OVERVIEW OF THE NEW ENGINEERING CONTRACT
3.8 The structure of the NEC Contract
3.8.3 Secondary options
Different contracts within the suite have different applicable options. These options will depend on the works information for a specific project or contract and will differ from one
i. Option X1: Price adjustment for inflation
This option is used only with main options A-D. The base and latest index dates are used to calculate the price adjustment of items costed within the scope of work, such as labour, material and transport. Contract price adjustment (CPA) is applicable on the long-term contracts for increase in prices during the execution of the contract. The employer provides the formula for calculations and the indices to be used. The contractor has to prove the basis of the price increase and the employer will verify the basis by using the table for indices. This allows the contractor to take price risks for longer duration.
ii. Option X2: Changes in the law
This option is applicable when there is a change in the law within the boundaries of the site where the works are performed. This option impacts on the contractor’s costs when providing the service or works, resulting in compensation events. It protects both the employer and the contractor. Where there are any changes in the law that can affect the contractor’s performance, such as economic embargo, and result in the cancellation of the contract, the contractor will not carry any risks related to changes in the law.
iii. Option X3: multiple currency
This is used when payment is made in a currency that differs from the one in the contract. The currency should not exceed the maximum amount stipulated in the contract data. Here, the employer is prepared to take the risk of currency fluctuations and forward cover will be taken from the forex market. If the option is not selected, the contractor takes all the risk associated with the foreign portion, and will be responsible for payments and for making all the arrangements.
iv. Option X4: Parent company guarantee
Option X4 is used for additional security or guarantee from the parent company in the event of the contractor failing to carry out his/her obligations as per the contract. The parent company gives the employer a guarantee of the contractor’s performance. This is applicable for complicated, high value and high risk scopes of work and can be
determined by means of financial evaluations through cash flows and financial statements.
v. Option X5: Sectional completion
This is used for longer period contracts. Some sections will be taken for use rather than only when the work is completed, especially the sections that generate income for the organisation. Once the completed section has been taken over by the employer, the contractor would not be expected to carry out any other work to thatsection; the contractor will use the completed section only for the correction of defects.
vi. Option X6: Bonus for early completion
This option may be used if there is a financial case for earlier completion of the works. In this case, the contractor should be rewarded for achieving such milestones.
This motivates the contractor to complete the contract before the completion date.
vii. Option X7: Delay damages
This is applicable for the late completion of the works or late delivery of the milestones. It is stated in the contract data as a rand value per day and is regarded as a penalty to be charged by the employer. This option is recommended for most of the contracts. The employer should keep a record of all delay damages costs incurred during the execution of the contract.
viii. Option X12: Partnering
This option may be used in multi- contract projects of a very complex nature. Risks are shared. Team work is recommended and decisions are made by the team. Partners will be named in the schedule of partners needed to complete the works. One partner’s performance may affect the others’ when a development project is underway.
Partnering information includes the following: sharing of offices, arrangements for joint development, risk management, use of common information systems, value engineering and value management, attendance at partners’ and core group meetings as well as participation in partnering workshops.
ix. Option X13: Performance bond
Performance bond is a security that may be used when the contractor is performing outside the parameters. It may be requested by the employer in a form of monetary guarantee, and it is obtained from financial institutions, banks or insurance companies.
x. Option X 14: Advanced payments for the contractor
Employers do not normally use this option as it is risky. If used, financial evaluations should be conducted to check whether they are beneficial to the employer. This option may be used for assisting the contractor with cash flow to buy the equipment at an early stage of the contract. This payment is paid before the first assessment of the amount due by the project manager.
xi. Option X15: Limitation of contractor’s liability for his/her design to reasonable skill and care
This option may be used for design and construction contracts, where the contractor appoints an engineer to do the design and he/she provides insurance to cover his/her professional indemnity, when the contractor is not prepared to take the risk gap between reasonable skill and care.
xii. Option X16: Retention
This option covers the risks that may occur. The employer may retain a portion of the amount due to the contractor as a form of a guarantee against the contract in the event of his not returning to correct defects after the completion date.
xiii. Option X17: Low performance damages
This option depends on the scope of work, where the performance is required as stated in the works information. This option will apply when the defects certificate is issued at the end of the maintenance period.
xiii. Option X18: Limitation liability
This option covers the total contract and is not carried by the contractor. Most contractors will require this option to be applicable. They may use this option for
international contracts because of the uncertain position which contractors could face in some jurisdictions regarding their liabilities.
xiv. Option X20: Key performance indicators
This option may be used to pay incentives or bonuses to the contractor for exceeding performance. This should be stated in the tender data; alternatively, the employer can set up specific objectives that are important to him and request the tenderers to propose suitable Key Performance Indicators (KPIs). The use of KPIs is to encourage the tenderers to perform and it should only be used as an incentive, not as a penalty.
xv. Option Z: Additional conditions of contract
This option may be used in instances that are not covered by the NEC where there are deviations, although it is clearly stated that the contractor provides works in accordance with the Works Information.