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Endangered Species : nec4 Sub-Contracts

Updated: Jan 1, 2020

Are Hong Kong’s Contractors ready for nec4 Sub-Contracts?

The new nec4 Engineering and Construction Contract includes glowing endorsements from two different governments. The first comes from the UK and recommends that public sector organisations use NEC4 contracts when procuring construction to ‘help to deliver efficiencies across the public sector’:

The second comes from Hong Kong and promotes ‘transition from NEC3 to NEC4 in public works projects in Hong Kong’. The Bureau expects nec4 to ‘enhance collaborative partnering, unlock innovations and achieve better cost management and value for money in public works projects.’

nec4’s intended application is clarified as follows:

“This contract should be used for the appointment of a contractor for engineering and construction work, including any level of design responsibility”

The Hong Kong Government has put its cards firmly on the table. There are whispers that nec4 will be mandated on all future public works projects with values over HK$1.0 Billion; there will be many of these.

So what does nec4 have to offer? It’s essentially an evolution of NEC3. Drafting has been clarified where arguments commonly arose. Terminology has been revised for ease of understanding - for example ‘Works Information’ is now called ‘Scope’. Substantial changes are few. Contractors in Hong Kong that are familiar with NEC3 should easily transition to nec4.

But will those same Contractors embrace nec4 Subcontracts?

Hong Kong’s Contractors mostly welcome the collaborative environment encouraged by NEC contracts, sharing project risks and rewards upstream with the Government. Typically, however, they still use in-house forms of subcontract or add extensive ‘Z-clauses’ to NEC subcontract forms.

This is understandable. Contractors' in-house forms of subcontract usually pass down of large shares of project risk - and their associated costs - to subcontractors. More risk passed down to subcontractors means less risk for them. This keeps tender prices down.

Many Contractors employ little or no direct labour. They subcontract the lion’s share of work. Why shouldn’t these subcontractors take their fair share of risk? And, of course, subcontractors have a choice. They don’t have to sign a subcontract if they don’t like it.

But… does maximised risk transfer to specialist trade contractors meet NEC’s expectations of equitable risk and reward sharing? Does it create the best environment for successful project delivery? Probably not.

Is there anything in nec4 which might encourage contractors to use nec4 Subcontracts with little or no amendment? Let’s take a look:

Clause 26.3 (Subcontracting) :

“The Contractor submits the proposed subcontract documents… for each subcontract to the Project Manager for acceptance unless

  • the proposed subcontract is an NEC contract which has not been amended other than in accordance with the additional conditions of contract or

  • the Project Manager has agreed that no submission is required”

Clause 91.2 (Reasons for Termination) :

“The Client may terminate if the Project Manager has notified that the Contractor has not put one of the following defaults right…

  • Appointed a Subcontractor for substantial work before the Project Manager has accepted the Subcontractor.”

In summary, the Contractor cannot commence any substantial subcontracted work before the Project Manager has accepted the proposed Subcontractor; he risks termination if he ignores this process.

The Contractor must submit his proposed subcontract documents to the Project Manager for acceptance. No such submission is required if the proposed subcontract is an NEC contract, revised only to reflect amendments in the Contractor’s Main Contract.

There is an expectation that projects under nec4 will deliver, amongst other things, enhanced collaborative partnering. It seems reasonable to expect the Project Manager to consider whether proposed subcontract documents will encourage such partnering and to ask the Contractor, if an nec4 subcontract isn’t used, “Why not?

A Project Manager working under nec4 may feel duty bound to encourage a collaborative working environment between the Contractor and his specialist trade contractors. If the Contractor requests his acceptance of a traditional, one sided, in-house subcontract, the Project Manager may consider that such an imbalance with the conditions of Main Contract - with its risk and reward sharing ethos - may jeopardise successful project delivery.

Valuable time will be wasted whilst discussions take place between the Project Manager and the Contractor to find a solution - in turn delaying placement of the subcontract, which is often late already. This may take weeks or even months.

The Contractor can, however, avoid this risk entirely - by using an nec4 form of subcontract incorporating only back-to-back amendments to his own Main Contract.

But will he? It will be interesting to see how this tug-of-war plays out .

If you’re a Contractor, Subcontractor, Employer or Project Manager and want to find out more about subcontracting under nec4 - or any other service offered by rhConsult Limited - click here to arrange a chat or a no-cost initial consultation at a time and place to suit you...

...or call Rob Hill on +852 5721 0122

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