Topic 7: NEC3 ECC - Main and Secondary options

Topic Preview
This topic will consider the following:
• Contract strategy
• Details of the main options.
• Details of the Secondary Options in NEC3 ECC.

Topic Content

1. The Main Options and Contract Strategy

The NEC3 ECC structure allows a complete contract to be formed by choosing a Main Option
and adding it to the nine core clauses. There are six main options in the NEC3 ECC, these
are:

• Option A - priced contract with activity schedule

• Option B - priced c o n t r a c t with bill of quantities
• Option C- target contract with activity schedule
• Option D - target contract with bill of quantities
• Option E - cost reimbursable contract
• Option F - Management contract

The Main Options serve multiple purposes; they are primarily the vehicle for determining the
payment method for the contract. They are also useful in determining contract strategy
including price risk, allocation of design responsibility and could indicate the Employer's
intentions regarding early mobilization to site. This section will discuss briefly how the choice
of a main option interacts with the contract strategy for a project, and then the next section
will examine each of the options in detail.

Contract Strategy refers to a range of issues that aids the Employer to choose an appropriate
contract to achieve his objective for each project. The issues include:
• Which party is responsible for design?
• Which is the higher priority, certainty of price or time of completion?
• How definite and sufficient is the Employer’s requirements for the project and what
level of flexibility is expected?
• Is the Employer keen on a single point responsibility the Employer keen on a single
point responsibility contract?
The effects of the choice of the NEC3 ECC main options on some of the above issues are
covered below.

1.1. Risk in price

It is a testament to the flexibility of the NEC3 ECC form that a wide spectrum of choices is
provided in the main options for the management and distribution of the risk in price. These
range from fixed price contracts to a management contract. In between, we have target price
contracts and cost reimbursable contracts. In the absence of price increases caused by
changes to the Works Information document, Option A (priced contract with activity schedule)
provides the maximum level of certainty of price for the Employer while Option F
1|Page
(Management contract) provides the least level of certainty of price of the contract.

Option A is a priced contract, where a lump sum is tendered for each activity on the Activity
Schedule (an activity schedule is a list of activities expected to be undertaking by the
contractor in constructing the works). The contractor tenders a firm price for the works based
on each activity in the schedule and an ascertainable total contract sum is easily established.

Option B is a priced contract based on a bill of quantities (a bill of quantities contains a list
of work items and quantities with the unit of measurement and a method of measurement).
The Contractor tenders rates and prices for the items on the bill of quantities. Option B
provides lesser certainty of price when compared to Option A. This is because the quantities
stated may change thus affecting the price; this is often the case. The Contractor is paid for
work done based on the actual quantities used. Usually, the risk of changes to the quantities
stated in the bill of quantities is borne by the Employer who traditionally prepares the
document. The Contractor bears the risk of the adequacy of the tendered rates and prices.

Option C is a target contract based on an Activity Schedule. Option C is next to option A with
regards to certainty of price. Option C provides for a maximum price - that is the target price.
Above this price the Contractor is liable to pay the Employer back at agreed percentages.
Option D is a target contract based on a bill of quantities. Because it is based on a bill of
quantity, it offers lesser certainty of price than Options A and C, as changes to the quantities
contained in the bill of quantity will significantly affect the price of the contract.

Options E and F offer the least certainty on price. Under Option E, the Employer pays for all
allowable costs incurred in constructing the works. The Contractor quotes his fee for carrying
out the works and this is paid along with all other legitimate costs incurred by the Contractor
in constructing the works. As there is no assurance as to the value of the costs and no
incentive to keep the costs down, there is even lesser certainty with regards to the price of
contract than previous options.

Option F is a management contract, apart from the works that the Contractor is expected to
complete, his main duty is to manage works let out to various sub-contractors. It is the
Employer that bears the risk of the costs of the various sub-contracts.

1.2. Employer's Requirement

The Employer's requirement (note that this is now called the ‘Scope’ under NEC4) sets out
the specifications and description of the works required by the Employer. Depending on
circumstance of a project, the Employer's requirement may be finalised or may be developing
and subject to changes as the project proceeds. The main Options provide the Employer with
a mechanism to manage this risk.

Options A and B being priced contracts are most suitable for projects where the Employers
requirements are finalised and subject to few changes as the work progresses. Options C and
D provide more flexibility than the priced contracts. However, to allow realistic target prices
to be set, a reasonable level of definition of the Employer's requirement is required. An
Employer that is keen on having maximum flexibility in developing or changing his
requirements for a project while the construction work proceeds is best advised to use either
Options E or F. These are costs reimbursable contracts and can accommodate the Employer

2|Page
changing the description of his requirements for the project or to develop them further.

1.3. Design
In the Works Information documents, the parties provide for the division of design
responsibilities in the NEC3 ECC. The parties are at liberty to assign this responsibility to
either the Contractor or the Employer. They are also at liberty to assign the design
responsibility to both the Contractor and the Employer, specifying the aspects of the project
to be designed by each party. The main options support this choice. However, some main
options are more suited to certain devolution of design responsibility than others.

Option A is flexible on design. While it is suitable for the Contractor’s design of the project, it
is ideally suitable for an Employer's design. The essential element in Option A is that the
design is complete at commencement (preferably at the tender stage). Option B relies on a
bill of quantity prepared by Employer and so is more suited to the Employer's design of the
project. Option C is like Option A. However, since there is a target price and therefore an
incentive to complete the works for less than the target price, the Contractor has greater
flexibility and motivation to develop a cost effective and appropriate design. Option D shares
the same fate with Option B and is more suited for the Employer's design.

Option E permits maximum design flexibility. It is suited for design by either party and allows
the development of the design as the works proceed. Option F is not very suitable for
Contractor’s design. It is particularly suitable for sub-contractor design and relies on specialist
sub-contractors who undertake their own designs.

1.4. Early Start

In some projects the predominant priority is timely completion. One of the variables that may
determine this is an early mobilization to site for the construction to commence. The main
options provide a mechanism to manage this. If it is the desire of the Employer to have early
mobilisation, the least favourable options are Options A and B. Being fixed priced contracts
they require the complete finalisation of many aspects before commencement and therefore
have the longest lead times. The intermediate choice is Option C and D, being target contracts
they require a reasonable level of finalisation but lesser than the priced contracts and
therefore have a shorter lead-time than Options A and B.

Options E and F provide the ideal choice for early mobilisation and start. As costs reimbursable
contracts, work may commence with a lesser amount of definition and therefore the shortest
lead-time.

1.5. Allocation of Risks and Compensation events

It is often asked: how the main options relate to the allocation of risks under the NEC3 ECC
and the compensation events that may arise from these risks? The main options, apart from
the price risk discussed above and the introduction of some specific compensation events to
cater for certain main options (i.e., compensation events for bill of quantities), have no effect
on the risk distribution of the NEC3 ECC and compensation events. The NEC3 ECC deliberately
pursues a policy of common allocation of risks throughout the main options. This is to ensure
consistency in the application of the core clauses and compensation events.

In conclusion, the appropriate choice of a Main Option by the Employer reduces the probability

3|Page
for disputes especially after construction commences. In the next section, we examine in
more depth the working of the main options.

2. Examination of the Main Options

The Main Options labelled A - F may be categorised into three classes, to wit:
• Priced Contract
• Target Contracts
• Cost reimbursable contracts

We will examine these classes in the above order.

2.1. Priced Contracts

Priced contracts require the Contractor to tender a firm price at the tender stage. There are
two priced contract options to wit: Option A priced contract with an Activity Schedule; and
Option B priced Contract with bill of quantities.

Option A
In option A, the Employer pays the Contractor for activity completed. The activity schedule
sets out a list of activities that the Contractor will need to provide the works required by the
Employer. For instance, in a construction activity taking place in an area of forest growth -
clearing the area will form an activity item. For each item on the schedule, the Contractor
provides a lump sum quotation. The contract price is the sum of the lump sums of all the
activities listed.

The Contractor is paid for activities that are completed by each assessment date. The amount
to be paid is the amount entered in the tender against that activity. Because of these, it is
important that the description of the activities is not lengthy to allow for regular cash flow to
the Contactor. Theoretically, fewer compensation events should occur in Option A contracts
since there is a well-defined and finalised works information supported by an appropriate
lump sum amount. However, this is not always the case. Where there is compensation event,
the assessment of any compensation event that is implemented will be added to the lump
sum price of the relevant activity. The assessment of the Compensation events is priced using
the schedule of costs components- and under NEC3 ECC, only the shorter schedule of costs
components is used. The Schedule of Costs Components is a complete identification of the
components of cost for which the Contractor will be reimbursed. It includes such headings
such as People, Plant, Machinery, and Equipment. The Shorter Schedule of Costs Components
is a simpler and less itemised version of Schedule of Costs Components.

Option B
Option B is a priced contract with bill of quantities. A bill of quantities is a list of work items
and quantities that includes the unit of measurement and a method of measurement. The
method of measurement describes the items to be included in the list and how the quantities
are to be calculated. The Employer, who bears the risk of the changes in quantities contained
therein, usually prepares the bill. Option B requires that the Contractor at the time of making
the tender should provide rates and prices against each item included in the bill of quantities.
The Contractor is paid for the actual quantity of work completed as identified on the bill of
quantities. The amount is determined by the prices that were tendered against the items on
the bill of quantities. The rates and prices are multiplied to the measured quantity of the work

4|Page
completed at the assessment date. Option B is therefore a measurable contract.

Unlike Option A, this Option does not require any activity or work to be completed before
payment. Where a compensation event occurs, the parties are to use the Schedule of Cost
Components, except the Contractor and the Project Manager agree to use the bill of
quantities. Option B also contains three additional compensation events (B60.4, B60.5 and
B60.6) that reflect the inaccuracy that may arise in the bill of quantities and such related
issues.

2.2. Target Contracts

In target contracts, the Contractor submits a bid that accounts for his assessed costs for
doing the works, his overhead costs, profit, and any other tender issue. The amount on the
bid when accepted by the Employer becomes the target price. During the construction, the
Contractor is paid at Assessment dates his defined costs (costs that he has already expended)
plus the fee. When the works are completed, the Employer would then assess the final Price
on Work Done to Date (PWDD) and the target price. Where the PWDD is above the target
price, the Contractor will be expected to pay the Employer back some of the money paid to
him at a pre-agreed percentage. Where the PWDD is less than the target price, the Contractor
is entitled to further payments based on a pre-agreed formula. In a target contract, the
parties share the pain or the gain.

Central to target contracts in the NEC3 ECC, is the concept of disallowed costs. This ensures
that the Employer does not pay for the inefficiency of the Contractor. Disallowed costs are
items that will not be considered when assessing payments due under the target contracts;
they are also used in the cost reimbursable contracts. They include such items as costs of
correcting faulty work by the Contractor, costs of correcting defects caused by the Contractor,
not complying with Works Information, costs of Plants and Materials not used to provide the
works among other items.

There are two target contracts in the NEC3 ECC that is Option C (target contracts with an
activity schedule) and Option D (target Contract with a bill of quantities).

Option C
Option C requires the Contractor to tender a lump sum price to an activity listed in the activity
schedule. The sum of all the prices constitutes the target price. The Contractor is paid at
assessment dates in accordance with the activity schedule. Payment at such dates covers the
Contractor’s defined costs i.e. - amounts due sub-contractors, plus amount due according to
the Schedule of Cost Components, plus profit and overhead costs less disallowed costs.
Changes to prices quoted by the Contractor for implemented compensation events are used
to change the prices in the activity schedule. This allows the target price to be realistic and
follow the changes in the works.

On completion, PWDD (final Price on Work Done to Date) is compared to the target price. The
Contractor and the Employer in a predetermined fashion share the difference between the
two amounts. Where the PWDD is greater than the target price, then the Contractor pays his
share of the difference. If on the other hand the PWDD is less than the target price, the
Contractor receives his share of the difference.

5|Page
Option D

Option D follows the discourse on Option C above except that in Option D, a bill of quantities
is used and the risk of the accuracy of the quantities lies with the Employer.

2.3. Cost reimbursable Contracts

In cost reimbursable contracts the Contractor is reimbursed all expenditures less any
disallowed costs. He is also paid his quoted fee. The cost reimbursable contract can be well-
managed using forecasts and audits. There are two cost reimbursable contracts in the NEC3
ECC; these are the Option E and Option F.

Option E
In option E the Contractor is required to tender his fee for undertaking the contract. During
the construction, the Contractor is paid his defined costs (expenditure on constructing the
works less any disallowed costs) plus fee. In terms of costs, compensation events assume
less prominence under this option. A more costs conscious regime would require the
Contractor to provide forecasts of defined costs regularly.

Option F
Option F is a management contract. The Contractor contracts directly with the sub-contractors
and manages them on behalf of the Employer. The Contractor is paid a fee for his work and
the Employer bears the price risk of the value of the sub-contracts. The Contractor is also at
liberty to indicate in the contract data that he intends to undertake some of the construction
himself. The discourse above covers the critical issues relating to the Main Options under the
NEC3 ECC. The resources section provides an article which considers Option C further.

3. Secondary Options in the N E C 3 ECC

There are eighteen different secondary options in the NEC3 ECC. Although combining one of
the main options to the core clauses completes a NEC 3 ECC contract, rarely in practice does
a NEC3 ECC contract fail to include a selection of some of the secondary options. The reason
the NEC3 ECC adopts the pick and mix approach is that some of the secondary options may
result in extra costs or may not be suited to the relationship between the parties. While the
traditional contracts include these options irrespective of the conditions, the NEC3 ECC offers
the parties a choice. For instance, retention or performance bond will incur costs for the
Contractor, which will be reflected in the bid. An Employer not requiring this option in a
relationship with the Contractor could save it some costs by not choosing it. The list of
secondary options includes the following:

• Option Xl: price adjustment for inflation

• Option X2: changes in the law.
• Option X3: multiple currencies.
• Option X4: parent company guarantee.
• Option X5: sectional completion
• Option X6: bonus for early completion.
• Option X7: delay damages.
• Option X12: partnering.

6|Page
 • Option X13: performance bond.
• Option X14: advanced payment to the contractor.
• Option X15: limitation of the contractor’s liability for its design to reasonable skill and
care.
• Option X16: retention.
• Option X17: low performance damages/low service damages.
• Option X18: limitation of liability.
• Option X19: task order.
• Option X20: key performance indicators.
• Option X29: climate change (to be published in consultative
• Option Y (UK) 2: The Housing Grants, Construction and Regeneration Act 1996 (dealing
with payment and supervision).
• Option Y (UK) 3: The Contracts (Rights of Third Parties) Act 1999

The final secondary Option Z: is additional Conditions of contract. Most of the options are
self-explanatory, below is an analysis of some of the secondary options:

Options X13 (performance bond) and Option X 4 (parent company guarantee):

These are alternatives and should not be used together. The NEC3 ECC provides the Works
Information is to specify the form of the bond. This gives the parties maximum flexibility in
structuring the requirement of the bond to meet the specific needs of the project.

Option X14 (advanced payment):

This option is usually used where the Contractor is to undertake a financially intensive activity
at the start of the construction. It allows the Employer to lend money to the Contractor and
be repaid at the later stages. Information on the advanced payment is to be provided in the
contract Data. It includes the amount of the advanced payment, the period that the
Contractor will be required to commence repayment instalments, the amount of the
instalments and, if required, an advance payment bond.

Option X3 (multiple currencies):

This could be especially important in an international contract. It allows payment to proceed
in different currencies. In the Contract data the parties are to specify the currency of the
contract, the exchange rate and a list of items and activities that will be paid in a currency
other than the currency of the contract.

Option X5 (sectional completion):

This option allows the Employer takeover sections of the work that has been completed.
Where used, this option sets out separate completion dates for sections of the works.

Option X15 (design liability limitation):

As the name implies, places limits on the Contractor's design liability. Where Option X 15 is
not part of the contract, the Contractors design must be fit for the purpose; this option
reduces this liability to the limit of the application of reasonable skill and care.

Option X1 (price adjustment for inflation to be used with main options A - D): Option E and
F are cost reimbursable and do not require adjustment for inflation. This option is used to link
prices of parts of the contract to the inflation rate.

7|Page
Option X16 (retention):
This allows the Employer to retain some money due to the Contractor until after the defects
correction period.

Option X6 (bonus for early completion):

This option allows the Employer to provide incentives for the Contractor and encourage him
to complete the contract early. The amount per day is to be stated in Contract Data.

Option X7 (delay damages):

This is a form of liquidated damages imposed on the Contractor for not meeting the
completion date. The amount of delay damages is to be stated in the Contract Data. It is
important that in common law jurisdictions, the damages are realistic estimates because
penalties will be unenforceable.

The New Option X29 (Climate Change)

The NEC published the secondary Option X29 in July 2022 after a consultative version of a
new secondary option on climate change was released in April same year. The aim of this
option, according to the NEC, is to ‘incentivise the NEC supply chain to meet the client’s
emissions and sustainability targets, and to link these into core processes of the contracts,
such as early warnings, the programme and compensation events. In addition, contractors
will be encouraged to propose changes to the scope that will reduce the climate-change
impact of both the construction and operation of the client’s asset.’ 1 As NEC points out,
emission reduction and sustainability are technical issues which, ideally should be taken care
of within the scope of the project. Option X29 has been developed to work with the diverse
types of NEC forms. So, there is a specific Option29 tailored to requirements of the ECC form.
Copies of the new Optionx29 documents and the Guidance are available on Moodle.

Option Z:
This option is to be used where the parties intend to introduce additional conditions of contract
to the NEC3 ECC. It is therefore one of the most important options as it allows the parties
amend the NEC3 ECC to fit their purpose. This completes our study of the main and secondary
options provided for in the NEC3 ECC. The next topic provides an overview of the changes
introduced by the NEC4 ECC.

4.Dispute Resolution options

The NEC 3 ECC provides two options for dispute resolution. These are described as Options
W1 and W2. Whilst Option W1 can be used in all situations, Option W2 is designed for use on
UK contracts to which the Housing Grants, Construction and Regeneration Act 1996 applies.
Also note that under the NEC4 ECC, a third Option W3 has been introduced. We will say more
on that next week. The parties are to indicate in the Contract Data Part I, which of the options
has been chosen for the project. As we will see below, the two options have many identical
clauses, the differences between the two options are that while option W1 sets out specific
timescales for notifications of disputes, and category of disputes to be notified by either party,
W2 allows the reference of any dispute by either party at any time. A summary of the

1
https://www.neccontract.com/About-NEC/News-and-Media/New-NEC-secondary-option-will-incentivise-net-zero-emissions
8|Page
important clauses in both options is set out below:

Option W1

1. Clause W 1.2 (1) provides that the parties are to appoint the adjudicator jointly at the
commencement of the contract.

2. Clause W 1.2 (2) states that the Adjudicator is to act impartially and decide disputes
as an independent Adjudicator and not as an Arbitrator. Without the second arm of this
clause, some jurisdictions would treat the adjudication proceedings as arbitration.

3. Clause 1.3 (1) sets out the schedule for adjudication specifying which disputes could
be referred to adjudication by the Employer and the Contractor. Generally, the
Employer may not refer to adjudication an action of the Project Manager or the
Supervisor, except where a Compensation Event quotation is deemed accepted
because the Project Manager failed to respond within the timescales set out in the
contract.

4. Clause 1.4 (5) provides that where the tribunal selected is arbitration. The details of
the seat of arbitration, the law of arbitration on other related concepts are to be set
out in Contract Data part I.

5. Clause 1.4 (6) provides that the adjudicator may not be called as a witness. Clause 1.3
(11) entitles the adjudicator to correct clerical and ambiguities within two weeks of
making the decision.

6. Clause 1.4 (3) allows either party to proceed to the tribunal stage where the adjudicator
fails to notify his decision within the stipulated time. The party intending to proceed to
the tribunal stage must notify the other party within four weeks after the date that the
adjudicator should have made his decision known.

Clause 1.4 (4) stipulates that the tribunal settles the dispute referred to it and may review
any decision of the adjudicator and any actions taken by the Project Manager or Supervisor.
It also states that parties are not limited to the information and evidence provided during the
adjudication during the arbitration proceedings.

Option W2

1. Clause W 2.1 (1) provides that the parties may refer to adjudication any dispute arising
from or is in connection with the contract to adjudication at any time. This is the major
difference between the two options.

2. Clause W 2.2 (1) and (2) has the same clause content as clauses W1 1.2 (1) and (2)
discussed above (clauses relate to joint appointment of the adjudicator and impartiality
of the adjudicator).

3. Clause W 2.3 (1) deals with notification of adjudication. It provides that party referring
a dispute to adjudication is to serve a notice of adjudication. The notice is to set out a

9|Page
 brief description of the dispute and the decision sought. The notice is to be sent to the
other party and the adjudicator named in the Contract Data. The adjudicator is to
inform the parties whether he will be able to decide the dispute or not within 3 days of
receiving the notification. If he does not do so, either party may act as if he has
resigned.

4. Clause W 2.3 (7) deals with assessment of costs or time and is identical to W 1.3 (7)
discussed above.

5. Clause W 2.3 (8) specifies that the adjudicator's decision is to be notified within twenty-
eight days from the referral of the dispute. It allows for a further fourteen days on the
agreement of the referring party. It also allows the parties to agree to further
extensions.

6. Clause W 2.3 (9) deals with the effect of notification of the dispute to the adjudicator
and is identical to clause 1.3 (9) above.

7. Clause W 2.3 (11) is identical to clause 1.3(10) discussed above. Clause W 2.3 (12) is
identical to 1.3 (11) discussed above. Clause 2.4 (2) has identical provisions to Clause
1.4 (2) mentioned above. Clause 2.4 (3) is identical to Clause 1.4 (4) on powers of the
tribunal discussed above. Clause 2.4 (4) is identical to Clause 1.4 (5) above, which
discusses arbitration, and finally Clauses 2.4 (5) and 1.4 (6) are identical in their
provisions that an adjudicator may not be called as a witness at the tribunal.

References

1. Mitchell B, et al, Introduction to the Engineering and Construction Contract - Managing

Reality - Book one, Thomas Telford publishing, 2005.
2. Broome J, The NEC Engineering and Construction Contract- A user's guide, Thomas
Telford publishing, 2005.
3. Eggleston B, The NEC 3 Engineering and Construction Contract- A commentary.
Blackwell Publishing Company 2006.
4. Michael Rowlinson, A practical guide to the NEC3 engineering and construction contract
(2015) [Available as eBook in the RGU Library through the Reading List]
5. Copies of the NEC3 ECC contract forms (Core Clauses, Main and Secondary options are
available in a folder on Moodle.
6. The NEC3 ECC Guidance Notes are also available on Moodle via the NEC3 Folder.
7. J. Mante, ‘Mutual trust and co-operation under NEC 3&4: a fresh perspective’ Const.
L.J. 2018, 34(4), 231-252 (on Westlaw)
8. J. Mante, Good faith, Mutual trust, and cooperation: recent judicial insights.
Construction law journal, 2022 (on Westlaw)

See also
9. Fraserburgh Harbour Commissioners v McLaughlin & Harvey Ltd, 2021 S.L.T.
1487 (2021)
10 | P a g e
10.Greater Glasgow Health Board v Multiplex Construction Europe Ltd [2021]
CSOH 115
11.Van Oord UK Ltd v Dragados UK Ltd, 2021 WL 04533227 (2021)

11 | P a g e