Early Warning Notices in NEC Contracts

The Engineering and Construction Contract 3, colloquially known as ‘NEC 3’, is the third revision of the Engineering and Construction Contract which was endorsed in the recommendations of Sir Michael Latham’s 1994 report “Constructing the Team”, a seminal Construction Industry report.

The NEC 3 suite of contracts was designed as much as an aid to good project management and a set of contract processes, as a set of contract terms and conditions, and this is one of the many aspects of the contract that more traditional commercial practitioners wrestle with on a regular basis.

The ethos of the NEC is that the parties to the contract operate the contract “in the spirit of mutual trust and cooperation” to achieve the overall goals that are set down in the Works Information, and part of the processes described in the contract is “Clause 16 – Early Warning”.

The entirety of Clause 16 is only 4 sections and yet can be argued as a key element in ensuring that the project is successful in its outcomes.

Clause 16.1

The initial clause requires that both parties, the Project Manager and the Contractor, issue a notice called “an early warning” to notify the other that an event could occur.

In general this “early warning” is a standard template which contains any number of details that need to be communicated.

The specific events listed in the contract are things which could lead to an increase in the price of the project, and/or extend the “Completion” of the project, and/or “delay meeting key dates” and/or “impair the performance” of elements of the project that are in use.

In addition to the previously noted events there is a specific event for which the Contractor alone is to notify the Project Manager and that is any other matter that would increase the Contractors “total cost”.

This clause is binding on the parties, namely to issue each other “early warnings”, it is a mandatory requirement not a discretionary one, and since the events which are to be notified cover a very broad ambit of scenarios, this would naturally lead to the conclusion that an awful lot of “early warnings” would be issued between the parties in the normal course of events.

This clause also requires the Project Manager to keep a register of the “early warnings” issued between the parties, called the “Risk Register”, again this is a mandatory requirement placed upon the Project Manager.

The result of this single clause 16.1 is that the Project Manager and the Contractor must tell each other about any event that meets any of the 4, or 5 criteria in the case of the Contractor, and that these must be recorded in the Risk Register by the Project Manager.

This requirement potentially could generate considerable correspondence between the parties about almost anything that could impact the project. In most instances it is very helpful to consider the “early warnings” as simply risks to the project.

Clause 16.2

This second clause allows either party to “instruct the other” to meet for the purpose of a “risk reduction meeting”, this clause also allows either of the parties to instruct the other to attend this meeting. It is worthy of note that the Contractor can tell the Project Manager what to do under this clause, a reversal of the usual power structure in a construction contract.

This therefore results in a situation of having a record of the potential risks to the project and an instructed meeting between the parties.

Clause 16.3

This clause states, in terms, what is to happen at the meeting, namely;

  • discuss proposals to reduce the effects of the risks, remembering that the parties are to work “in mutual trust and co-operation”;
  • seek solutions that benefit the affected party, note that this applies to both parties and not solely to one or the other;
  • decide who will do what, again this applies equally to both parties;
  • remove risks which have become irrelevant from the Risk Register

This results in a cumulative position of having a record of the potential risks to the project, an instructed meeting between the parties, and a set of criteria with which to resolve any of the potential risks listed.

Clause 16.4

The final clause, Clause 16.4 states that the Project Manager is responsible for maintaining the Risk Register, recording the “decisions made at the risk reduction meetings” and for sharing that revised Risk Register with the Contractor, note again that this is a mandatory responsibility for the Project Manager.

It is also a mandatory responsibility for the Project Manager to issue instructions where “decisions made at the risk reduction meeting” mean that changes are required to the Works Information.

Reality?

At the end of the Clause 16 process we have a set of potential issues which have been discussed and with agreed actions for specific parties, along with the required instruction (if needed). This process should then be repeated throughout the project duration, which will assist with enabling the project to run smoothly to completion.

Does this actually happen?

Not often!

It is often the case that this process falls at the first step, i.e. the parties failing to notify each other, for whatever perceived reason, this is then compounded by not holding regular meetings with the relevant parties, which can include suppliers, the Employer, the Employer’s other professional consultants, etc, then failing to record the agreements reached and finally failing to issue any relevant instructions.

All of this is very likely to be considered a breach of contract which has its usual sanctions under the NEC3, and these sanctions apply against both parties, via Clause 60.1 (18) “breach of contract by the Project Manager”, and Clause 50.1 “assessing the amount due” for the Contractor, this would be notwithstanding the potential impacts of whatever event has failed to be notified and discussed.

In respect of other sanctions the key sanction available to the Project Manager is via Clause 63.5, which allows the Project Manager to assess compensation events as if an early warning had been issued by the Contractor. Compensation events are the NEC 3’s way of allowing for changes to value and time within the contract.

It is worth noting that this sanction does not apply to the Project Manager’s failure to issue early warnings, although the Contractor may seek a position through Clause 60.1 (18) which could be considered equivalent thereto.

The Clause 63.5 sanction then allows the Project Manager to put himself in the position he would have been, had the early warning been issued. i.e. that the Project Manager had been allowed to put in place measures to mitigate against the impacts of the now realised risk, thus reducing the value of any subsequent compensation event.

This then allows the Project Manager to legitimately assess a compensation event at potentially zero cost and time impacts, despite the Contractor having incurred potentially considerable costs and delays, a position no Contractor would ever wish to be in.

In the alternative the Contractor can ask for compensation events via Clause 60.1 (18) to increase his value and time should the Project Manager not comply with the Clause 16 provisions.

Given these available sanctions and as the parties are not perhaps even discussing any risks to the project, it is likely that a dispute would arise, along with the attendant impacts to both the programme and the project cost.

The fear surrounding informing a client about what effectively may be potential failings within the Contractor’s organisation, and the perceived sanctions that could be applied, is one that requires overcoming.

It is a brave or perhaps foolish Contractor who keeps his Project Manager in the dark, as the sanctions could be so much more severe than simply asking for a little help every now and then, as is envisaged by the contract, and the converse is also true.

To return to the original ethos of the NEC as an aid to good project management, it is a well-established reality that the earlier a risk can be discussed, and avoiding actions agreed, the smoother the project will progress, the happier the Client will be and the less stressful the working parties will become.

In applying what is required by Clause 16 good project management will become a reality and the objective of the contract will have been achieved, and this requires the parties to lose the fear of talking to each other.

Aldous Smewing – Associate Director

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