Optimizing construction project performance using the New

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					                          Published in PM World Today – May 2009 (Vol XI, Issue V)


                    PM WORLD TODAY – FEATURED PAPER – MAY 2009

    Optimizing construction project performance using the
       New Engineering Contract Third Edition (NEC3)

                                           By Luc Bauwmans, PMP

Executive summary

Part 1: Partnering in construction contracting is still the subject of much debate. The
simplest form of partnering occurs when two parties to a contract have aligned (some of)
their objectives for the project that the contract is intended to execute. Lately more complex
forms have emerged such as multi-party arrangements governing a number of single
contracts on a project, incentivizing all partners when client objectives have been met.

Perhaps with the exception of Build-Own-Operate-Transfer contracts, used on large public
infrastructure projects, most partnering approaches to construction contracting are of a
tactical nature, and not all have been successful. It appears that successful long term,
strategic partnering is still more the exception than the rule.

Partnering in construction contracting started getting earnest attention in the UK through
the Latham report “Constructing the Team” of 1994. This report also recommended the use
of the New Engineering Contract (NEC) which was released that same year, and proposed
improvements to it. This gave rise to more research into partnering in construction on the
one hand (see below: Bennet and Jayes 1995), and the updated NEC 2 nd edition (1995) on
the other.

While NEC 2nd edition was a great step forward toward tactical, project based partnering
along the supply chain, it is the 3rd edition (NEC3) of 2005 that takes the step towards
strategic partnering, with the addition of the Framework Contract and Term Services
Contract, intended for contractual commitments in the longer term, and spanning many
capital or operational projects.

In part 2, the paper then looks to identify the characteristics of NEC3 that support the
principles of long term strategic partnering that would herald a new beginning in
construction contracting. NEC3 is also a more flexible form of contract and is suitable for
international use through its many combinations of options and “Contract Data” that allow
customization of the document for engineering and construction related projects in all
industries, across most legislatures around the globe.




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                          Published in PM World Today – May 2009 (Vol XI, Issue V)


The paper concludes that NEC3, for reasons stated, could be advantageous not just to the
contracting parties, but could also help mitigate the effects of the current global economic
crisis, particularly in high growth areas such as the Gulf Cooperation Council (GCC) countries,
and the United Arab Emirates (UAE) in particular.

Introduction:

While the current economic crisis weighs heavily on construction industries everywhere, in
super-fast developing countries like the UAE and some of its GCC partners, its impact is
probably more prominent than in most other countries.

On 6 March 2009 Reuters Dubai reported that in UAE, US$ 263 Billion of real estate projects
had been postponed awaiting more favorable economic winds. Others clients in the Gulf
have since re-issued invitations to bid, in the (realistic) hope to receive more favorable offers
from contractors in the changed climate, sparking the latter’s concerns about dwindling
profits.

A vast number of projects are ongoing though, in some cases on account of policies that
prevent unfinished projects being abandoned, and a recent forecast of project expenditure
for the Emirate of Abu Dhabi has in fact shown an increased figure for 2009, compared to
2008.

For the purpose of this paper this somewhat categorizes construction contracts into two
main categories, awarded and not yet awarded, and the (post-) crisis approach to those
categories would differ substantially.

Many a client locked in an existing fixed price contract may try and benefit from what could
be termed windfall profits by contractors due to a steep decline in supply prices, but even
then this would be at best a slice of what would have been all theirs otherwise. As a result,
we see a sudden swing of the pendulum towards a propensity for cost reimbursable
contracts which only recently, in the bull economy, were not that popular with clients. But
otherwise, existing contracts will run their course, leaving their parties better or worse off.

The focus of this paper is on new contracts, and how in the new lean economy, contracts
could be selected and drafted towards better outcomes for all parties.

About partnering contracts

Partnering contracts between supplier and customer have probably always existed, in some
form or other. In fact they come in so many different shades of grey that the very term has




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almost lost its meaning. Differentiators like market conditions, contract strategies, contract
types as well as legislatures can substantially change the face of partnering agreements.

For a start, let’s look at how the benefits for the contracting parties would alter in different
markets.

In a supply driven market the main beneficiary of a partnering arrangement is more often
than not the client. Here partnering is a way to curb uncontrolled price hikes form over-busy,
finicky contractors and suppliers, and enjoy preference of supply. Unless there are shared
long-term mutual objectives, contractors will be lukewarm at best about the idea as it limits
their profit potential, in exchange for a promise of continued work at a time when there is
aplenty.

On the other hand, in a demand driven market it is the clients who do not see immediate
benefits from partnering, as it is seen to blunt competitive pricing. In this case contractors
would rather like the idea for this exact reason, as well as work continuity, better resource
planning and business sustainability. Again, if not based on long-term shared benefits,
successful partnering is unlikely to evolve.

As the above scenarios change hands in their perpetual cyclical dance, real partnering has
never really established itself as a mainstream approach to construction projects. We have
seen the odd successes and failures but the argument is far from settled.

A milestone on the road to partnering was the publication of the report “Constructing the
Team” by Sir Michael Latham in the United Kingdom in 1994. Sir Latham had been
commissioned by the UK government to look into the ailing construction industry, the
largest industry sector at the time, accounting for about 8% of GDP. The industry was highly
adversarial and litigious, and said to be on average 30% more expensive than in the US(1).

Sir Latham’s report made some 30 recommendations that mostly pointed towards a well
designed partnering approach along the whole supply chain. It also recommended the use of
the New Engineering Contract (NEC), then in its first edition, as a preferred vehicle for
construction projects in the UK. It contained suggested improvements to NEC, and the NEC
panel at the time took this task to heart and produced the NEC 2nd edition by 1995. For the
first time a contract format existed that described not only the constructed facility, but also
comprehensively focused on the management process of the work in the contract, by
making management deliverables contractual requirements.

Around the same time and also in the UK, Bennet and Jayes (2) released a study called
“Trusting the Team: The Best Practice Guide to Partnering in Construction” listing the
achievement of mutual objectives, problem resolution and continuous improvement as the




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three key objectives of partnering. Out of those, the “continuous improvement” objective is
perhaps the most significant in this context, as it implies a long term, high trust relationship.

The partnering philosophy promoted by NEC 2nd edition was supply chain based and it
provided a suite of documents supporting this philosophy. It was a first step in making
partnering a contractual obligation, which the UK Partnering Charter, an optional reference
document, did not.

NEC 2nd edition contract documents included the Engineering and Construction Contract
(ECC), the Engineering and Construction Short Contract (ECSC), the Engineering and
Construction Subcontract (ECS), the Professional Services Contract (PSC) and the Adjudicator
Contract (AC).

Later on, a multi-partner option, now known as Secondary Option X12 was added that, if
selected, created a contractual obligation between named partners to achieve stated client
objectives, coupled with shared and interdependent incentives, managed by a core group.

The introduction of these shared objectives between a selected and named group of
partners built on the two-party partnering inherent in NEC stand-alone contracts. The use of
NEC and its (multi) partnering option was a first step towards making multi-party
relationship management a contractual requirement.

However, the NEC 2nd edition remained mostly tactical in nature in that partnering was
focused on multiple suppliers of the same project.

The release of NEC3 in 2005 put paid to many a criticism of NEC. Taking into account the
legal commentary of NEC 2nd Edition by Arthur McInnis in 2002 (3), NEC3 explicitly addresses
force majeure and various instances of tacit approval, amongst others. Dispute resolution
procedures are now separated for UK and other markets and divorced from termination
provisions, further emphasizing that one does not have to lead to the other.

More importantly though, NEC3 is shifting the contracting paradigm - again - by releasing a
23-document, more consistent suite of contracts, simultaneously in one edition. This edition
now also includes the Framework Contact (FC) and Term Services Contract (TSC) which are
more strategic in nature than any previous NEC contract. They are not limited to a specific
project. The Framework Contract is an umbrella contract governing work orders issued
under it using other NEC3 documents, where the Term Services Contract is designed to
outsource ongoing work, such as facilities management duties, during the operational cycle
of the facility that was constructed under the project (or any other facility for that matter).




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The addition of a small volume called “Procurement and Contract Strategies” echoes this
holistic view of relational contracting in the medium to long term.

Thus, the right grouping of NEC3 documents bundled together with partnering option X12
could be used to structure a strategic multi-partnering setup, for cradle-to-grave
management of a facility.

In order to grasp the power of such a tool as a behavior driver, we need to simply imagine a
situation where a design-and-build contractor of a process plant is also responsible and
incentivized for the maintenance of this facility for its 20-year lifespan.

Framework contracting

In its current form, framework contracting is still in its infancy stages, pioneered the last 10
or 15 years mostly by public authorities in Europe seeking quick access to suppliers in case
work was needed. It is mostly used where an array of small contracts is expected to be
placed and bidding cost and time are not warranted by client advantages from competitive
bidding.

Framework contracting is sometimes described as a hybrid partnering arrangement, where a
number of potential suppliers are pre-qualified and certain procedures such as bidding and
bid adjudication are predetermined, but at the same time a degree of competitiveness is
maintained.

Under a framework contract, one or more pre-selected suppliers can bid, under specified
conditions, for supply of several items of work. The framework contract itself is an umbrella
agreement that manages the relationship, i.e. it lays down the rules of co-operation, but
does not scope the individual work packages executed under it. That is done by separate
single contracts issued under the framework.

The NEC3 Framework Contract can be used for large projects, programs or portfolios of
projects. Its umbrella may cover both consulting and construction works, through the use of
various other appropriate NEC3 stand-alone forms. With it, the NEC journey has reached a
new milestone. It now has the capability to govern strategic long term partnering
relationships, which is, as we’ve seen before, the common denominator of successful
partnering in both the supply and demand driven markets. And markets being what they are
today, decision makers would do well to take notice.




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                          Published in PM World Today – May 2009 (Vol XI, Issue V)


List of References:

(1)      V. King (J.D.), "Constructing the Team": A U.S. Perspective, Minneapolis, Minnesota, U.S.A. 1996.

(2)      Bennett, J. and Jayes, S., Trusting the Team: The Best Practice Guide to Partnering in Construction,
         Centre for Strategic Studies in Construction, University of Reading, 1995.

(3)      McInnis, A.: The New Engineering Contract: A Legal commentary, Thomas Telford Ltd, UK, 2001.




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                          Published in PM World Today – May 2009 (Vol XI, Issue V)




       About the Author:


                                             Luc Bauwmans

                                             Author




                                 Luc Bauwmans is Vice President for Construciton
                                 Management with SUKAD FZ-LLC in Dubai, USA. A
     senior executive with more than 24 years experience in the projects
     industry, he has worked on capital projects in architecture, urban design,
     and engineering disciplines. In conjunction with the above, Mr. Bauwmans
     has also been a lecturer at various Academic institutions in South Africa,
     lecturing topics such as architectural theory, history and design, construction
     methodology, acoustics and interior design. Since obtaining his PMP
     credential in 1998, Mr. Bauwmans has further engaged in training of various
     Project Management disciplines to clients in mining, petrochemical,
     construction, engineering, transport, communications and heavy
     manufacturing sectors. In the last 8 years he has delivered over 10,000
     delegate-days in training of project management and related topics, through
     organizations such as BRP Project Management and PangaeaWorleyParsons,
     both South African based. Mr. Bauwmans joined SUKAD as its VP
     Construction Management in 2008. SUKAD is an Innovation Center based in
     Dubai Knowledge Village with services across the Middle East. SUKAD‘s core
     competence is project management and the company provides consultancy,
     training, performance improvement, and professional development/career
     services. Prior to joining SUKAD, Mr. Bauwmans, who was based in South
     Africa, provided professional services in various locations around Africa,
     Middle East, and the United Kingdom. Companies to which Mr. Bauwmans
     provided services include Eskom, Anglo American, Anglo Gold, Sasol, South
     African Airways, Joy Mining machinery, Goldfields and various Government
     organizations. In recent years he managed Training Departments for
     PangaeaWorleyParsons South Africa and WorleyParsons Abu Dhabi.
     Mr. Bauwmans holds a Master of Architecture Degree from Sint Lucas,
     Ghent, Belgium. He has also delivered several papers at conferences in
     South Africa and the Middle East. Mr. Bauwmans specializes in project
     management and contract management training in NEC (New Engineering
     Contract), competency standards development and competence assessment
     in PM related fields. He is a registered assessor in PM with the South African
     Services Sector Education and Training Authority (SSETA), and was part of a



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                          Published in PM World Today – May 2009 (Vol XI, Issue V)


     Subject Matter Expert (SME) panel for the South African PM Standards
     Generating Body (PMSGB). Mr. Bauwmans has served 4 years on regional
     and national committees of PMSA. Under his tenure as Branch President of
     the Mpumalanga branch in SA, the branch doubled its membership and
     gained substantial exposure in industry. Mr. Bauwmans is a native speaker
     of Flemish and also speaks Dutch, Afrikaans, French and English. For more
     information about SUKAD or to contact Mr. Bauwmans, visit
     www.sukad.com.




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