locked in an existing fixed price contract may try and benefit from what could be termed windfall profits by contractors due to a steep decline in supply prices, but even then this would be at best a slice of what would have been all theirs otherwise. As a result, we see a sudden swing of the pendulum towards a propensity for cost reimbursable contracts which only recently, in the bull economy, were not that popular with clients. But otherwise, existing contracts will run their course, leaving their parties better or worse off.
The focus of this paper is on new contracts, and how in the new lean economy, contracts could be selected and drafted towards better outcomes for all parties.
to be continued