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November 8, 2018

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How can contracts help in construction?

Innovation is often talked about as a means of solving the issues within the construction industry. The tendency is to think about big and often expensive changes, or to rely upon technology to save the reputation of the industry. The problem with big changes is that they often take a long time to implement and, as a result, fail before they get implemented. Sarah Wilson, Head of Construction at Shulmans LLP explains why it’s sometimes best to start small.

Sarah WilsonIt may not be viewed as the most obvious innovation within the construction industry, but the NEC4 Alliance Contract provides an opportunity for improved working practices. Whilst not a wholly new concept, as an NEC form of contract it is more likely to be adopted, as opposed to previous versions which have rarely been used and therefore have had little impact.

What is the NEC4 Alliance Contract?

If we look at the NEC form of contract and how it has evolved over the years, we can see that dealing with issues “up front” has (almost) become a habit within the construction industry and is reflected in other contracts which seem to be following NEC. The NEC4 is no different…. Key parties sign up to a single contract and is designed for a substantial project or multiple individual projects.

The key features are:

  • Joint insurance policy, including professional indemnity insurance;
  • The parties are managed by an Alliance Board with all key parties represented and where decisions must be unanimous and are binding – my view is that, having all parties represented and unanimity required, will help in planning the projects, trouble shooting and will foster real collaboration;
  • The parties share the risks and the rewards – the aim of which is to ensure collaboration;
  • There are limited compensation events – which means that the parties take greater risks, but this reduces the opportunity for disputes.

What will it change?

Disputes arise for a number of reasons including:

  • Lack of planning before start on site;
  • Failure of different parties to interface with each other;
  • Work starting before contract terms have been agreed;
  • Substantial changes and variations to the works – which often has a knock-on cost effect that the client is unaware of until the end of the project.
  • The claims culture often prevents parties dealing with problems on site when they start, because they are trying to protect their own position;
  • Parties who “buy work”.

Many of these problems would (or should) either not occur, or, be quickly resolved under the Alliance Contract. However, despite this approach being advocated in the past, it has not proved popular, so what has changed?

The use of NEC has gained a lot of traction in the last 10 years, mainly due to Government support and this might just mean that the Alliance Contract will succeed where other similar contracts have not.

There is another change in NEC4 that may help avoid some of the problems listed above, particularly surrounding the lack of planning and preparation. This is Option X22 – Early Contractor Involvement.

Under Option X22 the Contractor is involved in the planning for the project at stage 1. Stage 2 is start on site when the appropriate NEC contract (whether it be Option A, B, C, D or E will be entered into between the parties).  Stage 1 allows the contractor to be paid for work developing the design, looking at innovation and basically planning how the work will be carried out, ensuring that everything is in order.

Clients may ask why they should pay contractors for this service when they currently get it for free.  However, if the contractor is being paid, it will have greater engagement and, from a client’s perspective, if an investment is being made, will ensure that its design team and consultants liaise fully with the contractor to ensure that the necessary planning and preparation is carried out so things run smoothly on site. This should then avoid costly site mistakes and help reduce claims.

The future?

The NEC4 contract was only introduced last year and it therefore remains to be seen what the take up is on these new provisions and how they will impact. However, it has the potential to foster greater communication, planning and collaboration between the parties. Even if the individual parties are culturally not used to working on a collaborative basis, the feature of the one insurance for all and requirement for the parties to meet and agree issues effectively forces collaboration and it may well be that parties see genuine benefits arising out of it and can only be beneficial to productivity and profitability.

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