NEC4 Changes & Acceptance Of Defined Cost

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NEC4 Changes & Acceptance Of Defined Cost

The NEC has announced that it is publishing a NEC4 fourth edition of the New engineering and construction contract at its annual conference on the 22 June. It?s now over 12 years since the NEC third edition was published and without any doubt, it?s had a major impact both in the UK and overseas.

NEC says that this fourth edition is as a result of feedback from industry and in response to what clients are demanding. Although we have yet to see what is going to be published, my concern is that on balance, the majority of changes may benefit the Contractor and not the Employer. Its very important that contracts and risk allocation between the parties to any contract is equitable. NEC has published a white paper titled “The Next Generation – An Explanation of the Changes and Benefits” as I would expect the paper sets out some of the NEC4 changes and benefits. They state that NEC4 changes are “a positive development” but the white paper falls short of identifying the risks. It’s my view that risks of change should also be debated and what is now required is a more critical appraisal of the proposed NEC4 changes. The white paper states the following in relation toe Defined Cost and Disallowed Cost:

Finality of assessments

NEC4 contracts now include a number of procedures which are aimed at reaching agreement on the final amounts due under the contract. Provisions have been introduced to the cost based contracts (main options C, D, E and F) that allow the Contractor to instigate a review and acceptance of its Defined Cost by the Project Manager, upon request. The Contractor notifies the Project Manager when part of the Defined Cost is ready for review and the Project Manager is required to review them within 13 weeks, and to communicate acceptance, or advise of any errors identified. If the Project Manager fails to do this then the Contractor?s Defined Costs and Disallowed Costs are treated as accepted.

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NEC4 engineering and construction contract

NEC state this will help ensure Defined Cost and Disallowed Cost is checked as the work proceeds,and its not all left until its too late and the projects complete.

I am a keen advocate for NEC contracts and there is much to be commended in the NEC’s proposed changes. However, I am surprised to learn that Defined Cost and Disallowed Cost may be “treated as accepted” if an audit is not completed by the Employer within a 13 week period. If this is the case then we will need to look at the NEC proposed drafting very carefully indeed.

I understand that there’s been problems for lots of Contractor’s historically when using NEC main Options C, D, E and F contracts. Its take far too long for the Contractor to get cost ledgers checked and journal entries accepted by the Project Manager. I do agree with NEC that lack of cost certainty has been something that has needed to be tackled. ?What I do not agree with, is to treat Defined and Disallowed Cost as accepted. This creates significant risk for Employers everywhere and it is not (in my view) the best way to ensure finality of cost.

I have completed lots of cost audits on NEC contracts and if its true that Defined Cost and Disallowed Cost may be “treated as accepted”, this approach to Defined Cost and Disallowed Cost in NEC4 is going to be a risk to Employers. It would not surprise me at all if Employers decide to delete or amend these provisions. There’s also risk that audits are going to be rushed if the Employers out of time, and in my view it also diminishes probity and there is a possibility (no matter how small it may be) that?criminal offences such as fraud may not picked up.

This simply won’t do.

As I say, we have not yet seen the exact NEC4 drafting yet and so lets wait and see before we get too excited. When NEC4 does arrive, the?new drafting will need to be looked at very carefully indeed.

Rub your hands together with glee you lucky Contractors and for you poor old Employers, well you will need to have a good cost clerk and auditor or accountant to hand on every job using a cost reimbursable option!! You won’t want to use a general QS that only deals with value but you will need a specialist person that is a cost accountant and really understands the Contractors business commercially and cost ledger accounting.

This NEC4 provision may be good for the Contractors but I think it could be bad news for Employers!

For more information about NEC4 changes please see my news bulletin and don’t forget to watch part 1 of 2 as well.