Pricing options under the NEC Engineering & Construction Contract

This is the latest of our series of articles introducing new users to the NEC (New Engineering Contract) suite of contracts, with particular focus on its proposed use on the Reconstruction with Changes Project in Peru. Here, we consider the standard pricing options under the NEC Engineering & Construction Contract (ECC).

Pricing options

The main options under NEC allow the client to price the project and pay the contractor in different ways. Each option includes a set of clauses which will be incorporated into the contract in the appropriate places.

In the NEC ECC the main options are:

  • Option A: Priced contract with activity schedule
  • Option B: Priced contract with bill of quantities
  • Option C: Target contract with activity schedule
  • Option D: Target contract with bill of quantities
  • Option E: Cost reimbursable contract
  • Option F: Management contract.

Whether the client wants a priced contract or target contract, or wishes to use an activity schedule or bill of quantities will affect which of the options A – D is preferable.

An activity schedule is programme driven and allocates each “activity” a price. Payment for each activity is only made once it is completed so the activity schedule will affect the timing of payments and cash flow to the contractor.

A bill of quantities is usually prepared by the quantity surveyor and sets out in detail what materials are required according to the drawings for the project, and the contractor can then price based on the required quantities. Under this option, NEC allows for partial payments based on the proportion of the work that has been completed at the time of the interim payment. As such, it can allow for more constant cash flow and be more flexible.

Priced contracts allocate a lump sum for the work. The interim payments are based upon either the completed activities at the rates set out in the activity schedule, or the proportion of work completed with reference to the bill of quantities, as above. Where the works are subject to a target price, as in options C and D, a pre-agreed pain/gain share is agreed whereby each party is allocated a share of both (a) the savings if the cost of the works is less than the target price and (b) the additional costs if the works exceed the target cost. The target cost is calculated according to either the activity schedule or bill of quantities. This complements the theme of collaboration running through NEC.

Option E allows the client to pay the actual cost of the contractor’s work on the project plus a pre-agreed amount for the contractor’s overheads and profit. In this option, the risk is largely borne by the client, because any additional costs above those predicted are reimbursable to the contractor. It can be useful where additional or emergency work is likely.

Option F is intended for construction management-type procurement and can be combined with other option clauses and choice of sub-contract to provide for a tailored risk management approach. Option F is also a cost reimbursable contract (see comments on Option E above) where the financial risk is taken largely by the client. 

Comment

The pricing options are yet another means by which the NEC suite of contracts offers users a customisable approach, which can be tailored to the needs of the project. This, of course, can mean that one NEC contract can be very different from the next, especially when secondary option X clauses and any bespoke amendments/Z clauses are also taken into account.

Unfamiliar users must be careful that their pricing of a project has taken into account the contractual mechanisms, and be sure that the final drafting of the contract reflects their requirements as to payment. 

Related item: El Niño and the NEC contractual phenomenon