Involving contractors early using NEC

While the phrase ‘early contractor involvement’ (ECI) has become increasingly popular among procurement practitioners, a two-stage tendering approach has long been practised in the construction industry.

The two-stage approach has been both informal, obtaining ideas from contractors through sharing sessions, and formal, whereby pre-construction service agreement is entered to between the client and the contractor, which would advise the client team for a fee. The historic informal way has limited incentives for contractors to share good ideas except for the hope that they would be in a better position to bid for the construction works.

NEC standardised an ECI process by publishing a set of standalone additional clauses for use in the NEC3 Engineering and Construction Contract (ECC) Option C (target contract with activity schedule) and Option E (cost reimbursable contract) in 2016. It subsequently incorporated the relevant clauses as secondary options X22 on ECI for use in NEC4 ECC Options C and E in 2017.

One of the key objectives of ECI is to enhance buildability, whereby contractors are engaged early in the project lifecycle to advise designers and clients on buildability issues in a costeffective way. In Hong Kong ECI is recommended in Construction 2.0 – Time to Change, which was published by the Development Bureau in November 2018. Without ECI, risks around buildability could still be addressed post-contract by way of value engineering, however at this later stage the project would likely incur more cost to address the same risk following the cost-benefit curve.

This article introduces the purposes of ECI, highlights ECI as part of a traditional two-stage tendering process, explores the NEC mechanisms under option X22, compares this single-contract approach with other approaches, and outlines challenges to be faced with ECI.

Purpose of ECI

So why do clients wish to engage contractors early? For projects which are relatively complex, high risk and/or subject to particular requirements (e.g. fast tracking, use of new technologies and construction methodologies), clients might wish to adopt ECI to achieve one or more of the following objectives:

• Establish collaborative working relationship early on
• Encourage joint risk and value management with project objectives aligned
• Get input from the contractor, subcontractor or specialist supplier to develop the design
• Get a buildable design right the first time
• Clarify the scope of work between the designer and the contractor pre-contract
• Enable innovation, latest construction technologies, better building information model integration and offsite manufacturing to be adopted
• Improve construction sequence, methodology, logistics and planning
• Improve cost certainty of the project

If ECI is used, it is essential to formalise the process contractually to maximise the benefits − and equally importantly for the contractor to give intellectual property rights to the client for purposes stated in the ECI brief.

Two-stage tendering

There are many variants of two-stage tendering that can involve contractors early. In essence, stage one (the ECI stage) generally involves the contractor in:

• Developing the design in conjunction with the client’s design team
• Advising on issues relating to buildability, supply chain engagement, programme and cost estimation
• Identifying project risk and developing a mitigation plan.

Stage two (the construction stage) generally requires the contractor to execute the works. As such this would involve two stages of tendering – the former aims to select one or more contractors to participate in the ECI process and the latter aims to select one contractor to execute the works.

With respect to the contracting approach, in stage one the client may engage one or more contractors to participate solely in the ECI process under a pre-construction service agreement (e.g. under an NEC4 Professional Service Contract), whereas there will be a separate works contract (e.g. under NEC4 ECC) with only one contractor to execute the works in stage two.

Before appointing the contractor(s) to participate in the ECI process (stage one), the client would need to identify the objectives of the ECI as well as the project, define the client’s requirements and the works and set the budget for the project based on certain preliminary design information. With this information, the client can invite competitive tenders, which requires contractors to submit technical and commercial bids for the ECI stage.

However, the higher the number of contractors engaged in the ECI stage, the more difficult it will be to incentivise them to work collaboratively and openly with the client team, thus reducing the benefits expected for an ECI process. A balance needs to be struck between performance and price.

NEC4 ECC option X22

A variant to the above generic two-stage tendering process is that the client only invites tenders once, with the aim of selecting a single contractor to provide services in stage one and works in stage two under a single contract with a ‘break clause’. The break clause allows the client to elect not to proceed with stage two or to engage another contractor to undertake the stage two works. The client will not be liable to the stage one contractor for loss of opportunity or profit for the omission of the stage two works in case it is unable to reach an agreed total of the prices for stage two or if the contractor fails to achieve the required performance. This is exactly how option X22 in NEC4 ECC Options C and E intends to operate.

Under option X22, the contractor would prepare its assessment of the total of the prices for stage two based on the prescribed rules stated in the pricing information provided by the client prior to stage one. Typically, the pricing information specifies how the contractor should price unit rates, resources costs, overhead and profit, preliminary costs, fee percentages and the like.

Option X22 introduces an additional incentivisation model by way of the following new terminologies:

• ‘Budget’ – set by the client prior to the start of stage one, this represents the maximum amount of money that the client wishes to pend on the project and includes the contractor’s cost, consultants’ cost, land purchase, client’s own cost and client’s risk allowance. The budget may be changed if the client’s requirements change during the course of stage one and stage two
• ‘Project Cost’ – forecast by the contractor in consultation with the project manager, this is the total anticipated expenditure against the budget
• ‘budget incentive’ – this is the budget minus the project cost, multiplied by the percentage stated in contract data part one

The budget incentive commercially encourages the contractor to achieve savings on the client’s budget but without sanction in the case of overspend. This incentive is additional to the pain/gain share mechanism dependant on the total of the prices and the price for work done to date where Option C is selected.

One may wonder why option X22 is only for Options C and E. It is arguably because:

• If the risk profile of a project is low as a result of good definition of design and certainty on cost, as would be the cases where Options A and B (priced contracts) would be appropriate, then the benefit of ECI would be minimal thus does not justify the effort required for ECI
• Option D (target contract) is priced using a bill of quantities, which is in turn governed by the design, hence the contractor may be incentivised to over-design
• In Option F (management contract), the contractor is not expected to provide much in the way of services and works other than managing subcontracts

Which route to go for

Arguably the single-contract approach may not be suitable in certain jurisdictions, where price negotiation for stage two works would not be allowed and the client’s commercial position and bargaining power would be effectively limited as there is no competitive tender for stage two works.

As such some clients, as in Hong Kong, prefer multiple contractors participating in stage one followed by a competitive tender exercise to select the final contractor for stage two. The drawbacks with this approach however could be that:

• The client needs to decide if one client team would work with multiple contractors or multiple client teams would work with corresponding contractors, either way the cost and resources demand would be higher than appointing a single contractor for stages one and two under one tendering exercise
• It is challenging to administer a fair process to ensure all contractors are treated equally
• The contractors may be less open to share good idea in stage one because the chance of getting into stage two is relatively lower
• The contractors may submit unrealistically low estimated price for the works to get into stage two, which may compromise its subsequent performance

There is no absolute right or wrong route to be adopted. However, it is essential for client teams to understand fully the pros and cons of the different approaches, and to make an informed decision and follow a robust process to achieve their objectives.

Conclusion

Simply adopting ECI will not automatically benefit a project. Project teams also need to overcome other challenges at the ECI stage, for example:

• Contractor does not exhibit collaborative behaviour or an open-book approach
• Contractor reluctant to propose constructability advice or cost-saving ideas design programme does not allow adequate time for contractor’s buildability input
• Programme and deliverables poorly defined
• Lack of commercial tension towards the end of the ECI stage, enabling the contractor (particularly if only one) to increase price and/or change risk position

However, the challenges can be met and resolved at every step in the two-stage process through selecting the right contractor(s) for the ECI stage as well as finalising the right contractor for the stage two works.

Fortunately there is a wealth of experience, best practice and know-how developed over the years in the UK and some projects in Hong Kong have already successfully used ECI for its intended benefits.

It is now time for change. When the right opportunities arise, clients need to start getting contractors on board early in the procurement process to start de-risking their projects and improving cost efficiency.