Dennis Li - HKCIC Lecturer Principles of NEC Dennis Li - HKCIC Lecturer

We are a developer who wants to invest in building new infrastructure in Myanmar under one belt one road initiatives. You have found a piece of land for a comprehensive development to this end. Your consultants have devised the design and provide a cost estimate at $10 billion. Based on your market analysis, only when the costs of development can be reduced by 20% can the investment become profitable. What will you do?

Lecture 2 Procuring a NEC contract Different forms of NEC contracts Main Options and their risk profiles Secondary options and their implications Contract data

The common forms of NEC Contract Engineering and Construction Contract (ECC) Term Services Contract (TSC) Professional Services Contract (PSC) Framework Contract (FC)

Engineering and Construction Contract The NEC3 Engineering and Construction Contract (ECC) is the main construction contract within the NEC3 family. This contract should be used for the appointment of a contractor for engineering and construction work, including any level of design responsibility.

Professional Services Contract The Professional Services Contract (PSC) is intended for use in the appointment of a supplier to provide professional services. It can be used for appointing project managers, supervisors, designers, consultants or other suppliers under NEC contracts and can also be used for appointing suppliers on non-NEC construction projects or for non-construction projects. In what situation would you use Professional Services Contract?

Term Services Contract The Term Service Contract (TSC) is intended to be used for the appointment of a supplier for a period of time to manage and provide a service. In what situation would you use Term Services Contract?

In what situation would you use Framework Contract? The Framework Contract (FC) is intended for use in the appointment of one or more suppliers to carry out construction work or to provide design or advisory services on an ‘as instructed’ basis over a set term. In what situation would you use Framework Contract?

Engineering Construction Contract Main Options Option A - Priced contract with activity schedule Option B - Priced contract with Bills of Quantities Option C – Target contract with activity schedule Option D – Target contract with Bills of Quantities Option E – Cost Reimbursable contract Option F – Management contract

Example of Milestone Schedule of Payment in GCC

What’s the difference between NEC’s AS and GCC’s Cost Centre?

Example of Activity Schedule Activities Price ($) Duration Commencement Activity 1 700,000 Activity 2 200,000 Activity 3 500,000 Activity 4 600,000 Activity 5 400,000 Completion Date Float … … Critical path leads to completion

BQ, SMM, GP & PP

Example of BQ – Water Mains Laying Works Item Description Qty. Unit Rate (HK$) Total Amount (HK$) 1 Excavation 50 m3 100 5,000 2 3 inch Galvanized Iron Pipe 1,000 m 300 300,000 3 5 inch Galvanized Iron Pipe 200 500 100,000 4 Trenchless Construction of 5 inch GIP 10 M 10,000 5 Connections Nr 6 Concrete 30 1000 30,000 7 Reinstatement m2 15,000 Total Sum 650,000

Example – Building Water Mains for Villagers Item Description Qty. Unit Rate (HK$) Total Amount (HK$) 1 Excavation 50 m3 100 5,000 2 3 inch Galvanized Iron Pipe 1,000 m 300 300,000 3 5 inch Galvanized Iron Pipe 200 500 100,000 4 Trenchless Construction of 5 inch GIP 10 M 10,000 5 Connections Nr 6 Concrete 30 1000 30,000 7 Reinstatement m2 15,000 Total Sum 650,000 Actual 47.5 1,220 140 8.5 4 50

Understanding Target Cost

Understanding Target Cost

How about this?

Understanding Target Cost 100% C’s share For case of a share range of 50/50 share up to 110% of the Total of the Prices

Understanding Target Cost Employer’s Share % 0% 50%

ECC – Option Analysis Option Payment Risk Allocation Remarks A – Priced contract with Activity Schedule Completed activity / group of completed Price-based Certainty of price depends on accuracy of design B – Priced contract with Bill of Quantities Actual work done based on quantity x rate C – Target contract with Activity Schedule Reimbursable of Defined Cost plus fee Cost-based Parties incentivized to drive down cost D – Target contract with Bill of Quantities E – Cost reimbursable contract Profit is guaranteed F – Management Contract Hybrid of Cost and Price based. Additional Quantity Risk Similar to GCC Additional Quantity Risk/ Overall project risk shared to a certain extent Overall project risk shared to a certain extent All risk borne by the Employer Risks of the works borne by Employer

ECC – Option Analysis E, F - Reimbursable D – Target BoQ Client’s risk and Flexibility C – Target with Activity Schedule B Priced with BoQ A Priced with Activity Schedule Contractor’s incentive and Risk

NEC – Options Analysis Activity Schedule Type – Less efforts at Design Stage because no BQ is needed Target Cost Type – Risks are being shared between the Employer and Contractor incentivize the two to work together towards the target cost Price-based Contract – More cost certainty and risks are transferred to the Contractor But in all case, compensation events are supposed to be based on market or, subject to agreement, tendered prices!

Professional Services Contract Main Options Option A - Priced contract with activity schedule Option C – Target contract Option E – Time based contract Option G – Term contract

Term Services Contract Main Options Option A - Priced contract with price list Option C – Target contract with price list Option E – Cost reimbursable contract

Secondary Option Clauses (optional) Usually Adopted in HKSAR Government NEC Contract Not used in HKSAR Government NEC Contract but there is an ACC with similar effect Option X1 – Price adjustment for inflation Option X2 – Changes in Law Option X3 – Multiple currencies Option X4 – Parent company guarantee Option X5 – Sectional Completion Option X6 – Bonus for early Completion Option X7 – Delay Damages Option X12 – Partnering Option X13 – Performance Bond Option X14 – Advanced payment to the Contractor Option X15 – Limitation of Contractor’s liability for his design Option X16 – Retention Option X17 – Low Performance damages Option X18 – Limitation of liability Option X20 – Key Performance Indicators (not used with X12)

Exercise on Secondary Clause