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NEC3 - Limited Options
NEC3 - Limited Options
www.drivertrett.com
April 2013
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AGENDA
1. Introduction 2. Defects Before Completion 3. Labour Productivity 4. Cash Flow and Activity Schedules 5. Post Completion Works 6. Termination
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1. Introduction
1. INTRODUCTION
RETURN TO FAIR ISLE POWER STATION The government has decided that it needs to increase the UKs Power output capacity, and as a result has made funds available to overhaul and extend the capacity of existing plants. The Employer, Ever Ready Power PLC has a budget of 300M for the additional boilers, generators and replacement cooling towers. The work must be completed in 24 months, to ensure that they will qualify for government subsidies in the future.
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1. INTRODUCTION
THE CONTRACT A contract in the NEC3 form has been let to the Contractor, under Option C Target Cost. The Target is 300M, and has been let on the basis of 50/50 gain share below the Target, and 100% pain share to the Contractor above the Target. The Target cost is now a Guaranteed Maximum Price, So Ever Ready now have no worries about the project.
1. INTRODUCTION
THE CONTRACTORS BID The Contractor, Springfield Civil Engineering PLC have won the project, based on their significant profile in the Power Sector, and have built their price up in the following way, so they also have no worries
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1. INTRODUCTION
What does that mean in practice?
Total Paid by Employer 50:50 Contractors share of Under /over spend
Defined Cost
Note: Option D Bill risk = Employer
1. INTRODUCTION
SCENARIO Work is well under way, and approximately half way through the 2 year programme. The Contractor has submitted interim applications 1 to 12 inclusive and been paid his defined cost to date.
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Risk Fee)
App 13 250M
Defined Cost
Why should we pay for their mistakes? These costs are Disallowed!
Target 300M App 13 250M
Fee
Paid 247.5 M
Defined Cost
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11.2(23) Defined Cost is The amount of payments due to Subcontractors for work which is subcontracted without taking account of amounts deducted for Retention, Payment to the Employer as a result of the Subcontractor failing to meet a Key Date, The correction of defects after completion, Payments to Others and The supply of equipment, supplies and services included in the charge for overhead cost within the Working Areas in this contract And The cost of components in the Schedule of Cost Components for other work Less Disallowed Cost
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3. Labour Productivity
3. LABOUR PRODUCTIVITY
SITUATION The contractor installed a clocking-in machine for his operatives at the entrance to the complex. Operatives are paid based on the time worked as recorded on this clocking-in machine. The Employer has installed a Safety Gate turnstile at the entrance to the construction site. Operatives use a swipe card to gain access through the turnstile.
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3. LABOUR PRODUCTIVITY
3. LABOUR PRODUCTIVITY
SITUATION The distance between the Contractors clocking-in machine and the Employers safety turnstile is a 30 minute walk. The Contractors village, cafeteria and toilets are located outside of the complex. Approximately 3 hours in a typical 9 hour day are spent walking between the entrance to the complex and the site boundary. The contract does not state which machine is to be used to record time.
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3. LABOUR PRODUCTIVITY
CONTRACTOR
Time is recorded from the clocking-in machine at the entrance to the complex and these are the hours billed as Defined Cost, and have been for a year.
3. LABOUR PRODUCTIVITY
CONTRACTOR I claim my labour costs using the Schedule of Cost Components, correctly under the contract. This includes the time walking between the complex entrance and the construction site. Also, the clocking-in machine was within the Working Area as defined at Clause 11.2(18)
The Working Areas are those parts of the working areas which are: necessary for Providing the Works and used only for work in this contract
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3. LABOUR PRODUCTIVITY
CONTRACTOR The schedule of Cost Components sets out that People costs to be included in Defined Cost are for:
People who are directly employed by the Contractor and whose normal place of working is within the Working Area. People who are directly employed by the Contractor and whose normal place of working is not within the Working Area but who are working in the Working Area.
All time incurred once the operatives have clocked-in is reimbursable by the Employer.
3. LABOUR PRODUCTIVITY
EMPLOYER This is nonsense. Walking time through the complex is clearly a disallowed cost. Clause 11.2(25). While the operatives are walking through the complex they are resources not used to Provide the Works Disallowed Cost is intended to prevent the Contractor using his resources inefficiently. In this case, the operatives were lazy and walked too slow. They seemed to walk at a fast pace when there was food available, but ambled slowly back to the workface. The Contractor made no attempt to hurry them along and insist on efficient working.
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3. LABOUR PRODUCTIVITY
EMPLOYER The Contractors clocking-in records, used under Clause 52.2 to help substantiate Defined Cost show an additional 3 hours per day on average to the records from the safety turnstile. This is Disallowed cost and I am not liable to pay any more than those hours recorded in my own records.
3. LABOUR PRODUCTIVITY
CONCLUSIONS There is no clear answer to who is right and who is wrong. If there is a clocking-in procedure, this would be best set out in the WI The Site and Working Area in Contract Data Part 2 need to be defined properly. If not the Contractor could pay for the consequences Disallowed cost is designed to motivate the Contractor to use resources efficiently. If not, the appropriate cost can be disallowed by the Project Manager. Schedule of Cost Components: 11 Wages, salaries and amounts paid by the Contractor for people paid according to the time worked while they are within the Working Areas. The Contractor needs to understand the gain / pain share mechanism. Gain is worth 50p, pain is worth 1.
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3. LABOUR PRODUCTIVITY
OTHER OPTIONS Options D & E are the same situation. Under options A & B of NEC 3, the risk of downtime is borne by the Contractor, unless a CE can be identified which caused the downtime. Under MF1 this was tested in Strachan Henshaw v Stein Industrie (UK) Ltd 1996. The Contractor failed, as the re-located welfare site, was not a variation. This was a fixed price contract, so not applicable as a principle. FIDIC - In all books (red, yellow and silver), the imposition of a safety gate by the employer that was not specified in the contract could be a Variation. Contractor would then be entitled to recovery. An alternative possibility is that this changes the contractors right of access to the Site. If so, it would be a claim under Clause 2.1.
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Electrical work Electrical 1st Fix Electrical 2nd Fix Electrical Final Fix
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CONTRACTOR
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Electrical 1st Fix Zone 1 Elec: H/L cable trays Zone 1 Elec: Conduit drops Zone 1 Elec: Conduit Zone 1 Elec: Submains Distribution Elec:Fixing Control panels
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None of these items distinguish pre or post completion. The contract, including the Schedule of Cost Components makes no distinction between pre and post Completion works. I am entitled to recover defined cost for all post completion works excluding the defective concrete.
Fee
Paid 285 M
Defined Cost
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OTHER FORMS Under Options A & B, payment is also made for the activities completed and the work carried out month on month. There is no provision to stop these processes when completion has been certified. FIDIC - In all books (red, yellow and silver), contractor would be responsible for remedying defective work and / or completing works post handover (i.e. issue of Taking Over certificate) at its own cost unless subject to an instructed Variation to change sequence / timing, which is not the case here IChemE Schedule 19 will define, after takeover, usually monthly
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6. Termination
6. TERMINATION
SITUATION Following a number of protracted disputes about payment, the Contractor decided to suspend the works, and refused to carry out further post completion activities. The subcontractor has not been paid the for significant sums that relate to incomplete activities. Work ground to a complete halt, and the Employer has decided to utilise other contractors to finish the remaining scope and to clear any remaining Defects. The Employer has employed the Subcontractor directly, to complete the works.
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6. TERMINATION
CONTRACTOR The works were completed, you certified it as such. Constantly withholding our money is not acceptable, we have had enough, we are off and not coming back until you pay! Your PM instructed us to defer works to post completion, 4 months ago, but has not yet formally instructed us to go back . The Contractor decides to terminate and uses reason R19: Clause 91.6 If the Project Manager has instructed the Contractor to stop or not to start any substantial work or all work and an instruction allowing the work to re-start or start has not been given within 13 weeks. The Contractor may terminate if the instruction was due to a default by the Employer(R19) and Either party may terminate if the instruction was due to any other reason.
6. TERMINATION
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6. TERMINATION
EMPLOYER The works were not completed, I am fed up with you lot, you are fired! No further payments will be made, and I will finish the job myself. The Employer has checked back through his paperwork, and realised that no acceptance was ever issued for the Electrical Subcontractor. A 4 week notification of this matter was raised 5 weeks ago, and the Contractor simply ignored the letter as the subcontractor had been working and being paid through the contract for over 6 months.
6. TERMINATION
EMPLOYER The Employer gives notice to terminate under Clause.91.2
The Employer may terminate if the Project Manager has notified that the Contractor has defaulted in one of the following ways and not put the default right within 4 weeks of the notification
Appointed a Subcontractor for substantial work before the Project Manager has accepted the Subcontractor (R13).
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6. TERMINATION
6. TERMINATION
NOTICES The Contractor gives notice of termination by email on 18 April. Simultaneously: The Employer gives a notice by email on 18 April that crosses in cyberspace
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6. TERMINATION
TERMINATION TABLE
TerminatingParty TheEmployer Reason AreasonotherthanR1 R21 Procedure P1andP2 AmountDue A1,A2andA4
6. TERMINATION
CONTRACTOR
TerminatingParty TheContractor Reason R1R10,R16orR19 Procedure P1andP4 AmountDue A1,A2andA4
Procedures P1 & P4 apply: P1 The Employer may complete the works and may use any plant and materials to which he has title. P4 The Contractor leaves the working areas and removes the equipment Amount Due: A1 Includes; amount due for normal payments, defined cost of plant & Material, other defined costs reasonably incurred, amounts retained by the Employer A2 The forecast defined cost of removing the equipment A4 The Direct fee percentage applied to any excess of the total of the prices at the contract date over the PWDD. Clause 93.4 The Contractors share
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6. TERMINATION
EMPLOYER
TerminatingParty TheEmployer Reason R1R15orR18 Procedure P1,P2andP3 AmountDue A1andA3
Procedures P1, P2 & P3 apply: P1 P2 P3 The Employer may complete the works and may use any plant and materials to which he has title. The Employer can instruct the Contractor to leave site, remove any plant or materials and assign any subcontracts to the Employer The Employer can use any of the Contractors equipment to finish and the Contractor must collect it when requested.
Amount Due: A1 A3 Includes; amount due for normal payments, defined cost of plant & Material, other defined costs reasonably incurred, amounts retained by the Employer A deduction of the forecast of the additional cost to the Employer of completing the whole of the works
6. TERMINATION
SCENARIO The Contractors termination options are limited, as Reasons 1 to 10 are all insolvency related. Non payment is R16, both parties released from performance by law is R17 and R19 relates to on-going suspension of the works due to an Employer default, as does R20 relates to stopping work for more than 13 weeks for any other reason. The Employers options are much more varied. Including defaults such as failing to provide a bond. Although the PM notifies such matters as defaults, after 4 weeks, the final termination notice can be issued.
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6. TERMINATION
SCENARIO Both parties have now commenced the procedure to terminate the contract, each blaming the other, and on these facts, both arguments may well have merit. The delta between the parties will run into tens of millions. Dispute resolution procedures will apply, even though the contract is terminated. In this case they will certainly be needed.
6. TERMINATION
SCENARIO The Project Manager must now certify that termination has occurred: Clause 90.1 If either Party wishes to terminate the Contractors obligation to Provide the Works, he notifies the Project Manager and the other Party giving details of his reason for terminating. The Project Manager issues a termination certificate to both parties promptly if the reason complies with this contract. How will he choose, if he considers both are valid?
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6. TERMINATION
The Project Managers Inbox:
6. TERMINATION
OTHER OPTIONS The procedure under Options C & D also requires an assessment of any pain share or gain share that the Contractor will be entitled to Clause 93.6 Under A, B, E & F this does not apply Key difference in most other forms of contract, a two strikes rule applies. There is usually a first termination notice, followed by a second, confirming final termination. In NEC3, if the Project Managers default notice for many issues goes unchallenged or without remedy, the Employer may terminate on one notice.
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