This paper explains the approach taken to the NEC3 form of contract on the Crossrail project and explains how that approach was established and then implemented. It then identifies some issues which arose out of the form of contract used and a number of improvements which might be considered on future projects. It will be of interest to any major project delivery organisation, or prospective contractor, particularly where NEC form of contract is to be used.
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This paper explains the approach taken to the NEC3 form of contract on the Crossrail project and explains how that approach was established and then implemented.
It then identifies some issues which arose out of the form of contract used and a number of improvements which might be considered on future projects.
Selection of the NEC3 form of contract
In 2007, the NEC form of contract was adopted as a ‘working assumption’ albeit that it had not, at that stage, been formally approved through Crossrail Limited (CRL) governance. Subsequent consultation took place with the Project Sponsors and Office of Government Commerce (OGC) / Major Projects Review Group (MPRG) (over the Delivery Strategy including the proposal to adopt the NEC form of contract) and with the market. All such consultation supported adoption of the NEC form and this was then approved by the CRL Board in late 2008.
Main reasons for the selection of NEC were:
- It was considered to be supportive of CRL’s culture and objectives;
- It should achieve a fair and sensible allocation of risk;
- It would provide robust contract management processes;
- It could be used for all Crossrail requirements (by providing a variety of forms of contract);
- Its endorsement by OGC, TfL and the Institution of Civil Engineers (ICE); and
- Its use on other major projects would provide the opportunity to benefit from lessons learned.
After the NEC3 form was selected, CRL put in place a copyright licence from Thomas Telford for the use of all NEC3 forms of contract across the project (including use by contractors). This provided native versions of each standard form which could be amended provided that CRL indicated those amendments made when it issued contracts for tender. An annual fee was payable for the licence.
Development of forms of contract
Appointments (on bespoke terms) of design consultants which had been in place during the Bill process were brought to an end with the award of CRL’s Design Framework Agreements in 2009. These Frameworks provided the mechanism for the award of individual packages of design work and construction phase services. Package Orders under these Framework Agreements utilised the NEC3 Professional Services Contract, generally Option C.
Around the same time, Enabling Works Framework Agreements were awarded under which all enabling works packages (civils, site facilities and demolition) were placed. Package Orders under these Framework Agreements utilised the NEC3 Engineering and Construction Contract.
Amendments made to the relevant NEC3 standard form at this stage were derived from:
- Recommendations made by external legal advisors in order to strengthen CRL’s position where the NEC3 form was perceived potentially to be inadequate;
- Consultation with Procurement representatives and their experience of NEC;
- Project specific matters; and
- A review of TfL’s and LUL’s NEC3 templates.
At this stage, a relatively heavily amended form of NEC3 was adopted (albeit still significantly less amended than examples reviewed from other projects and organisations).
Later in 2009, work started on the development of CRL’s Main Civils Contract template. It was acknowledged that a full review of the conditions of contract which had been developed for the Enabling Works Frameworks was appropriate given the different nature and scale of the works packages and the appointment of the Project Delivery Partner.
The process commenced with a workshop at which a number of lessons learned from the use of NEC on other projects were shared with the CRL team and a number of the challenges perceived at that stage to the successful adoption of NEC were identified.
Following the workshop, a working group was established comprising representatives from Legal, Delivery and Procurement. The working group was charged with the development of the new conditions of contract over a period of time until the first major ITTs (tunnels) were issued in early 2010. Whilst external lawyers (Ashurst) provided advice on discrete issues and often took the lead on drafting, this was an internal and project driven exercise. By this time, it had become clear that the project preference was for a ‘light touch’ approach within which amendments would be made to standard form NEC only where there was an identifiable benefit rather than e.g. where there was perceived to be a potential risk which was, to date, untested under NEC3. The detailed work conducted by the working group culminated in a relatively modest number of amendments.
The working group process
The conditions of contract contained in the Enabling Works Framework Agreement were taken as the starting point and it was agreed to revisit each amendment which had been made to NEC3 in order to verify that it was necessary, appropriate and carried a benefit.
In addition, members of the working group brought a variety of experience from previous projects and were able to propose further amendments and/or additional clauses which were reviewed by the group. The group, often after much debate, was generally successful in achieving a consensus view on each issue.
A tracker document was maintained to record the progress and outcome of the discussion of each topic. A considerable volume of change which had been made to NEC3 in the Enabling Works Frameworks was, as a result of this process, discounted and the Main Civils Contract is therefore considerably more ‘true’ to standard form NEC3. On the other hand, it does contain a handful of other very significant changes which had not previously been adopted.
The working group had available to it a number of precedents (as well as the benefit of access to individuals with direct experience of those forms) including the NEC conditions of contract used by Transport for London (TfL), London Underground Limited (LUL), the Olympic Delivery Authority (ODA) and the Channel Tunnel Rail Link (CTRL).
Further development of the Main Civils Contract through procurement
During the procurement of CRL’s first major works contracts (the tunnels), CRL’s approach was to use responses from tenderers to further develop its standard conditions of contract. Qualifications put forward within bids were reviewed and some were accepted as changes to our standard form. There was very little individual negotiation of conditions of contract with individual tenderers. Thus, upon award of those first major contracts, CRL’s standard Main Civils Contract (conditions of contract) had matured to a point which provided an allocation of risk which was not only acceptable to CRL but also to a significant portion of the construction market at the time. As a result of that process, all further procurement was able to be conducted at the pace required to support the overall project programme since very little, if any, time was required for the negotiation of qualifications to contract conditions.
The working group was able to make decisions on many matters but any issue involving a significant point of principle or of considerable commercial significance required escalation to the Procurement Steering Group / Procurement Sub-Committee (PSG / PSC, a sub-committee of the Executive Committee). Copies of papers which were presented to PSG / PSC are at Appendix 3 hereto. In many cases, the recommendation to PSG / PSC was to make an amendment or to include additional provisions over and above standard NEC3. A number of other matters were presented on the basis that the working group recommended that there should be no change to the standard NEC form on a matter but where it was considered important to highlight a potential risk.
Once tender processes were underway the Commercial Steering Group (CSG) was formed to which PSG / PSC delegated some decision making authority on contractual matters. CSG was established in order to provide a quick decision making forum in response to the heavy demands at that time of the large volume of procurement work. Its remit included decisions over amendments to the conditions of contract arising out of queries / qualifications submitted by tenderers.
As a separate exercise (outside of the ambit of this working group) CRL decided upon
- the use of Project Bank Accounts;
- the pain / gain share which it would adopt in all its main works contracts; and
- utilisation of Option X1.
Project Bank Accounts and fair payments
A working group was established by PSG around the same time that the Crossrail conditions of contract were being developed which was tasked with developing:
- a fair payments charter for adoption on CRL contracts along the lines of that recommended by OGC; and
- a strategy for the use of Project Bank Accounts (PBAs) on the project based on best practice from other projects.
Consultation took place with colleagues who had experience of use of PBAs on other projects (in various forms and to varying degrees) and also with OGC who were promoting the use of PBAs at that time. Reference was also made to OGC guidance on fair payment practices.
CRL considered the range of potential uses for PBAs e.g. the CTRL model which had used PBAs purely for cost/payment transparency purposes compared with the OGC model (on which the standard form NEC3 documents were based) which took the idea further and sought to provide protection for the supply chain through the use of a trust arrangement.
A strategy was progressively developed, approved and implemented as follows:
- PBA to be used on each Crossrail NEC Option C contract for main works;
- PBA to be in the name of CRL and using CRL’s bank;
- A payment cycle to be provided for in the main contracts which supports the OGC model fair payment charter (payment within 30 days for all tiers of the supply chain);
- Interest accrued on the PBA to belong to CRL;
- A trust deed to be put in place to allocate beneficial ownership of monies in the PBA to the main contractor and subcontractors (in the knowledge that such an arrangement had not yet been tested by the Courts).
The governance papers at Appendix 4 to this paper provide greater detail.
All PBAs on the project were opened with CRL’s own bank (HSBC) who were, at that time, unfamiliar with the proposed approach. Initially, therefore, this required a considerable amount of work with Finance colleagues to persuade the bank to agree an arrangement which was acceptable to all.
Pain / gain share
A 50/50 share profile was adopted on all Crossrail Option C main works contracts. Various options were considered and a workshop was held to determinate the most suitable share profile. The following guiding principles were established:
- The principal objective should be to motivate the contractor to implement cost control;
- Tenderers should be motivated to submit realistic tender prices;
- The share profile should be equitable;
- It should not encourage the overly aggressive pursuit of and/or excessive evaluation of compensation events;
- It should be as simple as possible; and
- It should not motivate excessive risk allowances in tender target prices.
Further details setting out the options which were considered, their alignment with the guiding principles and reasons for selecting a 50/50 arrangement are set out in the PSC Paper at Appendix 5 hereto.
Option X1 – price adjustment for inflation
Use of NEC Option X1 was considered on a contract by contract basis but was generally included in all main works contracts which were expected to exceed a three year duration
Subsequent development of systemwide contracts
Crossrail’s systemwide contracts were awarded later than most civils contracts and the Main Civils Contract standard form, whilst remaining largely intact, was revisited on a number of matters to provide greater suitability for the scope of those contracts.
The first of the systems contracts to be awarded was for the railway signalling and control system. The contract terms were developed initially with input from external lawyers (Ashurst), from TfL and others. While the general approach taken was to try to minimise change to the existing Main Civils Contract, it was recognised that in a number of areas, the signalling contract would require different terms to reflect usual practice in that field and to deal specifically with the issues that can arise with signalling systems, particularly in relation to performance and reliability. Feedback from other LUL signalling projects (in particular, the earlier difficulties with the Jubilee Line extension signalling, and the then recently awarded Sub-Surface Lines signalling contract) was therefore used to both develop further remedies for CRL in the event of poor performance and to ensure that the contract was in line with market practice in areas such as IPR.
Main contract forms
The end result of the process outlined above was two main forms of conditions of contract (one for civils and one for systems) which have remained in place (subject to some later commercial changes e.g. incentive payments) throughout the project. Some key features of these forms of contract are set out below.
Main Civils Contract – key features
Certain compensation events
- Physical conditions – the physical conditions compensation event would be retained on the standard NEC basis but with provision for use of a Geotechnical Baseline Report (“GBR”), in line with the Tunnelling Joint Code of Practice. The GBR would fix the baseline for certain physical conditions, on an objective basis. GBRs would not necessarily be factual (in the sense of Site Information) but would establish a sensible allocation of risk. Types of conditions not addressed in the GBR would fall to the usual NEC mechanism. A paper on the use of GBRs was presented to PSG.
- Weather – retained on the standard NEC basis providing an objective approach to the measurement of the effects of weather.
- Prevention – initially recommended to be retained but subject to a carve out for certain specific risks which could fall within the potentially wide ambit of this compensation event but which CRL considered ought not to constitute a compensation event e.g. subcontractor insolvency and industrial action affecting only the Contractor’s workforce. This approach was subsequently revised upon further consideration and the compensation event was deleted in its entirety. Little resistance was encountered by bidders after an initial round of negotiation.
- Changes in law – this optional compensation event was included on the basis that bidders ought not to be required to price a risk which they cannot quantify. After discussion, it was established that the Contractor should take the risk of the first two years of the contract since changes in law for that period ought to be foreseeable. After that period, a compensation event would arise.
The compensation event process
After consultation with the delivery arm of the Crossrail organisation (which would provide the Project Managers required to operate this process), it was recommended by the working group and agreed by PSG that the standard NEC3 process, including time periods for responses and the deeming provisions (which operate in the absence of a required response from the Contractor or Project Manager), ought to be retained. In order to provide some protection for CRL, an amendment was made to ensure that the reminders to be issued by Contractor would be made mandatory.
No entitlement to Fee when cost exceeds target
This position had been adopted on CTRL and was recommended to CRL. After discussion, it was agreed to be appropriate for Crossrail contracts in order to seek to avoid any potential for Contractors to gain commercially, even when in a pain situation.
Forecast Defined Cost
The NEC position under which cost is paid on a forecast basis was retained with the appropriate forecast period agreed to be 4 weeks (the assessment interval). A longer (7 week) period had been adopted on CTRL and was considered but, after consultation with Finance, it was considered that a 4 week period would be sufficient to ensure the Contractor is kept ‘cash neutral’.
A payment cycle was established which reflected the requirements of the then current legislation (Housing Grants Construction and Regeneration Act 1996) and which was also consistent with the fair payment commitment for the payment of subcontractors within a 30 day period. The proposed payment cycle granted CRL a 16 day period to take certificates through internal finance processes which was considered to be adequate.
Neither retention nor retention bonds were utilised in Crossrail tier 1 contracts. CRL relied instead on use of a performance bond (see below). It was decided that CRL should not expressly prohibit the use of retention further down the supply chain in light of the fact that main Contractors would be committing to the Fair Payment Charter.
Standard NEC termination events were retained, with some modifications to the drafting of individual grounds.
The Contractor’s entitlement to the entire Fee in the event of termination for Employer fault or for convenience was reduced to an entitlement to 25% of the Fee and, in contracts entered into prior to Review Point 4 (the final go/no go point for the Crossrail Project), appropriate provision for termination was made ensuring that the Contractor would not be out of pocket but with no entitlement to Fee. This position was accepted by tenderers.
Right to deduct pain share early
It was recognised that, under standard NEC3, in the event that costs were to exceed the target at the end of the contract such that there should be a deduction from the Contractor for pain share, CRL may find itself in a position in which it would be required to take action to recover that pain share. In order to avoid this situation, the contract was amended to permit CRL to deduct a forecast pain share in advance at a point when cost was still owed to the Contractor against which the pain share could be offset. This was a position which was initially resisted by tenderers and was the subject of some negotiation during the tunnel contracts procurement. The clause was retained with some modifications which provided the tenderers with adequate comfort that the clause would be operated responsibly and fairly by Project Managers. The Contract Administration Manual supplemented the contractual provisions to ensure that the clause would be utilised appropriately.
It was decided by PSG that CRL ought to go out to tender on its first (tunnelling) contracts on an unlimited liability basis. Whilst CRL was not averse to a sensible cap on Contractors’ liability, it did not wish to pre-empt the levels of liability at which tenderers would be comfortable.
Following receipt of those initial tenders, it was determined that a cap of 30% of the final total of the Prices would represent a sensible allocation of risk which would not drive excessive risk allowances in tender prices whilst maintaining an adequate incentive on Contractors to perform. After consideration of approaches taken on other projects and by other organisations, CRL decided to adopt a straightforward approach with one overall liability cap (rather than different caps applying to different types of loss) subject to certain excluded matters. Excluded matters were deliberately retained at a minimum, as follows:
- delay damages;
- Contractor’s share; and
- Repayment of Disallowed Cost.
The 30% cap was accepted almost without exception by tenderers. On occasion the excluded matters were the subject of some negotiation such that some contracts contained a separate sub-cap on delay damages or provided for delay damages to fall within the 30% cap.
Liabilities were also considered in the context of the Owner Controlled Insurance Programme (“OCIP”), in particular:
- The possibility of splitting liability for the level of deductibles on lower value (<£10m) contracts – this was never required to be implemented as all main works contracts exceeded that value.
- The possibility of CRL indemnifying contractors for losses in excess of OCIP levels of cover – this was never insisted on by tenderers and thus never implemented.
Delay damages were calculated for each contract on the usual basis i.e. as a genuine pre-estimate of CRL’s loss. Due to the complex interfaces between Crossrail contracts and the potential impacts of delay, such calculations often gave rise to very significant levels of potential liability. A process was therefore put in place for such numbers, once calculated, to be revised to a lower level which was considered to represent a more realistic allocation of risk, preserving a balance between an adequate level of recovery for CRL in the event of Contractor delay (and thus an incentive on Contractors) and the desire to avoid tender prices inflated for risk. Records of this process and approval of the relevant figures were maintained for each contract.
Certain items of Disallowed Cost
The topic of Disallowed Cost was the subject of much discussion drawing on a variety of experience from other projects. It was, however, the goal that commercial success on Crossrail contracts should be driven by cost control by the Contractors, incentivised by an effective pain / gain target arrangement (50/50), rather than cost control by Disallowed Cost. Only a couple of additions to the standard Disallowed Cost provision were therefore included as follows:
- The cost of correcting Defects caused by non-compliance with an accepted quality plan; and
- The cost of correcting Defects notified by the Supervisor which ought to have been notified by the Contractor.
In the case of each of these additions, there was considered to be a clear benefit to be derived beyond simple cost control.
Perhaps the most contentious issue considered by the working group was whether CRL ought to be entitled to disallow cost for contractor breach / default (which would include Defects). Various options were considered by the working group and presented to PSC. A wide ranging head of Disallowed Cost was rejected and the above two specific heads of Disallowed Cost were included to provide support to the self-certification process. The issue was then revisited following difficulties encountered on certain enabling works contracts and a desire from the delivery team for additional ‘leverage’ in the event of Contractor default. The proposal was, however, discounted again, primarily because of the high level of risk such an approach would place on Contractors and the resultant un-collaborative and inefficient behaviours this would lead to.
Security – PCG and bonds
Parent company guarantees were required by CRL to be provided by the ultimate parent company of the Contractor.
10% on default performance bonds were required from all main works contractors. The requirement was always priced as an option at tender stage so that it could be omitted if the cost proved to be prohibitive but this was never the case and bonds were provided on all main contracts. The bond value reduced to 2.5% at Completion. On demand bonds were not sought other than in respect of advance payments for off site goods and materials.
CRL Finance developed further guidance on these matters which is at Appendix 6 to this paper.
Dispute resolution process
CRL considered approaches taken on other projects (e.g. the Olympics’ Independent Dispute Avoidance Panel) and determined that a panel of adjudicators would be the most appropriate option for the Crossrail project. The panel was established under the auspices of the ICE and members were selected on the basis of advice from the ICE to provide the breadth of experience and expertise which would be required for the project. In the event of an adjudication, the parties were to seek to agree an adjudicator from the panel, failing which one would be nominated by the ICE. In the latter event, each party was entitled to ‘veto’ one member of the panel.
Referral to adjudication was to be preceded by managerial discussions. Whilst this could not exclude a Contractor’s right to adjudicate at any time, in practice, potential disputes were generally the subject of managerial discussions before any adjudication proceedings were commenced. To date, only three adjudications have been commenced under our contracts, of which two were handled on a ‘documents-only’ basis.
Other topics which were addressed in papers to PSG / PSC included:
- Subcontractor collateral warranties;
- Set-off rights;
- Responsibility for delay in receipt of third party approvals;
- Grounds for withholding acceptances;
- Payment in the event of Defects;
- Express right to omit scope (without liability for loss of profit in certain situations);
- Common Plant and Materials clause to facilitate uniformity of certain components across stations;
- Delay damages on Key Dates to facilitate the numerous interfaces within the station contracts;
- Treatment of subcontract performance bonds; and
- Value engineering clause.
Form of subcontract
Once the form of Main Civils Contract was established, it was recognised that the burden on Project Managers to accept individual subcontract terms could be lessened by including within the main contract a form of pre-approved subcontract which could be utilised. This sought to flow down, as far as possible, the main contract terms. Even where this form of subcontract was adopted, acceptance of subcontract terms would still remain subject to Project Manager approval in respect of various contract particulars included in the Subcontract Data and any negotiated amendments. In practice, most contractors have taken this form of subcontract and adapted it to incorporate their own requirements. A contract specific form has then been approved with each Project Manager and this process is reflected in the Contract Administration Manual (see below).
Main Systems Contract – key features
The main areas of change from the Main Civils Contract were as follows:
Because of the need for the systems contractors to co-operate effectively with other contractors over, in particular, design integration and access to sites across the project, additional limbs were included in the “Disallowed Cost” definition to allow cost of delayed/ cancelled etc access caused by the Contractor’s default, failure to give notice and similar reasons, and also the cost of rectifying design defects caused by a failure to integrate design with Others, to be disallowed.
While the concept of Key Dates already appeared in the Main Civils Contract, to which liquidated damages or unliquidated cost reimbursement could be attached, it was felt that a stronger remedy would be required in respect of particularly critical dates (“Milestone Dates”) which had the potential to impact a number of other contractors if missed by the signalling contractor. The right for the Employer to retain all payments due to the Contractor during a period when a Milestone should have been achieved but has not been was therefore included. Milestone Dates were only adopted in the signalling contract.
Retention and enhanced ‘Reliability Period’
Although retention was not used for the civils contracts, it was felt that in the case of an IT-based contract such as signalling, some form of retention should be used on the basis that the Employer has very little value in the asset until it has been completed, fully commissioned and has been proven to be performing to the required standard. It is also very difficult for another contractor to complete the works/ rectify defects. That being the case, the signalling contract included provision for a “Deferred System Performance Payment” to be retained by CRL from amounts due to the Contractor. The Contractor is also required to provide enhanced support to the operator during an extended “Reliability Period” during the first 3 months of revenue-earning service. The retention was to be released in stages at Completion, the successful completion of the Reliability Period and the issue of the Defects Certificate.
Rejection of the whole of the works
An express right for the Employer to reject the works was included in the signalling contract where the works fail to pass an acceptance of performance test within the time allowed or performance is below the required level at any time prior to Completion.
Intellectual Property and Escrow
The ownership of intellectual property tends to be a much more sensitive issue in systems contracts, due to the amount of R&D resources invested in the creation of proprietary software and other technical features of the systems. Because of that, the intellectual property clauses were amended so that the Contractor would own the majority of the foreground rights in the works, with some limited exceptions, and would grant a wide IP license to CRL, sub-licensable to future operators etc. IPR provisions were often the subject of individual negotiation with tenderers.
In addition, more detailed escrow provisions were included requiring the Contractor to place certain key pieces of software in escrow.
Limitation of liability
Additional exclusions from the general limit on liability were included, in particular:
- Contractor’s liability in the event of abandonment or suspension
- Costs of rectifying defects
- Infringement of third party IPR
- Insured risks
Form of sub-contract
No pre-approved sub-contract was included in the systems contracts given the expected bespoke nature of sub-contracting arrangements for signalling works.
Additional requirements were included for the Contractor to co-operate with Others over design and integrate his design with those of Others. The Contractor’s design warranty was also amended to make it a “fitness for purpose” warranty rather than the lesser “reasonable skill and care” test. This was, on occasion, the subject of individual negotiation with tenderers such that not all systems contracts contain a straightforward fitness for purpose standard.
Train-carried signalling equipment and Maintenance arrangements
In the specific case of the signalling contract, the Contractor was required to enter into a contract directly with the (then to be appointed) rolling stock manufacturer for the provision of train-carried signalling equipment directly to the manufacturer (enabling CRL/RfL to place responsibility for this equipment, and any related performance issues, on the rolling stock manufacturer). Heads of terms for this contract were attached to the signalling contract and a Milestone Date and Employer termination right was linked to the completion of the train-carried equipment contract.
In addition, in order to tie in the Contractor to agree reasonable maintenance/ spares/ support terms with the operator in the longer term, an obligation was included in the systems contracts to negotiate and agree a maintenance contract, substantially in the form attached to the works contract. Negotiations on the maintenance contract were in practice conducted in parallel with those on the signalling works contract. Maintenance contracts were in fact only put in place by RfL pursuant to two systems contracts around the time of award of the works contract itself (signalling and platform screen doors).
The Contract Administration Manual
The Contract Administration Manual was developed after finalisation of the Main Civils Contract standard form and has been a very important internal tool to regulate the proper administration of our forms of contracts. Its intention was to provide both guidance (especially on terms which had been amended from standard form NEC3) and to ensure consistency of approach across Project Managers. It has been updated continuously throughout the project to reflect lessons learned and the progression of the project. The use of checklists to simplify various NEC processes e.g. the standard programme checklist has proven to be particularly useful. A copy of the manual is at Appendix 7 hereto.
Successes and suggestions for improvement
The CRL contracts are considered to be quite commercially ‘hard’ due to:
- the 50/50 pain/gain share;
- no Fee being payable on cost above the level of the target;
- heavy liquidated damages on (often numerous) Key Dates and Completion Dates;
- the ability to take pain share prospectively. This provision, in particular, has driven tough commercial outcomes and significantly affected tactics and behaviours.
On the whole, however, it is considered that the approach taken was the correct one although a less onerous position on time (both in respect of number of dates and levels of damages) would merit consideration.
With respect to the management of cost:
- It is considered that CRL’s approach to Disallowed Cost was the correct one. Whilst the clause was amended to some degree, those amendments have not been heavily used and were included to promote the right behaviours. The additional heads of Disallowed Cost have been used by Project Managers on some contracts.
- Future projects might consider the potential for an express head of Disallowed Cost where the Contractor adopts excessive resources, especially commercial resource.
- The Schedule of Cost Components could be tightened up further but:
- deletion of Working Area Overhead was the right thing to do; and
- future projects should consider deleting the provision for special plant and equipment rates to avoid excessive rates and leave this instead to be established on a cost basis.
CRL did not include incentives in its contracts from the start although these have been used subsequently as the project has progressed to focus and prioritise activities and interfaces and, especially, to manage the handover from civils contractors to systemwide and, more latterly, in order to drive the activities leading up to handover of the railway. Crossrail incentives are written on an absolute basis such that there is no entitlement to adjustment as a result of e.g. compensation events. This approach has been key to ensuring the effectiveness of the incentives and to promote the desired behaviours. As well as incentives, CRL later adopted NEC clause X12 (Partnering) across certain contracts where collaborative working was required for each contractor to earn its incentive payment. This was not, however, used extensively.
Finally, standard form NEC3 does not contain a traditional ‘final account’ stage so this has been individually negotiated as contracts have neared completion. Future projects should consider including some additional process around this with a strengthened attempt at finality although it should be noted that the standard for NEC4 has sought to address this point.
Compensation event process
CRL encountered many of the familiar issues arising from the use of the NEC3 form of contract in that compensation events were not always properly addressed in compliance with the prescribed timescales. Problems arose from Contractors failing to provide quotations and Project Managers being reluctant to assess compensation events in the absence of (or when in disagreement with) a Contractor’s quotation. This reluctance appeared to stem from a level of discomfort with the forecasting approach of NEC under which assessments may well prove not to reflect actual cost. The concern was perhaps exacerbated by the financial scrutiny arising from the levels of audit on a project of the nature of Crossrail.
Future projects should consider the extent to which internal controls might be implemented under which Project Managers would be obliged to assess a compensation event within stated timescales unless the Employer agrees otherwise.
Time and Accepted Programme
There has been much debate in the industry (and within CRL) during the currency of the project in respect of the assessment of time under NEC on which there is, at present, little case law to provide guidance. Particular issues encountered include
- which Accepted Programme is to be used when assessing compensation events;
- the use of assumptions and the use of actual as opposed to forecast cost when correcting assumptions;
- to what extent is the Contractor required to mitigate delay (his own and Employer delay) and arguments from Contractors that instructions to accelerate must always be given – see below.
Future projects should consider giving greater certainty in the contract terms to such matters.
CRL provided for a 5% deduction where a programme is not submitted for acceptance. Future projects should put beyond doubt that any such deduction is available where a programme is submitted but this is not of the requisite quality.
The question of the Contractor’s obligation to mitigate delay has been one of our biggest challenges on the project where, as a consequence of the packaging of the works and the number of interfaces, the issue of time has been critical. These (and other) issues of time were exacerbated by the volume of Key and Completion Dates and levels of damages contained in some of our contracts. Future projects might consider, as appropriate, the greater use of constraints written into the Works Information in place of Key or Completion Dates. For example, dependencies and interfaces across contracts may more helpfully be dealt with as constraints which would have to be reflected in the Contractor’s programme rather than as a contractual date with a fixed definition of the scope attached to that date. A Key Date or Completion Date is more rigid, less easily altered by the Project Manager and increases the administrative burden of the compensation event regime. In particular, the effectiveness of Key Dates without liquidated damages should be given consideration.
Contractors have taken the stance that any delay is only required to be mitigated in the event that the Project Manager issues an instruction to accelerate the works. Whilst CRL developed guidance around this (included in the Contract Administration Manual) setting out its view on the extent of the Contractor’s duty to mitigate and when an instruction to accelerate is appropriate, future projects might consider additional explicit provisions on the subject to remove scope for debate over contractual interpretation.
On acceleration itself, CRL amended the NEC3 acceleration clause making it by instruction rather than by agreement. This instruction then falls to the compensation event mechanism. This means that the Completion Date cannot be moved to an earlier date except by supplemental agreement. The benefit with this approach has to been to reserve the ability to conclude any such agreement to the Employer. On balance, it is considered that this approach was probably sensible and has assisted the argument that the Contractor should mitigate delay itself rather than insist on a Project Manager instruction.
Contract amendments / additional powers for the Project Manager
As might be expected on a project of scale of Crossrail, it has been necessary, in a number of cases, to subsequently amend or supplement the original terms. Often, such changes could not have been foreseen and simply reflect the evolution of the project. However, there are certain matters which might have been facilitated by additional Project Manager powers, avoiding the need to make changes by agreement (which inevitably gives scope to the Contractor to negotiate other matters) e.g. changing site boundaries. Future projects should consider any matters on which they might require some flexibility as a contract progresses.
Advance payments – advance payments have been relatively commonplace under our systemwide contracts and Contractors have expressed concern over our requirements for advance payment bonds (including our minimum security rating) for the purchase of off site materials. This has led to the need to agree alternative arrangements in certain situations.
Value engineering clause (Z15) – this has given rise to arguments over whether something is a VE proposal. Generally the costs of implementing the VE idea, overall, have outweighed the benefits. Future projects might consider omitting any such clause since there is nothing to stop a Contractor making the proposal anyway.
Owner Controlled Insurance Programme – the conditions of contract require careful review to reflect any OCIP, especially the effect of claims under the target cost mechanism. The Crossrail provisions have not been tested to date.
Project Bank Accounts – after some initial difficulties (gaining first the bank and then the Contractors’ buy in to the principle and ensuring that the accounts were set up quickly enough following contract award) these have worked very well. Future projects should allow adequate time in advance of any contracts commencing to ensure that all necessary arrangements with the bank are in place.
Fair payments – it is important to ensure that the contract payment cycle (timings for payments and length of forecast period) is appropriate to deliver the fair payment objectives throughout the supply chain.
Communications – use of an electronic system is essential. Whilst the ban of email communications is good practice, this is hard to prevent so an email capture/archive system is vital (especially on a long duration project with Project Manager teams changing).
Subcontracting – future projects might consider stronger provisions relating to PM approval of package awards with a view of improving Contractors’ procurement processes and, in turn, to drive cost control. This is one area where CRL might, with hindsight, have been more intrusive.
Geotechnical Baseline Reports – these have generally been a success but the quality of the GBR is key.
W2A – establishment of a panel of adjudicators is considered to have been the right approach route to go down with the right to veto one member.
Key Date and Completion Date descriptions – future projects should ensure that these descriptions, even if intentionally written in broad terms, provide certainty. In particular, it should be clear whether the description is entirely the wording in the Contract Data or whether the Works Information provides a fuller description. If the latter, clear cross referencing between Contract Data and Works Information is needed.
Collateral warranties / third party rights – legal advice taken at the time of awarding Crossrail contracts remained that certain sectors (e.g. development funders) remained resistant to the use of third party rights. It is understood that this may no longer be the case. The process of collecting and arranging the execution of third party collateral warranties has been an onerous one and for which there was no dedicated resource. Future projects should consider utilising third party rights insofar as possible.
Cross-contract claims – CRL excluded the possibility of a compensation event arising as a result of an action of the same contractor under another contract. It also reserved the right to set-off sums owing from a contractor under another contract with the same contractor. The identity of the Contractor has been key to the operation of both provisions, especially the former, and future projects should consider the extent to which a joint venture comprising largely the same (but not identical) companies ought to be caught by the provisions.
Works Information – future projects should confirm, at an early stage in the development of their Works Information, whether a prescriptive or high level approach is appropriate. The Crossrail approach was highly prescriptive. Whilst this has not been a problem per se, it is vital that any such approach is then properly coordinated such that a single author is responsible for the Works Information, obtaining input from all disciplines as required, to avoid duplication and/or conflicting requirements.
Subcontract performance bonds – any future project must be clear as to its expectations from the outset including the extent to which the Employer will agree to pick up the cost of such bonds which protect against a shared risk and the treatment of any proceeds of a call on a bond (under Option C contracts). It has proven difficult to extract such costs from general subcontract costs in practice.
Delay damages – future projects might consider how the proportional reduction of delay damages under X7 when part of the works is taken over might operate in practice. Whilst the contractual provision is clear, the project has experienced difficulties in its operation in practice in terms of ascertaining the ‘benefit’ to the Employer of taking over of part. There were inevitably differences of opinion between Employer and Contractor as to the extent of that benefit.
Key Person compensation clause – this was introduced in response to early experience where people who had been instrumental to a Contractor winning a tender were immediately removed from that contract and put forward on another tender. The clause has not, however, been used.
Accepting Defects – CRL has found itself in a ‘dead end’ as a consequence of the operation of these NEC provisions which require a quotation for an accepted Defect to be agreed. Where agreement cannot be reached (over the question of whether something is a Defect and/or the resultant change to the Prices), there is no ability for the Project Manager to make an assessment.
Design responsibilities – this is largely a matter for the Works Information but it is, as ever, vital that design responsibilities are clearly set out, especially where design is split. Numerous problems were encountered on the project where Contractors were required to complete an Employer’s initial design. Whilst contractual guidance was issued seeking to clarify the Contractors’ obligations and the extent of their entitlement to compensation events, in practice, any potential ambiguity in the contractual provisions was exploited.
Training – CRL delivered both general NEC and more focussed (e.g. time) training to Project Managers and their teams which was well received and helped to promote consistent application of the contracts across the project.
APPENDICES (in Document Links)
- Crossrail Main Civils Contract
- Crossrail Main Systems Contract
- PSG / PSC Papers 1 to 5 on NEC conditions of contract and relevant minutes of meetings
- PSG Papers – Project Bank Accounts
- PSC Paper – pain / gain share
- Finance guidance on guarantees and bonds
- Contract Administration Manual
- Works Information Volume 2B (civils contracts)
 The 2017 decision of the Northern Irish High Court in Northern Ireland Housing Executive v Healthy Buildings (Ireland) Limited considered the extent to which a compensation event must be assessed on a forecast basis and concluded, in the circumstances of that case, that a retrospective approach was appropriate
As Crossrail’s Delivery Contracts Director, David has been the Employer’s commercial lead since the start of construction in 2011. David has been responsible for providing leadership and guidance to the Crossrail delivery teams on the NEC contract, managing disputes and settlements with Contractors and setting commercial strategies to ensure successful delivery of the programme. Prior to the construction phase David was a member of the Crossrail procurement team. David’s career in infrastructure spans 25 years; he was previously a Partner of Gardiner and Theobald although his initial career was with Mott MacDonald highways and structures