This article is part of our EIR Insights series from our Energy, Infrastructure and Resources team. Stay tuned for regular updates and commentary on topical issues across the sector.
The recent launch of the Australian version of the NEC4 suite of project contracts is the fourth generation of this collaborative model of contracting by the UK Institute of Civil Engineers. The NEC style of project contract has not had a large uptake in Australia in the past. Indeed, in respect to the renewables sector, the publishers cite a project from 20121, using the NEC3 suite, as to the ability of this style of contract model to be more widely used for EPC projects. So will the NEC4 suite prove to be different? Our view is that, despite the value of more collaborative forms of project delivery suites, the uptake of NEC4 in larger renewable projects will be a long road. Strong leadership from financiers and government participants will be required to alter the traditional ‘pass it down if I can’ mantra in the EPC sector which has become entrenched as the default contract framework for principal, sponsors and head contractors alike. This article provides a brief overview of the new NEC4 suite and some of the issues to be addressed when considering the model for EPC contracts.
What is NEC4?
Of note, the new suite of project contracts for the NEC4 includes:
- a design, build and operate contract for principals seeking design, construction, operation and maintenance from a single supplier;
- an alliance from of contract incorporating an integrated delivery team with risk share/reward based on this more collaborative model;
- a fixed term services contract for facilities management and other consultancy services;
- a ‘framework’ contract for the supply of goods or services on an as needs basis over a project; and
- downstream subcontract and consultancy forms (both longform and simple) to suite the above delivery structures.
Each of the main contract suites incorporates many of the collaborative features of the previous NEC3 format including:
- a target cost with shared savings or liability for over-runs;
- processes incentivising early notification and dispute minimisation on a ‘best for project basis’;
- options for adopting a dispute avoidance board as part of this ‘dispute minimisation’ and collaborative framework; and
- the ability to consolidate disputes to include downstream/upstream participants as required.
Risks specific to EPC and renewables?
This form of contracting, as with the NEC3 suite, is more ‘head contractor friendly’ than commonly seen in the EPC market in Australia.
For example:
- unexpected site risks are a compensation event borne by the Principal;
- inclement weather outside of a 1 in 10 year event is similarly a risk borne by the Principal;
- where the Principal does not accept or reply to a communication within the program or project management plan, this can also be a compensation event for the Contractor; and
- the float is expressly owned by the Contractor.
Further, there is an obligation on all project participants to act ‘in a spirit of mutual trust and cooperation’. Much like ‘good faith’ obligations in the EPC and major project context, it has become the norm to strike out such provisions – and indeed this is often the default for government as the principal in major infrastructure projects, often deleting such obligations in various PPP contracts.
It is genuinely submitted that many of these concepts have merit – and would lead to a better project outcome for all concerned. It is not the purpose of this article to debate the value of such contracts – indeed, we consider that more collaborative contracts are often vastly better value and more certain that traditional ‘lump sum’ delivery models.
So why so negative? Why wasn’t NEC3 widely adopted in Australia? Why will NEC4 be different?
Perceived bankability and sponsor constraints?
The reality is that it is not perceived bankability concerns which have prevented the use of more collaborative models in the EPC sector. The industry largely understands the value of more collaborative models – and has the tools for risk based decision making, BIM and integrated project controls to identify, assess, plan, manage and properly account for such models on a transparent basis – but the current Australian market simply does not provide any imperative to incentivise change through the adoption of more collaborative models.
Part of the problem is that the use of traditional ‘lump sum’ contracts by government sponsors (both in the renewables sector and across the infrastructure spectrum), has contributed to a culture when ‘pass it down’ has become the norm in terms of risk management. This in turn has made it easier for financiers and principals to adopt predictably similar approaches with draconian lump sum contracts passing risk through to the head contractor (because the market accepts this and further passes such risks down to subcontractors – sometimes in a harsher form than upstream).
Citing perceived bankability is frankly a cop out. The reality is that the lack of up-take in more collaborative models has not been a function of not appreciating the risks – or indeed the benefits – of such relational models. Rather it has been market driven. Despite major contractors leaving the EPC market due to such lop-sided models2 and worse yet, the insolvency of RCR Tomlinson3 and others, head contractors have come from overseas to adopt risks the local market would not take.
Despite a few notable outliers at government and principal level4 in major projects, the uptake in the EPC market, particularly for renewables, has been less than encouraging. The results predictably included poor project outcomes, a lack of incentives for innovation and major insolvencies which are ongoing.
Way forward
Collaborative contracts are not new. The writer considers there is much to be gained from the greater adoption of more balanced contracts in the EPC sector. However, changing entrenched behavioural norms as to risk allocation in the renewables industry will require strong leadership and management across the project life cycle. Change will take time and in our view will be a long road.
So seriously consider the NEC4 suite in EPC projects – but don’t believe the hype – changes in contract delivery models are slower than major rail projects! (sorry).
The Hamilton Locke team advises across the project life cycle – from project development, grid connection, financing, construction, including the buying and selling of development and operating projects – through to the resolution of major project disputes.
Veno Panicker is the lead Construction and Infrastructure partner within Hamilton Locke’s Energy Infrastructure and Resources team and has a strong track record in EPC contracting and the delivery of EPC projects across Australasia, including adjudication, litigation and arbitration.
1 https://www.neccontract.com/NEC-in-Action/Case-Studies/Mt-Mercer-Wind-Farm
2 Downer EDI and many other major contractors have refused major renewables projects based on such one sided delivery models https://www.pv-magazine-australia.com/2020/02/12/downer-exits-australian-solar-sector-as-risks-pile-up/
3 It is not posited that this was the sole cause of the RCR Tomlinson collapse.
4 https://www.neccontract.com/About-NEC/News-and-Media/Sydney-Water-picks-NEC4-for-new-works-programme
