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Architect and engineer shaking hands at a construction site.

Project overruns? It’s time to use the F-word (and a proper contract)

Richard Patterson, Procurement and NEC specialist

What happens during a construction project when something occurs to make it obvious to a contractor that the work is going to cost more and take longer than anticipated?

The answer is normally that the client is notified and warned that it will cost them extra money. But what happens next largely depends on the type of contract that exists between the parties.

In most traditional contracts, there is a requirement for the contractor to be upfront about what is happening and to keep accurate records. However, these records are usually kept on file and not translated into real costs until long afterwards. There is a mindset of ‘we'll sort it out later’.

This can result in a contractual bunfight at the end of a job, where contractor and client try to do a deal that both are happy to walk away with, without having to go to adjudication or arbitration.

NEC contracts are completely different. Under an NEC contract, if something happens which entitles the contractor to have any more time or money (a compensation event) you don't just keep records. On the contrary, you sort it out there and then, by sitting down and negotiating using the f-word: a forecast.

Clause 63.1 of the standard NEC contract says that in a compensation event, “the change to the price is assessed as the effect of the defined cost of the work already done because of this event, and the forecast cost of the work not yet done plus a tendered fee percentage.”

I think that one F-word is the word that makes NEC contracts so different from other standard forms.

Because of it the project manager and the contractor need to lock themselves in a room and agree this forecast. It means that both sides need to have competent people who can assess time effects, price up work and make sensible risk allowances based on the situation at it stands today. They also need the negotiation skills to be able to strike a deal there and then, so the work can proceed without the shadow of uncertainty. No forecast will ever be ‘right’ – but it is a ‘deal’.

For many, this is a massive change. Clients will need people in their team with an understanding and appreciation of programme and contractors’ real costs, and empowerment to do these deals. But the benefits are significant. Being open on the thorny issue of cost fosters trust and collaboration between the parties.

Critics have argued that the process set out by the NEC contract requires too much management. It is true that it does require extra effort during project delivery, but only because it intentionally forces you to try and sort out potential problems as you are doing the work. By applying resources at the right time, rather than the traditional method of leaving it to an expensively-hired claims consultant to sort out later, you can achieve incremental certainty about costs and avoid disputes.

I am an enthusiast for NEC contracts because of the flexibility, clarity and stimulus to good management that they provide. But they also do foster collaboration and are effectively one big dispute avoidance process, giving you the mechanisms, timescales and rules for resolving issues and doing deals as you go along.

Richard Patterson

Procurement and NEC specialist

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