REUTERS | Ronen Zvulun

NEC: a suitable contender? Use of the NEC standard form in the Gulf region

Considering the cultural and long-standing approach to contracting and dispute resolution in the UAE and Qatar, compared to the UK, to what extent can the NEC form of contract compete with more traditional construction contracting in the Gulf region, including the commonly-used FIDIC forms?

Infrastructure in the Gulf

With a Qatar 2022 World Cup on the horizon and Dubai’s successful bid for Expo 2020, the scale of infrastructure investment in both Qatar and the UAE is likely to be exceptional over the course of the next few years.

In both the UAE and Qatar, and in many other Gulf countries, procurers of major infrastructure have generally opted for the FIDIC Standard Form Contracts to deliver their projects. However, there is an emerging competitor on the international projects scene: the NEC3 (previously known as the New Engineering Contracts).

In this blog I take a brief look at some of the differences between the two standard forms in terms of what the new competitor brings to the table in the Gulf region, which the current incumbent may not.

Differences of approach

The structure of the two standard forms is markedly different. FIDIC has produced a range of contract forms whose terms differ to reflect the different risk profiles of construction projects: for example, design and build (Yellow Book), turnkey (Silver Book), build-only (Red Book).

In contrast, the NEC3 suite is generally arranged according to alternative pricing options: lump sum (Option A), re-measurable (Option B), target cost (Options C & D) and cost reimbursable (Option E). The core clauses of each “Option” do not materially differ and they focus upon collaboration and the use of the contract as a project management tool.

The NEC’s focus on these aspects is viewed by many as its unique selling point. It is often contrasted to the strict allocation of risks in FIDIC (and other standard forms), the latter being perceived to be more “adversarial” and, as such, more likely to give rise to intractable disputes. Whether this is true is difficult to say, given that the NEC3 is relatively young and that disputes under both forms of contract are commonly resolved privately by arbitration.

Project management tools

The NEC3 is more detailed and prescriptive in promoting good project management compared to FIDIC and the other standard forms.

Take the construction programme: over the course of some 21 bullet points, the NEC3 lists out in detail what the programme must include. It requires the programme to deal with the order and timing of the contractor’s operations together with a statement of how the contractor plans to work for each operation by reference to equipment and resources. It requires the programme to show provision for float and time risk allowances, as well as the timing of the work of the employer (or other sub-contractors) and the dates by which information or access is required from them.

The detailed programming requirements under the NEC3 dovetail with other bespoke project management tools in the core clauses. Both the contractor and project manager must give early warning of matters that could affect cost, time or performance, which the parties then enter in a risk register and assess between them how those risks are mitigated.

Principles of proactive project management, collaborative working, good faith and mutual trust and cooperation go to the very core of the NEC3’s terms. It is the prominence of these concepts which perhaps set it apart from FIDIC and other standard forms and which have contributed to its success on major infrastructure projects such as the London 2012 Olympics.

Issues for the Gulf

The approach of major procurers in the UAE and Qatar (as well as elsewhere in the Gulf region) has traditionally been towards the wholesale transfer of risk to the contractor in return for a fixed price, to buy certainty.

The inherent risk in such an approach is that the parties end up with an unbalanced allocation of risk, which in turn can lead to costly and entrenched disputes, particularly if the price paid is not sufficient to cover the onerous risk allocation.

Given the demanding timescales for the delivery of major infrastructure associated with (for example) the Qatar World Cup and the Expo 2020, the parties may ask whether the traditional approach is the best approach or whether a more collaborative approach is called for. The NEC3’s proactive project management requirements and emphasis on collaborative working has the potential to deliver on this.

In particular, the NEC3’s target cost options (Options C and D) permit the parties to agree a target cost for the project with any cost saving or excess against that target shared between them. In doing so, the parties are incentivised to work together to deliver the project in the most efficient manner on the basis that both parties stand to benefit from doing so.

This approach is not currently offered by the FIDIC suite and is perhaps an option to be considered where the delivery of projects is time-critical and requires both parties to collaborate in order to successfully deliver the project.

A suitable contender?

As we know from the successful procurement of the London 2012 Olympics, the principles of proactive project management and collaborative working at the core of the NEC3, if deployed effectively, can reduce the risk of cost and time overrun and the risk of formal disputes materialising.

However, these detailed and proactive project management requirements come at a cost. To operate as effectively as possible, the NEC3 requires each party to commit a project team to manage and administer the contract. Of course, this is the case for all construction contracts, but it is perhaps even more necessary for the administration of the NEC3 form. In this way it can work to the advantage of the parties, rather than becoming a management burden.

The issue for the Gulf region is therefore not so much whether the NEC3 is a suitable contender for projects in the region, but whether procurers of major projects in the region are willing to give the NEC3 a go and if so, whether the various stakeholders are able to affect the shift in mindset required to realise the NEC3’s full potential.

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