The NEC3 Engineering and Construction Contract: A Comparative Analysis – Part 1

The Engineering and Construction Contract (NEC3) and FIDIC Conditions of Contract for EPC/Turnkey Projects (FIDIC Silver) are both popular standard forms of engineering and construction contract, used on a variety of projects both in the UK and internationally. However, they have fundamentally different approaches to the way projects should be managed and conducted.

In this, the first of a two-part series assessing NEC3 against the more conventional FIDIC Silver in terms of its suitability for substantial international construction and engineering projects, we examine the contrasting approaches and philosophies of the two forms in relation to structure, portability, risk and administration.

Introduction In his 1994 report entitled Constructing the Team, Michael Latham commented that "The client who wishes to accept little or no risk should take different routes for procuring advice from the client who places importance on detailed, hands-on control." This comment characterises the difference in approach between a more traditional form of contract (such as FIDIC Silver) and the new NEC3 form, which embraces a more collaborative approach.

FIDIC Silver is specifically designed as a turnkey contract, where an employer hands full responsibility over to the contractor for all design, engineering and construction. This approach expects the employer to "wait for the keys" and to have little day-to-day management of the project as work progresses.

NEC3 envisages the project as a collaborative process, with an emphasis on contract administration. The parties are obliged to "act in a spirit of mutual trust and co-operation", an obligation which is central to the philosophy and concept of NEC3.

Of course, every project will be different, and every employer will have a different appetite for risk. Whether an NEC3 or FIDIC Silver standard form contract is used for a large-scale project, there will inevitably be considerable scope for tailoring and amendment to suit the project and the parties. That said, it is counterintuitive to select a contract which is drafted on the basis of a particular philosophy and then seek to heavily amend it such that it becomes far removed from its basis; the choice of base form is still important.

Hands on or hands off? NEC3 is often viewed with suspicion by those who are not familiar with how it works, even though the form is now in its third edition. It is, intentionally, a very different contract, in structure, language and terminology, from more traditional forms such as FIDIC. It shies away from the traditional language of construction contracts, such as "extensions of time" or "variations," and even avoids the use of mandatory wording such as "shall" – instead, verbs are used in the present tense. This takes some getting used to, but is deliberately done to reflect the underlying collaborative philosophy of the NEC3 approach. It is drafted to operate in a "common sense" manner. The language is intended to operate flexibly; as design responsibility and pricing structure are not "nailed down" in the draft it should, theoretically, be adaptable for any project which may make it more portable internationally.

Structurally, NEC3 is made up of core conditions, six main options (reflecting the price/procurement strategy, analysed further in the second of this two-part series) and various secondary options ("W," "X" and "Y" clauses). The parties can tailor their contract to fit a project by selecting which of the optional clauses they would like to incorporate.

Optional clauses include dispute resolution procedures, provision for bonds or parent company guarantees, limitations on liability and advance payment. The parties can also include further "Z clauses" if they want to amend any of the NEC clauses or include additional provisions. Many of the provisions intrinsic within FIDIC appear as secondary options in...