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 2 is next
About partnering contracts
Partnering contracts between supplier and customer have probably always existed, in some form or other. In fact they come in so many different shades of grey that the very term has almost lost its meaning. Differentiators like market conditions, contract strategies, contract types as well as legislatures can substantially change the face of partnering agreements.
For a start, let’s look at how the benefits for the contracting parties would alter in different markets.
In a supply driven market the main beneficiary of a partnering arrangement is more often than not the client. Here partnering is a way to curb uncontrolled price hikes form over-busy, finicky contractors and suppliers, and enjoy preference of supply. Unless there are shared long-term mutual objectives, contractors will be lukewarm at best about the idea as it limits their profit potential, in exchange for a promise of continued work at a time when there is aplenty.
On the other hand, in a demand driven market it is the clients who do not see immediate benefits from partnering, as it is seen to blunt competitive pricing. In this case contractors would rather like the idea for this exact reason, as well as work continuity, better resource planning and business sustainability. Again, if not based on long-term shared benefits, successful partnering is unlikely to evolve.
As the above scenarios change hands in their perpetual cyclical dance, real partnering has never really established itself as a mainstream approach to construction projects. We have seen the odd successes and failures but the argument is far from settled.
A milestone on the road to partnering was the publication of the report “Constructing the Team” by Sir Michael Latham in the United Kingdom in 1994. Sir Latham had been commissioned by the UK government to look into the ailing construction industry, the largest industry sector at the time, accounting for about 8% of GDP. The industry was highly adversarial and litigious, and said to be on average 30% more expensive than in the US(1).
Sir Latham’s report made some 30 recommendations that mostly pointed towards a well designed partnering approach along the whole supply chain. It also recommended the use of the New Engineering Contract (NEC), then in its first edition, as a preferred vehicle for construction projects in the UK. It contained suggested improvements to NEC, and the NEC panel at the time took this task to heart and produced the NEC 2nd edition by 1995. For the first time a contract format existed that described not only the constructed facility, but also comprehensively focused on the management process of the work in the contract, by making management deliverables contractual requirements.
Around the same time and also in the UK, Bennet and Jayes (2) released a study called “Trusting the Team: The Best Practice Guide to Partnering in Construction” listing the achievement of mutual objectives, problem resolution and continuous improvement as the three key objectives of partnering. Out of those, the “continuous improvement” objective is perhaps the most significant in this context, as it implies a long term, high trust relationship.
The partnering philosophy promoted by NEC 2nd edition was supply chain based and it provided a suite of documents supporting this philosophy. It was a first step in making partnering a contractual obligation, which the UK Partnering Charter, an optional reference document, did not.
NEC 2nd edition contract documents included the Engineering and Construction Contract (ECC), the Engineering and Construction Short Contract (ECSC), the Engineering and Construction Subcontract (ECS), the Professional Services Contract (PSC) and the Adjudicator Contract (AC).
Later on, a multi-partner option, now known as Secondary Option X12 was added that, if selected, created a contractual obligation between named partners to achieve stated client objectives, coupled with shared and interdependent incentives, managed by a core group.
The introduction of these shared objectives between a selected and named group of partners built on the two-party partnering inherent in NEC stand-alone contracts. The use of NEC and its (multi) partnering option was a first step towards making multi-party relationship management a contractual requirement.
However, the NEC 2nd edition remained mostly tactical in nature in that partnering was focused on multiple suppliers of the same project.
The release of NEC3 in 2005 put paid to many a criticism of NEC. Taking into account the legal commentary of NEC 2nd Edition by Arthur McInnis in 2002 (3), NEC3 explicitly addresses force majeure and various instances of tacit approval, amongst others. Dispute resolution procedures are now separated for UK and other markets and divorced from termination provisions, further emphasizing that one does not have to lead to the other.
More importantly though, NEC3 is shifting the contracting paradigm – again – by releasing a 23-document, more consistent suite of contracts, simultaneously in one edition. This edition now also includes the Framework Contact (FC) and Term Services Contract (TSC) which are more strategic in nature than any previous NEC contract. They are not limited to a specific project. The Framework Contract is an umbrella contract governing work orders issued under it using other NEC3 documents, where the Term Services Contract is designed to outsource ongoing work, such as facilities management duties, during the operational cycle of the facility that was constructed under the project (or any other facility for that matter).
The addition of a small volume called “Procurement and Contract Strategies” echoes this holistic view of relational contracting in the medium to long term.
Thus, the right grouping of NEC3 documents bundled together with partnering option X12 could be used to structure a strategic multi-partnering setup, for cradle-to-grave management of a facility.
In order to grasp the power of such a tool as a behavior driver, we need to simply imagine a situation where a design-and-build contractor of a process plant is also responsible and incentivized for the maintenance of this facility for its 20-year lifespan.
In its current form, framework contracting is still in its infancy stages, pioneered the last 10 or 15 years mostly by public authorities in Europe seeking quick access to suppliers in case work was needed. It is mostly used where an array of small contracts is expected to be placed and bidding cost and time are not warranted by client advantages from competitive bidding.
Framework contracting is sometimes described as a hybrid partnering arrangement, where a number of potential suppliers are pre-qualified and certain procedures such as bidding and bid adjudication are predetermined, but at the same time a degree of competitiveness is maintained.
Under a framework contract, one or more pre-selected suppliers can bid, under specified conditions, for supply of several items of work. The framework contract itself is an umbrella agreement that manages the relationship, i.e. it lays down the rules of co-operation, but does not scope the individual work packages executed under it. That is done by separate single contracts issued under the framework.
The NEC3 Framework Contract can be used for large projects, programs or portfolios of projects. Its umbrella may cover both consulting and construction works, through the use of various other appropriate NEC3 stand-alone forms. With it, the NEC journey has reached a new milestone. It now has the capability to govern strategic long term partnering relationships, which is, as we’ve seen before, the common denominator of successful partnering in both the supply and demand driven markets. And markets being what they are today, decision makers would do well to take notice.
List of References:
(1) V. King (J.D.), “Constructing the Team”: A U.S. Perspective, Minneapolis, Minnesota, U.S.A. 1996.
(2) Bennett, J. and Jayes, S., Trusting the Team: The Best Practice Guide to Partnering in Construction, Centre for Strategic Studies in Construction, University of Reading, 1995.
(3) McInnis, A.: The New Engineering Contract: A Legal commentary, Thomas Telford Ltd, UK, 2001.