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

2. 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?

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

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

5. 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.

6. 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?

7. 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?

8. 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?

9. 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

10. Example of Milestone Schedule of Payment in GCC

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

12. 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

13. BQ, SMM, GP & PP

14. 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

15. 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

16. Understanding Target Cost

17. Understanding Target Cost

18. How about this?

19. 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

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

21. 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

22. 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

23. 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!

24. 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

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

26. 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)

27. Exercise on Secondary Clause