Collaborative contracting strategies and the use of the NEC3 family of contracts

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leading edge
projects consulting ltd , 2014
©
Project contracts & how they support collaborative working :
Collaborative contracting strategies and
use of the NEC3 family of contracts
Presenter :
Jon Broome
leading edge
projects consulting ltd
setting | your | projects
up for | success
jon@leadingedgeprojects.co.uk +44 (0) 7970 428 929 www.leadingedgeprojects.co.uk
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©
Outline Agenda
Collaborative working : some models
Collaborative contract strategies :
o Use of incentives.
o Target cost contracts.
o Alliances in all their forms
o Frameworks and Packages
The NEC3 family : objectives and how it achieves
them (briefly)
Quick introduction to the NEC3 Professional
Services Short Contract.
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Raising the Standard of Collaboration

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A virtuous circle of continuous improvement
A simpler project based
Model for Partnering
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Aligned
Objectives
Continuous
Improvement .
Integrated Changing Culture
Processes Teams Skills
A Model for Partnering
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(with Bells Whistles)
Value Planning
Risk Management
Project Strategic Alliances,
Target and Cost Reimbursable Contracts
Use of Incentives.
Use of NEC family and PPC2000 forms of contract.
Selection by Value : Eligibility Suitability
Aligned
Objectives
Continuous KPIs, Balanced Scorecard
Improvement Benchmarking, Performance Management .
Integrated Changing Culture
Processes Teams Skills
Risk Management Facilitated Workshops
Value Engineering throughout Project
Shared Offices IT Hard Soft Skills
Process Mapping Training
Collaborative Programming Coaching

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A Virtuous Circle of Continuous
Improvement
Aligned Objectives
Changing
Culture
Skills
Integrated
Teams
Processes
Continuous
Improvement
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Two quotes from Warren Buffet
1. “It is impossible to unsign a contract, so
do all your thinking before you sign.”
2. “It is easier to stay out of trouble than
get out of trouble.”
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Price (Output) vs.
Cost (Input) Based Contracts
A Price Based Contract is where the basis
for payment is what the Provider has
offered, regardless of what it costs him to do
the work, once he has provided the output.
An Input Based Contract is where the basis
for payment is for the resources that the
Provider uses to do the work. The input is
often ‘cost’ (a cost based contract), but can
be any unit of input e.g. time charge.

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The Role of Incentives.
The Purpose of Incentives is to :
Align the Motivations of the Contractor
with the Client and Vice Versa; or the
Subcontractor’s with the Contractors
Vice Versa
To Stimulate Improved Performance;
Directed towards the Optimum
Achievement of Project Objectives.
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Type of Incentives.
Cost e.g. Target Cost Contracts.
Time e.g. Bonus for early Completion.
Performance In Use e.g.Output or
Efficiency compared to benchmark.
Process Incentives e.g. Key Performance
Indicators. Health Safety Processes.
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Incentive Plan Design.
Business Objectives and Drivers
Project Objectives
Prioritise then Weight Objectives
Balance Incentives and Set so that :
Value to Client Amount Paid to Contractor Cost to Contractor
of Achieving Objective.
Communicate

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CSF 1 : Clear objectives
Abu-Hiljeh and Ibbs found that “incentive plans ………
require owners to define their objectives more clearly.
They also encourage owners to communicate their
objectives more effectively, both within their own
organisation and to their contractors”.
A summary of Construction Productivity Network event
on incentive based contracts stated that “success is
dependent upon a high level of trust and openness and
everyone having a clear understanding of the project
objectives. Agreements underpinning these have to be
simple, clear and owned by all parties before the project
begins”.
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CSF2 : Simplicity of design
A CIRIA report, titled Construction Contract Incentive
Schemes 17, states that when multiple incentives are
used “these require care in determining priorities,
designing the incentive controls and understanding
the interaction between them”.
Stuckhart 14 states “that owners must be careful how
they combine cost, schedule, or technical incentives
in any one contract, so that incentives do not result
in imbalances” and that “such imbalances might
motivate the wrong behaviour or over emphasise
some objectives at the expense of others”.
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CSF3 : Focus on what matters
Ibbs and Abu-Hijleh, in their research in America :
recommended clients incentivise “the project
areas in most need of improvement or that
yield the highest returns, depending on project
objectives” and
that when these areas are targeted a “total
return to the owner of five times the plan’s cost
is not unusual” ! In other words, the return
minus plan cost / plan cost was 4 to 1.

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CSF 5 : Focus on the positive
Uff and Capper, two distinguished UK lawyers, claim 26 that
“bonuses are far more effective psychologically than liquidated
damages in obtaining performance and timely completion”.
Newman of Bechtel illustrates this by stating that “our
experience is that positive incentives, for some reason, have a
much lower risk of causing aberrant behaviour, even when the
monetary effect is the same. Applying a 20% fee penalty, as
with a negative incentive for a cost over run, is somehow more
painful to a contractor than getting an 80% score on an award
fee basis”.
Ibbs, in his research 9, found “positive incentives encourage
positive actions, behaviours and relationships. Contractor’s
energies are directed toward developing more effective ways to
achieve project objectives”.
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CSF4 : Realistic starting point
A basic principle of incentives is that the Contractor
makes :
o average profit for average performance,
o improved profitability for better than expected
performance, and
o reduced profit for poor performance
This implies that the starting point of any incentive plan
has to be realistic targets of performance.
Stukhart 14 concludes that “to insure that incentive
contracts achieve the efficiencies that owners want, it is
essential that targets be realistic .... . This implies that
owners must emphasise ....... reliable targets rather than
elaborate sharing schemes and complex incentives”.
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CSF6 :
Negotiate versus impose.
Why ?
o Because the Contractor better understands
the Client objectives their weighting
o Because the Client better understands the
Contractors drivers their weighting
which results in a more effective incentive
plan.

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Cost Reimbursable Contracts
what are they ?
Provider is reimbursed Actual Costs plus
Fee.
Fee can be expressed either as :
a fee percentage applied to Actual
Costs.
a fixed fee.
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Cost Reimbursable Contract
with fee percentage
Defined Cost
fee percentage
Price for Work
Done to Date
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Target Cost Contracts :
what are they ?
A development of CR contracts where the
Provider is reimbursed Actual Costs plus
the Fee.
Any cost over or under run vs. the Target
is split in pre-agreed proportions.

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Overrun
/ Pain
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Target Cost Contract
Actual Costs
Target
Under run
/ Gain
Overrun
/ Pain
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Actual Costs
Target
Employer’s
share
Employer’s
share
Provider’s
share
Provider’s
share
Under run
/ Gain
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CSFs for Target Cost Contracts
1) Use them in the right circumstances :
(a) in less extreme circumstances to cost+ contracts
where, if a Priced contract was used, the Contractor
would either not tender or add a high premium
(b) where both parties can contribute to managing risk
(threat /or opportunity) within the target /or
(c) where there could be significant, but manageable
changes to the Target I.e. Employer owned risks
2) Intelligently set the share profile to create
alignment reflect risk within the target Prices
3) Make sure all the components of the Target are
realistic : Defined Cost, Fee risk allowance

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Overrun
/ Pain
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with variable share profile and Employer taking large share
of over run
Actual Cost
target Prices
Under run
/ Gain
Overrun
/ Pain
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with cap on Employer’s share of over run :
a Guaranteed Maximum Price (GMP)
Actual Cost
target Prices
Under run
/ Gain
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CSFs for Target Cost Contracts
4) Specify audit requirements as :
o a performance spec pre-contract
o evaluate Providers’ proposals
o fine tune / agree early on in contract before start
spending serious money.
5) Ensure ‘real time’ financial management systems are in
place for
o up to date monitoring of Defined Cost
o agreeing changes to the Prices due to CEs and
o forecasting out turn Defined Cost and pain / gain
share.
o Adding in ‘bells whistles’ / pairing back Scope to hit
Employer’s budget.
6) Select right quantity and quality of staff with pro-active
collaborative skills and culture.

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Characteristics of a Project Alliance.
Combination of construction management
target cost contracts used in similar (more
complex) circumstances to the former, with
significant players part of the Alliance.
Potential alliance members develop scope so can
agree an alliance target.
Fundamental characteristic is that alliance
agreement / contract largely ties fortunes of
each member to success of project rather than
their individual work scope.
Incentive to partner horizontally vertically.
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Three sorts of Alliance Contract
1. Traditional Alliance Contract : an extra
contract which sits on top of conventional
(normally cost based) routes.
2. Pure Alliance (The “Australian model”) :
everyone signs the same contract at the same
time and includes works scope. PPC’2000 takes
this approach.
3. Alliance Agreement : Add-on clauses to the
individual contracts which tie fortunes to the
success (only !) of the project. E.g. NEC3 option
X12.
Principal
Consultants
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Alliance Contractual Framework
Sub
Consultants
Client Alliance Agreement
Principal
Contractors
Sub
Contractors
Principal
Suppliers
Sub
Suppliers

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Project Alliances
When to use them :
On large projects where a management contract
might otherwise be used.
Where there is potential for break through
solutions through partnering, which implies must
not over constrain alliance members
There is a limited number of ‘strong’ works
Providers who can have significant impact on
project outcomes by working together.
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Frameworks
What are they ?
A Client selects a Provider or Providers for a
series of as yet undefined projects usually
for a set time period.
As the time for each project approaches, it is
defined and scoped up together till a budget
and contract Price can be agreed.
The Project is let, often in a Target Cost or
Project alliance format.
Each project is heavily benchmarked and
lessons learnt from one are used in the next.
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Frameworks
Advantages :
Genuine ‘Bulk purchase’ discount on overheads
Particularly in public sector, once framework in place,
quicker and cheaper to get to contract.
Continuous improvement against performance
parameters of Client.
Disadvantages
High selection start up costs : scale of works needs
to justify investment
Complacency may set in : robust and visible benchmarks,
incentives, transparency of costs, non-exclusivity clauses need to
be in place to ensure motivation, plus internal competition
Reduced competition at end of alliance period

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Frameworks
When To Use Them :
When there is a series of projects, whose
total value is sufficient to justify the
investment in selection and start up.
To minimise time cost of getting to
contract.
When the workload will be roughly continuous
and consistent.
There is scope for (continuous incremental)
improvement over time e.g. they cannot be
too constrained.
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Interlude …
Answer this question in your mind :
“Of all that has been discussed, what
insight is potentially of most use to
you ?”
Having answered it, swop perspectives
with those around you (groups of 3) ?
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NEC Overview :
the 3 main objectives
Stimulus to Good
project Management
Clarity
Simplicity
Flexibility

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Flexibility
Purpose : to promote easy selection of ‘best fit’
contracting strategy for the project circumstances
Whole family of interlocking contracts for works,
goods services.
Modular structure within each contract, so that can
rapidly assemble ‘best fit’ procurement arrangement
without expensive legal input.
Similar structure terminology across whole family
to promote ease of learning and ‘back to back’ness
for process integration and contractual cover.
Note : Whole family updated in 2005 and pre-fixed
with nec3
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Members of the nec3 family :
Engineering Construction Contract
Engineering Construction Subcontract
Engineering Construction Short Contract
Engineering Construction Short Subcontract
Professional Services Contract
Professional Services Short Contract
The Adjudicator’s Contract
Framework Contract
Term Services Contract
Term Services Short Contract
Supply Contract
Supply Short Contract
As well as X12 : partnering option X19 : Task Order.
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Contracting strategy at main payment option level
ECC EC-SubC
PSC TSC Supply
Contract
Short
Contracts
(not Supply)
A : Priced Contract with
Activity Schedules (AS)

B : Priced Contract with Bill
of Quantities

C : Target Contract with AS /
Price List

D : Target Contract with Bill
of Quantities

E : Cost Reimbursable/ Time
Based contract

F : Management Contract
G : Term Contract
X12 : Partnering (project
alliancing) option

X19 : Task Order

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Contracting strategy at main payment option level
ECC EC-SubC
PSC TSC Supply
Contract
Short
Contracts
(not Supply)
A : Priced Contract with
Activity Schedules (AS)

B : Priced Contract with Bill
of Quantities

C : Target Contract with AS /
Price List

D : Target Contract with Bill
of Quantities

E : Cost Reimbursable/ Time
Based contract

F : Management Contract
G : Term Contract
X12 : Partnering (project
alliancing) option

X19 : Task Order
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Secondary Option Selection
ECC EC
SubC
TSC PSC Supply
Contract
X1 : Price Adjustment for Inflation
X2 : Changes in the Law
X3 : Multiple Currencies
X4 : Parent Company Guarantee
X5 : Sectional Completion
X6 : Bonus for early Completion
X7 : Delay Damages
X8 : Collateral Warranty Agreements
X9 : Transfer of Rights
X10 : Employer’s Agent
X11 : Termination by Employer
X12 : Partnering
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Secondary Option Selection
ECC EC
SubC
TSC PSC Supply
Contract
X13 : Performance Bond
X14 : Advanced Payment
X15 : Limitation of Contractor’s

liability to reasonable skill care
X16 : Retention
X17 : Low Performance Damages
X18 : Limitation of Liability
X19 : Task Order
X20 : Key Performance Indicators
Y(UK)1 : Project Bank Account
Y(UK)2 : H, G, C R Act
Y(UK)3 : Rights of 3rd Parties
Z : Additional Conditions of Contract

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Other Aspects of Flexibility
International Use : catered for by secondary options and no
paraphrasing of law
Contractor’s design : for ECC, extent defined in the Works
Information or equivalent.
Multi-discipline work : exclusion of discipline specific
procedures from CofCs. Either in Requirement or Contract
Data
Able to fine tune many provisions by entry in Contract Data
Subcontracting :
o ‘Purple Book’ can be used
o Short Subcontract for low risk complexity work
o Slightly amended PSC or PSSC can be used for design subcontract
o Supply for specially designed goods
o Short Supply for commodities / off-shelf goods.
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Clarity Simplicity
Purpose : to promote ease of understanding at ‘doer’ level
so reduce disputes due to misunderstanding or
omissions
Simple common structure across whole family leads to
ease of finding way around any contract
Flow charting to ensure logic : hints at process of project
management
Shorter sentence length use of bullet points
Less subjectivity: preciser definitions, risk allocation
Roles Responsibilities; stated maximum timescales.
Defined Terms with Capital Initials to avoid replication
Contract specific information in italics in Contract Data
ECC is about a third of the length of traditional contracts
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Stimulus to Good Project Management
Purpose : Range of contractual mechanisms and incentives
to promote collaborative project management, thereby
increasing predictability of time, cost quality being
delivered.
It is founded on three key principles :
1. Foresighted, co-operative management shrinks risk and
mitigates problems
2. Both parties are motivated to work together if it is in
their professional and commercial interests to do so
3. Clear division of function, responsibility ( risk) helps
accountability and motivates people to play their part

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Foresighted, co-operative management
shrinks risk and mitigates problems
A regularly updated and agreed programme with
method statements resources showing timing and
sequencing of Employer and Contractor actions
An active Risk Register stimulating active risk
management
An ‘early warning’ procedure for identifying future
problems minimising their impact
Assessment of time and cost as contract progresses
ideally before work done, but within set timescales
Stated maximum time scales for actions of parties
Full on risk register (an aide memoire)
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Overview of how change is dealt with
early warning Risk Register
16.1 Early
Warning
Potential
Event
Actual
Event
Contractor does
agreed actions as
Defined Cost only
No CE
CE, but “arises from
fault of Contractor”
OR no effect
No change to
Completion Date
Prices
CE
PM gives
instruction to
submit quotation
Forecast
if possible
Records
if not
Quotation
submitted
within
3 weeks
Quotation
accepted
within
2 weeks
Use of
Accepted
Programme
16.3 Risk
Reduction
meeting
Both parties are motivated to work together if it is in
their professional commercial interests to do so
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Statement of events for which Employer is liable : clear
definitions of compensation events (CEs) in one place
Sanctions on the Contractor to :
o early warn
o submit a first programme containing information required
o maintain an up to date Accepted Programme
o provide notification of CEs within set timescales
o provide realistic and timely quotations to these CEs
Sanctions on the Project Manager to make timely decisions
on the Employer’s behalf : stated timescales
More structured method of calculating changes in
Contractor’s time costs : a dedicated detailed CE process + the
Schedule of Cost Components
Margin on compensation events is tendered : the fee
percentage(s)

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The nec3
Professional Services
Short Contract
(PSSC)
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The NEC3 Professional Services Contract (PSC)
‘the Orange Book’
First published in 1994.
For use with any Professional
Services Contract, where services
specified in the Scope.
Allows the project management of
Professionals.
But considered by many to be too
heavy handed for simple to
medium complexity appointments
… … such as a client empowered
project manager.
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The Requirement for a
“a simpler approach to simpler commissions”
Replacing the APM’s current Standard Terms of
Appointment, including
o managing an NEC3 form as the ‘Project Manager’ etc.
o any project.
Appointing other consultants under NEC3 e.g. designer
Appointing any professional in the built environment
Be attractive for any low value, low risk professional
services commission in whatever sector.
For international use.

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For flexibility of payment, the Consultant could be paid
on :
1. A fixed price activity schedule basis
2. A time charge basis where they provide a service :
i. over an approximate period of time
e.g. a project’s duration.
ii. on a very flexible ad-hoc ‘call-off’ basis
e.g. a professional term services contract; or
iii. an ill-defined or high level Scope, where the
issues etc. and therefore Scope are not defined.
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3. allow for payment of standard measured items,
both those specified to be done in the original
Scope and those specified in the Scope, but ‘called
off’ at a unit rate.
4. a combination of 1., 2. and 3..
5. as per 1. to 4., with additions to the Scope done
either on a fixed price or time charge basis.
6. allow for time charge contracts as per 2. to have
additions done on a fixed price basis where new
bits of definable work emerge and the Client wish’s
to have greater cost certainty.
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The Target Market
The centre point or bulls eye is a few people doing the
work with helpers. For instance :
One or two people doing the majority work to deliver a
series of outputs to stated dates, albeit with their bosses
oversight, and specialists contributing advice reviews.
A project manager under a time charge contract
managing a project full time who, from time to time, may
require extra expertise or resource at busy times.
A professional adviser giving predominantly on-going, but
ad-hoc advice to a client on a time charge basis. From
time to time, they may need to bring in extra expertise
/or a discrete bit of work may drop out to be delivered
on a priced basis.

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Value of Contracts ?
less than a £1,000 for a couple of hours work to
… …
a couple of hundred thousand pounds per year
for a full time project manager to … …
up to half a million pounds for defined
assignment delivered on priced basis by a small
team (of say 6 people over half a year) at which
point the PSC might start to come into
contention.
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Final Review
On your tables :
Review your original objectives : have
you got them ?
Discuss and agree your Top 3 key insights
from today.
Briefly feedback one to the main group ...
... but it can’t be one that a previous
group has said !
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Contact Details :
Dr Jon Broome
Tel : 07970 428 929 / 01179 093 297
Email : jon@leadingedgeprojects.co.uk
setting | your | projects | up for | success
Web : www.leadingedgeprojects.co.uk
setting | your | projects | up for | success

Collaborative contracting strategies and the use of the NEC3 family of contracts

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Collaborative contracting strategies and the use of the NEC3 family of contracts