How to: Navigate the NEC4 Engineering and Construction Short Contract

Kate Knox and Michael O’Connor

Published in June 2017 (and amended in October 2020), the NEC4 Engineering and Construction Short Contract (ECSC) is the shorter version of the Engineering and Construction Contract (ECC). It is intended for relatively minor works of low complexity. Here is a guide to some of the key terms of the ECSC.

Key Features

Parties: the Client and the Contractor. Note there is no Project Manager or Supervisor.

Contract ethos: in common with other contracts in the NEC4 suite, the parties are to act in the “spirit of mutual trust and co-operation” (Clause 10.2).

This wording was considered in Costain Ltd v Tarmac Holdings Ltd [2017] EWHC 319 (TCC) where the Court referred to Keating on NEC3, where it drew parallels between ‘mutual trust and co-operation’ and ‘good faith’, taking the view that:

“the term of mutual trust and co-operation suggests that, whilst the parties can maintain their legitimate commercial interests, they must behave so that their words and deeds are … not attempts to improperly exploit the other party”.

Structure: aligned with the structure of other contracts in the NEC4 suite, it includes:

Client’s Contract Data and Contractor’s Contract Data,
Contractor’s Offer and Client’s Acceptance, signed as a simple contract and so ordinarily applying 6 years’ limitation period for breach of contract,
Price List,
Scope, including: description of the works, the Contractor’s design responsibility (if any), drawings, specifications, constraints on how the Contractor Provides the Works, programme requirements and services and other things provided by the Client,
Site Information,
Conditions of Contract (Core Clauses): General (1), Contractor’s Main Responsibilities (2), Time (3), Quality Management (4), Payment (5), Compensation Events (6), Title (7), Liabilities and Insurance (8) and Termination and Resolving Disputes (9),
Additional Conditions when the Housing Grants, Construction and Regeneration Act 1996 (as amended by the Local Democracy, Economic Development and Construction Act 2009) (Construction Act) is stated to apply to the Contract,
Terms identified in the Contract Data are in italics and defined terms have capital initials.

Pricing Options Under the ECSC

Pricing can be either of the following or a combination of the two:

Lump sum (making sure that the ‘unit’, ‘quantity’ or ‘rate’ columns are not populated in the Price List), or
Re-measurable (applicable where the price list is populated, including the expected quantities).

Subject to deductions, the Contractor is entitled to be paid ‘The Price for Work Done to Date’, which is the total of:

‘the Price for each lump sum item in the Price List which the Contractor has completed,
where a quantity is stated for an item in the Price List, an amount calculated by multiplying the quantity which the Contractor has completed by the rate.’

So, for lump sum items, the Contractor needs to have ‘completed’ the item to apply for its payment. To understand cashflow, review how the Contractor’s activities are broken down in the Price List.

Scope

As you would expect, the Scope is a key contract document. Among other things, it stipulates the extent of the Contractor’s design responsibility (if any) and the Client’s programme requirements as, unlike the ECC, the contract conditions do not include any programme requirements of substance.

Unlike the ECC, the ECSC does not distinguish between the Client’s Scope and the Contractor’s Scope. All Scope content is the Client’s responsibility. Any instructed changes to the Scope will be Compensation Events, unless to make a Contractor’s Defect acceptable (Clause 60.1(1)).

Factors to take into consideration when preparing the Scope:

Consider whether all Client policies and standards should be included in the Scope; particularly if these may be subject to regular change. Consider a separate additional condition requiring compliance with policies (as amended from time to time).
Resist the suggestion of including or cross referring to the Contractor’s quotation letter in the Scope.
Avoid the battle of the forms. Do not let conflicting contract terms, qualifications etc sneak in through the back door i.e. by including or cross referring to the Contractor’s quotation letter in the Scope. If there are ambiguities or inconsistencies in the Scope, the interpretation most favourable to the Contractor is selected when assessing the effect of a Compensation Event (Clause 63.8).
There is no requirement in the ECSC for the Contractor to maintain professional indemnity insurance. Consider if this needs to be addressed if the Contractor has material design responsibility.
Consider if the roles of principal designer or principal contractor need to be assigned to the Contractor pursuant to the CDM Regulations (if applicable).

Notable Clauses

Early warning (Clause 15): Each party is obliged to give the other notification upon becoming aware of any matter which could increase the total of the Prices, delay Completion or impair the performance of the works in use.

Note that there isn’t an express sanction for failing to give an early warning (unlike in the ECC).

The Contractor’s Main Responsibilities (Clauses 20-22): Under Clause 20.1, the Contractor is to Provide the Works in accordance with the Scope. Depending upon what requirements are set out in the Scope, this could impose a fitness for purpose obligation, which may be contentious. We would typically recommend that clauses 20 and 21 are enhanced by additional conditions.

Correcting Defects (Clause 42): The terms used can be a little confusing!

‘Defects correction period’ is, for example, 2 weeks to correct the notified defect.
‘Defects date’ is, for example, 12 months after Completion.

It is important to be aware that Clause 42.4 provides for the Defects Certificate to be issued at the earlier of:

the end of the last defect correction period and
the date when all notified Defects have been corrected.

Accordingly, the second half of the retention (if any) is released once the Defects Certificate has been issued. It may be that the Contractor has not managed to correct the Defect within the defects correction period. That doesn’t entitle the Client to delay issue of the Defects Certificate. Clause 44.1 says that the Client must assess the cost of correcting the defect and the Contractor pays it. To tackle this, Clients should:

be wary of specifying short defects correction periods which don’t give the Contractor a realistic time to remedy a defect. Consider specifying periods for categories of defects,
be ready to promptly get quotations to assess the cost of correcting a defect notified close to the Defects Date so that the rectification cost can be deducted from the retention monies before the retention monies are required to be repaid to the Contractor. Make sure that the Pay Less Notice is issued documenting that deduction.

Payment

Retention: this can be stipulated in the Contract Data, with half repaid following Completion and the remainder paid to the Contractor once the Defects Certificate is issued.

Payment and the Housing Grants, Construction and Regeneration Act (as amended) (Construction Act): the ECSC provides for monthly assessments until the month after the Defects Certificate. We routinely amend the additional conditions (Construction Act) to supplement the Construction Act provisions for compliance purposes and to add the right to not pay the sum otherwise due where the Contractor has gone insolvent after the prescribed period (as defined in the Construction Act).

Compensation Events Regime: Beware of the Time Bars!

Clause 60.1(1) lists 12 Compensation Events (CEs), and where the additional conditions for the Construction Act apply, the Contractor’s suspension on non-payment, being the 13th CE. These entitle the Contractor to claim for additional money and extensions of time. Notable CEs include:

Physical Conditions: in applying the objective test of what an experienced contractor would have judged to have a small chance of occurring at the date of the Contractor’s offer, the ECSC refers to the contents of the Site Information. It is important to consider what Site Information is included and how accurate it is.
Prevention: to apply, the event must prevent the Contractor from completing the works on time, or at all. Events which cause disruption only will not be a CE under this sub-clause 60.1(11).

Notably there is no ‘catch all’ CE for a Client’s act of prevention. Users of the ECSC should be careful to not omit those CEs which relate to a Client’s act of prevention, without which, time may become ‘at large’ if the Contractor is not entitled to an extension of time when it is prevented by the Client from completing the works. When time is ‘at large’, the Contractor is not held to the contractual completion date, instead having a reasonable period of time to complete the works.

A claim for a CE is barred (Clause 61.3) where it is not notified within 4 weeks after the Contractor has become aware that the event has happened unless it arises from the Client correcting an assumption, or the Client giving an instruction, or the Client changing an earlier decision.

In comparison to the ECC, the timescales imposed on the Contractor (e.g. 1 week to submit a quotation) are short under the CE provisions. This reinforces the fact that the short form contract is not suitable for substantial or complicated works.

This is where the entries for the fee percentage, the people rates and the equipment related entries in the Contractor’s Contract Data come into play, in assessing the CE.

Disputes: More Time Bars!

The contract provides for adjudication as standard as its interim method of dispute resolution (Clause 93).

Unless the Additional Conditions (Construction Act) apply, the parties lose the right to refer a dispute to adjudication if they fail to notify the other party of a dispute within 4 weeks, or fail to go on to refer the dispute to adjudication between 2 and a further 4 weeks since making the initial notification.

The adjudicator’s decision is:

binding in the interim, unless and until revised by the tribunal; and
finally binding if a party has not notified the other within 4 weeks of the intention to refer a dispute to the tribunal regarding the adjudicator’s decision or its late notification of its decision. No referral can be made outside of the 4 weeks.

When is the ECC More Suitable?

Clients should consider the ECC if:

they instead require target cost or cost reimbursable pricing or management contracting,
they require sectional completion or key date provisions; the ECSC doesn’t provided for either, only a single start and completion date,
if the project is substantial, of longer duration or more complex, therefore triggering the need for the more detailed provisions in the ECC’s core clauses and/or some of the ECC’s Secondary Options, for example parent company guarantee (X4), performance bond (X13), undertakings to the Client or Others (X8) (i.e. collateral warranties), KPIs (X20) or climate change (X29), among others,
if the Contractor has substantial design responsibility and may have provided Scope documents for its design.

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Melanie Hardingham

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