Early contractor involvement under NEC4 Option X22

NEC4 Option X22

NEC4 introduced ECI via option X22: ‘option C’ – target contract with activity schedule; and ‘option E’ – cost reimbursable contracts.  It divides the work into up to three stages as follows:

• the entirety of the works is divided into stage one and stage two, so the whole of the works is subject to the ECI procedure; or
• only parts of the works are designated as stage one and stage two, with stage three (the remaining works) not subject to Option X22. 

The client sets the ‘budget’ in stage one and stage two, and the ‘budget incentive’ (similar to the ‘contractor’s share’ under the target cost contracts) encourages the contractor to complete for less than the budget. 

For stages one and two, the contractor provides:

• stage one – forecasts of the defined cost at the agreed intervals;
• stage two – design proposals including forecasts of their effects on the project cost and the accepted programme;
• stages one and two – forecasts of the project costs (with the project manager) at the agreed intervals; and  
• approvals and consents from ‘others’.

The project manager either accepts or rejects the contractor’s forecasts and design proposals. Following the project manager’s acceptance of the contractor’s stage two design proposal, the client issues the ‘notice to proceed’ to the contractor to proceed to stage two. 

If no ‘notice to proceed’ is issued, then stage two work is omitted from the scope. It therefore appears that Option X22 gives the client considerable discretion to choose whether to proceed with the stage two works. 

However, the client can only engage another contractor for the stage two works if the contractor has failed to: (i) achieve the performance provided in the scope; and (ii) agree the stage-two prices with the project manager. 

Option X22 only requires the contractor to provide design proposals for stage two, so presumably, the requirement for any contractor’s stage one design is set out in the scope, and subject to the project manager’s acceptance under clause 21. NEC4’s Option X22 seems more focused on monitoring and controlling the budget, total of the prices and project cost, than on obtaining the contractor’s design. 

Advantages

ECI offers several advantages when used in this way.

The contractor may be best placed to interpret data gained from feasibility studies to produce the optimum design:

• the scope benefits from the contractor’s early input, including from their design consultants and specialist subcontractors; and
• better coordination and integration of the design’s key elements.

There may be greater scope for value engineering, the earlier the contractor is involved:

• greater transparency of cost if the contractor’s supply chain engages with the client; and
• opportunity to consider the best pricing model for the contract, e.g. fixed price, target cost, or cost-reimbursable. 

Employer’s requirements can be more precise in terms of programme, including sectional completion, or ‘key dates’, through better programming of design development, including approving and accepting the contractor’s design.

Disadvantages

ECI often proceeds without any formal procedure, so a clear record of design development should be kept. Other disadvantages may be:

• ECI under NEC4 has less focus on design;
• the employer may be concerned that the contractor may withdraw at any time; 
• the threat of contractor withdrawal may place the employer at a disadvantage when negotiating a price with the contractor. This can present a significant risk to the employer, particularly when the contractor’s early involvement has ‘crossed the Rubicon’, where his withdrawal would place the project in jeopardy; and
• the contractor may suspect the client’s participation in the ECI process is purely speculative and the client may choose not to proceed with the project. 

The parties may wish to protect themselves by formally agreeing conditions for the ECI process by agreeing:

• a non-disclosure agreement (NDA) so the parties don’t disclose any of the project’s details – either without their written authorisation, or for a defined period;
• the contractor’s agreement that they can only withdraw from the ECI process after a period of notice;
• the contractor may require an ‘exclusivity’ agreement that the employer will not solicit the involvement of any other contractors; and
• the contractor may insist on reimbursement of his reasonable costs of participating in ECI process if either: (i) the parties agree not to continue with the process, or (ii) the contractor is not awarded the building contract within an agreed period.

Guy Higginbottom is a director of Guy Higginbottom Consultancy Limited, which provides contractual, commercial and expert advice. This article is an excerpt from his book, Design and Build Contracts, published by Wiley Blackwell and available at www.wiley.com.