Infrastructure contracts – the debate continues

A recent workshop for NEC3 contracts project managers in Christchurch, and organised by NEC in the UK, rekindled an old industry debate and dilemma over infrastructure contracts.  By ALAN TITCHALL.

THE ONE-DAY NEC workshop was held on October 27, a few days before the IPWEA-owned RIM conference in Dunedin, and was organised in partnership with Constructing Excellence in New Zealand, which is the NZ licensed re-seller of NEC3 information and currently acts as the secretariat to the Australasian NEC3 User Group.

The NZS:3910 Conditions of Contract for Building and Civil Engineering Construction is still the most widely used contract here. Written specifically to reflect our civil construction industry, NZS:3910 was first published in 1984 following a radical rewrite of the previous standard NZS:623. Supporters of NZS:3910 say it has been developed (and regularly reviewed) collaboratively by industry peers (clients, consultants, contractors, insurers, lawyers) and has benefited from many revisions – generally at five-year intervals. Each revision has followed an extensive industry-wide consultation period.

The latest revision of NZS:3910 accommodates the Construction Contracts Act 2002 (CCA), which is not covered by overseas standard forms of contract. For instance, a main component of the CCA provides processes for payment and dispute resolution (it is illegal to contract out of the Act).

However, over the past decade, with an influx of engineers from overseas (particularly the UK) there has been a push to use alternative forms of contracts that are held up to be ‘relational’ contracts.

NEC says it is gaining ground in the Australasian region with the use of its contracts, especially among local councils. Recently, the Horowhenua District Council appointed local contractor Caldow Builders under an NEC3 Engineering and Construction Contract (ECC) option D (target contract with bill of quantities) to build a new $4.3 million community centre in Foxton.

Project manager Marc Palmer says: “NEC’s strong cooperative principles and its tried and tested target cost provisions were central to the council’s decision to select ECC.

“The contract also aligns with the community-driven project’s aims to maximise collaboration between the key groups supporting it as well as harness the skills and capacity of the community.”

Other major projects that have adopted NEC3 include Watercare’s Hunua 4 project in Auckland; the Christchurch Art Gallery re-levelling project (featured in the October 2016 issue of Contractor); the Waitaki hydropower station refurbishment; and the Mill Creek wind farm.

Despite this, many in the contracting industry believe that NEC contracts will never improve upon the Kiwi-designed NZS:3910.

Says Malcolm Abernethy, executive officer with CCNZ: “NZS:3910 was written by Kiwis for Kiwis and developed collaboratively by all sectors within the construction industry.

“On the other hand, NEC was developed in the UK as a result of their dysfunctional contracting industry and litigious approach to contracts back in the ’90s or very early 2000s.”

Malcolm says the local industry is relatively small, which requires contractors to have a “mature” approach to contract relationships.

“As a result the industry is generally collaborative and has to be if the contractors and clients want to work together in the future.”

He also notes that Horowhenua District Council a couple of years ago used NEC on a water maintenance contract and then retendered it as a NZS:3910.

Gallo Saidy, group manager Infrastructure Services for the council, says the three waters NEC maintenance contract is actually still in place and doesn’t expire until June 2017.

“In the past the intention was to go about to tender using a simpler contract such as the NZS:3910, but the existing contract got extended for another two years. I can say (though) we will not be continuing with NEC.”

Joe Edwards, an operations manager at McConnell Dowell Constructors, says NEC3 needs to be adapted to comply with New Zealand law using special conditions, while this is not the case for NZS:3910.

“NEC3 does limit overall risk exposure on contracts by allowing a cap on liability and excluding consequential loss, and this is being adopted by some clients using NZS:3910. I believe there are now a number of litigations that are coming through in the UK over NEC3s.”

Joe also notes that the NZTA, the country’s largest procurer, works exclusively with NZS:3910. “NZTA has also developed, and continues to expand, the collaborative contracting approach throughout its work. Watercare Services used to use NEC3 and has now reverted back to NZS:3910.”

To work effectively, NEC3 imposes a number of key obligations on the client’s PM, says Joe, which is an area often not well managed and can be overlooked.

“A key issue with a number of contracts put to the market is the special conditions imposed and the implications of these. The reasons for including special conditions vary, but generally they move risk from what was the intent in the General Conditions of Contract. This in itself changes attitudes.

“A contract I saw recently had a milestone payment clause proposed where the contractor would be significantly cash negative to a high percentage of the overall contract value, and for the majority of the contract. This is not collaborative and the general conditions of contract allow these changes.

“Hence, a key aspect of collaborative contracting starts with the willingness to work together, have special conditions that match this, and a knowledge that the way the current contract goes will impact on the winning of future contracts.”

Contract consultant Chris Olsen says he is not surprised to see NEC contracts picking up here.

“NEC’s strength is that it includes formal contractual obligations and systems around collaboration whereas NZS:3910 and Conditions of Contract for Consultancy Service (CCCS) rely informally on a collaborative ‘culture’ only.

“Some of my old Roading New Zealand members used to say that the NZS:3910 Conditions of Contract operating in a collaborative culture always went to custard when the real heat came on, whereas NEC has processes that keep collaboration working.”

Dave Jewell from Bond Contstruction Management says that while it is often stated that NEC is a ‘cooperative’ or ‘collaborative’ contract, this is wrong.

“It is not correct to describe prescriptive notification requirements and strict communication protocols as ‘collaborative’.

“While these are good disciplines in any contract, it is my view that NEC3 is no more ‘collaborative’ than NZS:3910. Collaboration is an attitude that the parties bring to their contractual relationship – it cannot be prescribed in a contract form that assigns risk to each party, and leaves each to the commercial consequences of those risks.”

A feature of our market is that it is small, and poor relationships and/or poor performance on contracts become common knowledge and can be a significant factor in securing future work, says Dave.

“So the parties work hard to maintain effective relationships, and in that context, NZS:3910 serves everyone very well.”

NEC3 also requires greater discipline with the management of the contract, he adds.

“There are requirements for notifications and communication that apply equally to both parties, and NEC3 contracts can come unstuck if that management input is missing.”

Dave concedes that NEC3 has one clear advantage over NZS:3910 – in that it is a suite of contracts for different situations and parties.

“While NZS:3910 has recently added a D&C version (3916), NEC3 has standard forms for just about every construction contracting situation.”

David Langford at New Plymouth District Council believes the industry will see more NEC contracts being used in the future.

“There are some large local authorities, such as Christchurch City Council, that have been big NEC users over the past few years. As more and more clients deliver successful projects using the NEC form of contract, its profile increases.

“New Plymouth District Council’s new Infrastructure Professional Services Contract is the first time we have used NEC. While our contract is still in its early stages, we are already seeing positive results, in particular regarding a strong swing towards a more collaborative working environment with our consultant.”

David says he has extensive personal experience of using the NEC2 and NEC3 contract documents in the UK, plus experience with other contracts forms such as ICE sixth and seventh editions in the UK, and NZS:3910 here in New Zealand.

“Over the years I have developed a strong preference for the NEC suite of documents due to their balanced nature, encouragement of collaborative working, flexibility, and stimulus of good project management practice. I say this having experienced working with the NEC contracts as both a client and as a contractor.”

However, he also believes there will always be a place for NZS:3910.

“As a client, I believe procurement is all about choice, which includes having a choice about which form of contract is going to best deliver your project objectives. As such, I very much see NZS:3910 and NEC3 sitting alongside each other to give project managers that choice.”