How to deliver best value when using NEC contracts

Key Points

• NEC contracts provide several strategies to assist clients in managing value.

• Value engineering is best done early on in the design process and not as a cost-cutting exercise.

• Delivering best value should include consideration of whole-life costs and the effects on climate change.

Value engineering seeks to optimise value by eliminating unnecessary cost while ensuring that essential functions and performance are met. However, in construction it has tended to become synonymous with scope reduction to achieve cost savings. At worst, it has compromised quality and safety with disastrous consequences.

In 2018, Dame Judith Hackitt, author of the post 2017 Grenfell Tower fire review of building regulations (Hackitt, 2018) was highly critical of value engineering, saying that all it does is cut quality and needs to be binned (Marshall, 2018). However, as long as the issues of product non-availability, budget constraints and the need to cut greenhouse gas emissions exist, the need for value engineering, done the right way, will continue.

The term value engineering is not uniquely stated or its meaning defined in the NEC contracts, however there are various options available to help the parties finding the optimum combination of cost and quality to deliver a sustainable solution that enhances value for money.

Value management is not a process confined to establishing lowest capital cost but also takes into consideration a project’s whole life cycle and impact on the environment. For example, value engineering in the Reading elevated railway redevelopment resulted in a 40% reduction in embodied carbon dioxide, saving 12% of the original cost of the project (RSSB, 2019).

The provisions available within the NEC forms facilitate all areas of value management, as discussed in the following sections.

Early contractor involvement

The best time to start value engineering is during design development as the impact of changes on cost and programme will be lower. Early contractor involvement using secondary Option X22 in the NEC4 Engineering and Construction Contract (ECC) involves entering into a single contract with two stages.

In stage one, the parties work together to develop the scope, design, price and programme (Hunter, 2019). Involvement by the contractor during the planning stages of the project will enhance the contractor’s ability to influence out-turn cost to the client.

The contractor is incentivised to seek savings against the client’s budget declared at the start of the contract. If the total cost on completion is less than the budget, the contractor is rewarded financially with payment of a budget incentive.

NEC4 ECC priced contracts

The core clauses of NEC4 allow the contractor to propose changes to the client’s scope providing the change will bring about a reduction in the amount the client pays the contractor (clause 16.1). If the proposal is accepted, the scope is changed by an instruction from the project manager giving rise to a compensation event.

In ECC Options A (priced contract with activity schedule) and B (priced contract with bill of quantities), the reduction in the prices resulting from the compensation event is calculated by multiplying the assessed value of the compensation event by the value engineering percentage stated in the contract data (clause 63.12).

NEC4 ECC target contracts

In NEC4 ECC Options C (target contract with activity schedule) and D (target contract with bill of quantities), the contractor is paid on a cost-plus-fee basis. The contract sets an initial target for the outturn price which is adjusted by compensation events. Any cost savings or overruns measured against the adjusted target price are shared between the client and the contractor according to the share ranges and percentages stated in the contract data (clause 54).

The contractor’s incentive to make a cost-saving proposal is provided for in compensation event clause 63.13. If the assessed value of a compensation event arising from a proposal made by the contractor under clause 16.1 reduces the total (defined) cost, the target price is not adjusted. The benefit of any subsequent realised cost savings for the whole contract are then shared in accordance with clause 54.

The extent to which the contractor is motivated to propose changes to the client’s scope under Options C and D will depend, among other things, on the share ranges and percentages.

Information modelling

Information modelling is a process for creating a digital representation of the physical and functional characteristics of an asset for use throughout its whole life cycle. The process involves creating a model that shows not just the geometry of the asset, but also information about its various components, performance and cost.

The application of secondary Option X10 on information modelling brings together the technical requirements for a project with provisions setting out the responsibilities for creating the model and liability of the parties.

Information modelling facilitates value engineering by providing visibility of both the function and cost of a design with the ability to readily examine the effects of design changes before committing to the construction stage.

Whole-life cost

The cost of operating and maintaining an asset is a significant part of its whole-life cost. Understanding the whole-life cost of a project plays an important part in design and ultimately the decision to make the capital investment. Secondary option X21 on whole-life cost is available for use in the NEC4 ECC, Term Service Contract (TSC) and Facilities Management Contract (FMC).

The contracts make provision for the contractor to propose scope changes with the objective of reducing whole-life costs (Hunter, 2022). Proposals must be supported by a forecast in cost reduction and an analysis of the resulting risks, and value engineering can play an important role in these assessments.

Climate change

Secondary Option X29 on climate change was published in July 2022 and is available for use with all the NEC4 main and subcontract forms (but not the short versions). This option allows the client to include its climate change requirements with targets in the contract, with the aim of bringing about a reduction of the impact of the work on climate change.

A performance table with financial incentives is used to motivate suppliers to achieve measurable targets on greenhouse gas emissions and other environmental performance criteria.

Conclusions

Delivering best value for public and private sector clients is fundamental to successful procurement and contract management. The UK government’s The Construction Playbook (HM Government, 2022) identifies value as core objective in project delivery.

The principles of value engineering play an important role in achieving best value (Fullalove, 2024). NEC contracts provide an excellent framework with varying strategies to assist clients in delivering best value within budget constraints without losing focus on safety, quality and the environment. 

References

Fullalove S (2024) Leeds City Council uses NEC to deliver its new award-winning outer ring road. NEC Newsletter 130 (March 2024): 4–5.
HM Government (2022) The Construction Playbook: Government Guidance on sourcing and contracting public works projects and programmes, Version 1.1. Cabinet Office, London.
Hackitt J (2018) Building a Safer Future – Independent Review of Building Regulations and Fire Safety: Final Report, Her Majesty’s Stationery Office, London.
Hunter D (2019) Engaging suppliers early with NEC4. NEC Users’ Group Newsletter 95 (January 2019): 5–6.
Hunter D (2022) How to reduce whole-life cost with NEC4 FMC options X21 and X27. NEC Users' Group Newsletter 122 (December 2022): 5. Marshall J (2018) Hackit calls for an end to value engineering. Building Design 8 October.
RSSB (Rail Safety and Standards Board) (2019) Case study: Reading Elevated Railway Value Engineering.