Rationale behind the NEC Suite of Contracts

Construction projects suffer many of the same recurring problems: disputes, cost overruns, poor communication, adversarial relationships and projects that fail to achieve their intended time, cost and quality outcomes.

For decades, many of these issues were treated as inevitable, an inherent part of construction. But by the late 1980s and early 1990s, there was growing recognition that perhaps the problem was not inherent, but influenced by the way projects were procured and managed.

This was the backdrop against which the NEC (now NEC4) emerged.

Importantly, the NEC was developed because many believed traditional contracting approaches were no longer fit for purpose in an increasingly complex and fast-moving construction environment.

The Problem the NEC Was Trying to Solve

Traditional forms of contract evolved over many decades, often through incremental amendment rather than fundamental redesign.

Whilst these contracts undoubtedly served an important role, criticism began to emerge around several recurring themes:

• Contracts becoming increasingly difficult to understand
• Ambiguity leading to inconsistent interpretation and disputes
• Procurement routes evolving faster than contract forms could adapt
• Poor communication between project participants
• Contract administration becoming reactive rather than proactive
• Risk allocation encouraging defensive behaviours rather than collaboration

At the same time, construction methods and techniques were changing.

Projects were becoming more multidisciplinary, supply chains more integrated, contractors more involved in design, and commercial pressures more intense. Yet many traditional standard forms of contract still reflected assumptions rooted in project delivery decades old.

The question increasingly became:

How could a form of contract do more than simply allocate risk and resolve disputes after the event? Could it positively influence project delivery, support achievement of time, cost and quality objectives, act as a proactive management tool, provide flexible approaches to risk allocation, and ultimately reduce disputes?

A Different Philosophy

The Institution of Civil Engineers (ICE) initiated what became the NEC in the mid-1980s following a fundamental review of construction contracting strategies.

Rather than continually modifying existing forms, the objective was more ambitious: start with a blank sheet and rethink the role a construction contract should play in project delivery.

The result was a contract founded around three key objectives:

1. Clarity and Simplicity

The NEC sought to remove much of the legalistic and complex drafting traditionally associated with standard forms of contract.

The philosophy was straightforward: if project teams cannot understand the contract, it is more likely that the parties misunderstand the intent, what their obligations are thereby increasing the likelihood of a dispute occurring.

Accordingly, the NEC form of contract adopted shorter clauses, plainer English drafting, clearly defined procedures and a more logical structure, albeit one that was unfamiliar to those who were familiar with the traditional forms of contract.

The intent was to improve consistency of understanding, reduce ambiguity and minimise the potential for disputes arising from differing interpretations.

2. Flexibility

Construction projects are rarely identical.

Different time cost and quality objectives, which influence such things as procurement strategies, the levels of contractor design responsibility, risk profiles and pricing mechanisms require different contractual approaches.

In the NEC the drafters sought to provide a form a contract that while containing familiar core clauses (main options), also had clause specific to a range of project delivery models by the use of secondary options (A to E).

The NEC sought to provide a framework adaptable to different commercial strategies while maintaining a consistent underlying philosophy.

In simple terms:

The NEC would provide a form of contract suitable for all delivery models from management contracting, design and construct, to lump sum.

3. Stimulus to Good Management

This was arguably the NEC’s most ambitious objective.

Traditional forms of contract were often seen as something to be used only when something went wrong.

The NEC instead sought to make the contract a tool for the proactive management of a project.

The philosophy was that contracts should encourage behaviours that improve project outcomes through communication, planning, risk identification, collaboration and early intervention.

The NEC attempted to move projects away from a culture of:

“Who is responsible for this problem?”

towards:

“How do we solve this problem before it becomes expensive?”

That is a subtle but significant shift.

A Contract Designed to Encourage Collaboration

Perhaps the most interesting aspect of the NEC is that it was fundamentally behavioural in design.

It recognised that project success is a management issue and, importantly, a people issue.

The contract was designed to influence behaviours by encouraging:

• early communication through Early Warnings,
• proactive management through unambiguous resolution mechanisms,
• clearer accountability by clear and simple drafting, and
• collaborative problem-solving supported by contractual processes.

The intent behind the NEC remains important.

It represents a deliberate attempt to move the industry away from reactive contract administration and towards better project management.

And in an industry where disputes remain expensive, time-consuming and often relationship-damaging, that ambition still feels highly relevant today.

Final Thought

The NEC form of contract was born out of a growing recognition that traditional contracts needed to better align with an industry:

• with increasingly complex projects,
• using increasingly innovative and more diverse procurement methods,
• where the concept of risk is that it is best allocated to the party most able to manage the risk,
• facing lower margins and increased competition,
• endemic with disputes

The NEC was created because as the Latham Report highlighted, many believed the industry needed a contract better aligned with how modern projects are actually delivered.

In that sense, NEC is perhaps best understood not simply as a contract, but as a management system embedded within a contractual form.

In the next article, we will look at how the NEC seeks to turn this philosophy into practical reality through mechanisms such as Early Warnings, Compensation Events, the Accepted Programme and the obligation to act in a spirit of mutual trust and cooperation.