Jack Lemley is to run Olympic projects under the NEC3 standard form, about which there is ‘massive ignorance' in the industry. So how can it wise up?

John Redmond Just to let you know that I am waiting for my first chatroom experience. I've been to the website, but it seems to be an invitation to create my own chatroom, which I doubt is the right thing to do.

Tim Willis I gather from Chloë there is a technical hitch. She'll send us an email letting us know how she has got on.

Chloë McCulloch Right, sorry about this - the website doesn't seem to be working, so let's carry on chatting over the email and hope we don't get too confused. We're here to talk about the third edition of the NEC contract. This partnering contract has proved controversial in Building's legal pages. Ian has attacked it from the employer's perspective and Roger has done the same from the contractor's perspective. Tim and John have written positive appraisals. Now that the Olympic Delivery Authority has announced that it is using it for the 2012 Olympics, let's discuss the pros and cons.

John First of all I don't really know what a partnering contract is, but I don't think that NEC is one. It's capable of being used in a partnering relationship, but I think more is needed with a view to a continued relationship to make it "partnering". In broad terms, it's good because it imposes management discipline on clients, project managers, designers and contractors. The major con is if the parties are determined not to accept the discipline - for example by saying "let's not worry about the extension of time (sorry, compensation event) claim now - let's leave it until the end like we always do".

Chloë Ian, what are your reservations about this family of contracts?

Ian Yule I have two specific concerns about the third edition, both of which affect employers.

The first is that there is a new compensation event (that is, one that gives the contractor time and money) for events that neither party could prevent and that an experienced contractor would not have allowed for. It seems to me that this is wide enough to cover such matters as subcontractor insolvency (or possibly even poor performance) labour and material shortages or an unusual accident in the vicinity of the site. The second is that the contractor now has the power to serve notices on the project manager imposing certain time limits in relation to compensation events. If the PM misses the time limit, the employer is stuck with the contractor's valuation of the event. The employer can challenge this in adjudication, but must pay up first.

John As the contractor is responsible for the subcontractor's performance, I am not sure I agree with the first point. There would in any event be a row about whether the subcontractor insolvency was predictable. I am dead against Ian on the second point. The PM really should be under pressure to deal with these things promptly. The NEC contract is a blueprint for good management and if the PM does not sort out compensation events quickly the project will not be managed efficiently. It's high time the PM received a boot up the backside.

Tim I agree - it is only after the PM has missed several notices that the default comes into play - and the whole contract is based on using good communications to manage risk.

Roger Button We seem to be agreed that the compensation event procedure gives rise to considerable doubt as to the rights and obligations of the parties. Although it is true that the contract puts the PM under pressure to deal with compensation events promptly, there is a "get out of jail" card for the PM and for the employer in that the adjudicator has the power to alter a quotation which has been treated as having been accepted. This is a novel power and one would have expected some guidance as to how it was going to be exercised. That, however, is completely lacking. One suspects that the NEC is more interested in the contract as a tool of project management than as a statement of the parties' rights and obligations. The result is a degree of vagueness which must undermine the partnering process.

Tim Roger's point about vagueness overestimates the "certainty" achieved by other traditional forms - they have not prevented litigation on their drafting and the courts have been very rude about JCT contracts on a number of occasions.

So far the court's decisions on NEC have not suggested any objection to its drafting style.

John I certainly agree that the NEC is a tool of project management, but I think that there is less vagueness here than in JCT, especially under NEC3, which is a real improvement on NEC2.

The project manager really should be under pressure to deal with these things promptly. It's high time the PM received a boot up the backside

Roger Tim mentioned the lack of criticism of the NEC's drafting style - that may reflect the fact there have been relatively few court decisions on this particular form. Most have been resolved in adjudication or arbitration.

Ian The big problem for the PM is that, if used properly, this contract generates a tremendous amount of paperwork on all sides. With the best will in the world, a PM may get lost in the middle of it - and it is the employer who pays the penalty.

Tim The PM needs to be properly resourced. Unless clients understand that the contract is a risk management vehicle and that risk management means communicating with people and responding to them, the whole thing comes unstuck. But the contract is clear and the philosophy is that managing risk is good value for money and a political imperative.

Roger The amount of paper cascading onto the PM's desk is going to be greatly increased by a provision requiring the contractor to notify all compensation events within eight weeks of "becoming aware" of them. Contractors are bound to give notice where there is any doubt at all, thereby placing further burdens on the PM. This provision creates more uncertainty, specifically:

  • The contractor may not become aware of the event immediately. It may, for example, take time before a contractor is aware that a bit of difficult ground is in fact caused by ground conditions which he could not reasonably have anticipated.
  • It is not clear who within the contractor's organisation has to be aware of the facts before that knowledge is attributed to the whole company.
What was intended to support the compensation event process could end up becoming a job creation scheme for the dispute resolution industry.

John Arguably the eight-week period is too long because proper project management requires the programme to be revised as soon as possible after a problem appears.

Ian Most employers will chop it back to around the two weeks that was in the last edition.

Tim The NEC3 position is that the contractor is precluded from recovery if it is its fault that the mechanism has broken down by not operating it. Is that unworkable?

John Theoretically, no, but in real life the delinquent contractor feels it has been badly treated and stops working in a spirit of mutual trust and co-operation. That is why all parties really need to understand the management commitment they are making when they take on a job under this contract.

Roger I agree. A contractor who feels that a justified claim has been denied because of a purely formal deficiency in giving notice is likely to become extremely unhappy, particularly in circumstances where there is doubt as to the scope of his obligations in this respect. A full blown dispute could well follow.

Ian I think many people would accept that this is a pretty pro-contractor form of contract, which is perhaps why it is heavily amended on major projects. For example, there are 19 compensation events, including a new one relating to where the employer interferes with a contractor's "key date". And only the other week in Building Tony Blackler noted that the NEC gives the contractor the use of any float in his programme. Most other contracts do not do this.

Roger I am not sure that I would agree with that. It has to be born in mind in relation to "key dates" that the contractor's liability for failure to meet a date is apparently unlimited - in contrast to the limit imposed in most contracts by liquidated damages provisions for failure to achieve completion. Most contracts also do not have a fixed time limit for the notification of claims by the contractor with loss of all rights in default. Overall, I suspect that the NEC balance between contractor and employer simply has a different profile rather than being consistently in favour of one side or the other.

A contractor who feels that his justified claim has been denied because of a purely formal deficiency in giving notice is likely to be extremely unhappy

Chloë So is it the wording of the contract or the people that use it that matters most?

John The wording of the contract is (most of the time) pretty clear. If the NEC fails it is because the parties have failed to appreciate the commitment to efficient management. When the PM (or the contractor's manager) says "I've been running projects like this for 20 years and I never worry about the small print", disaster looms.

Roger It must be the people who use the form that matter more. The contract is there to provide clear guidance in those cases where a party's performance has caused a problem.

Tim I agree that partnering contracts require a cultural change as well as different wording. The key seems to me to be management of risk; if all parties are actively collaborating, they will resolve issues so the hard-done-by contractor is less likely to be a reality. The risk transfer will dependthe options used and the amendments made.

Chloë Okay, a last word on whether the ODA is right to have opted for the NEC - are contractors prepared for its disciplined approach?

John Yes - but it should promote a serious education campaign. There is still massive ignorance about how the contract works.

Roger I agree - there's an impression in some quarters that with an NEC contract, there will be no problems. That is only the case if people behave as the contract expects them to behave.

Ian The interesting point will be to see how far the ODA amends it to get rid of the contractor-friendly points.

Tim The ODA needs to avoid disputes, and culture of NEC3 is less adversarial. If it amends the contracts it will need to explain the amendments to the supply chain and not leave it to the lawyers to guess. I think certainty of delivery must outweigh certainty of price - we can't have contractors fail and put the the thing back to next season.

Chloë Thanks everyone, and sorry the website went so spectacularly wrong.

John Can I go to lunch now?

Why is NEC3 controversial?

  • Employers are concerned that contractors can make a claim if completion is delayed by an event that is not preventable by either side
  • If the project manager does not respond in time to a contractor’s valuation for a compensation event, the employer has to pay the amount claimed
  • Contractors have eight weeks to give notice of a compensation event or lose all rights
  • Contractors may have to ensure work reaches a specified intermediate condition by a key date before completion – with unlimited liability if they default.