NEC2 and NEC3 compared

01/08/08

By Alan Williamson writing in Construction Law Review 2008

WITHIN THIS ARTICLE, I consider the changes made between NEC2 and NEC3 with regard to working areas overheads and the cost components used as a basis for their calculation.

It is useful to compare the items of overheads costs, which are deemed to be included within the working areas overheads uplift percentage, between the two editions of the NEC. As can immediately be seen from Table 1, the major change made is the deletion of all site accommodation orientated items from NEC3. The only other minor change being that of hand tools, which, although still included, are clarified to not be those that are powered by compressed air.

These accommodation items are now deemed to constitute cost components in their own right, as can be seen by a reading of the schedule of cost components within NEC3, where in the paragraph, equipment 2, it is stated:

“The following components of the cost of equipment which is used within the working areas (including the cost of accommodation but excluding equipment cost covered by the percentage for working areas overheads).”

This would seem to be a sensible amendment, as working areas overheads are intended to reimburse the contractor the cost of its preliminaries orientated items but, under the old regime, it could have found itself in a loss situation through not recovering its full actual cost here. Clearly, the accommodation elements were the most costly of the charges listed under item 44 of the schedule of cost components in NEC2. Thus, at the bottom and top of the ‘S curve’ on a project, when site resources are building up or running down, the contractor may not have enough people on site to generate sufficient working areas overheads to cover the cost of its preliminaries orientated items.

This position would have been inequitable as, for example, a compensation event instructed at the tail end of a project may not have generated sufficient working areas overheads to cover all of the item 44 charges that were deemed to be included within it. Such a scenario cannot be right, as no compensation event arises through the default of the contractor. This potential inequality is overcome by the amendments made in NEC3.

As the working areas overheads charge is calculated by reference to the total actual cost of people cost components, it is worth considering these and what is deemed to be included in the value to which the percentage uplift is applied.

In NEC2, this is stated as being the total of the people items 11, 12 and 13, but in NEC3 this is expanded to include item 14. I would not propose to list a full description of people cost components from both editions, but merely highlight major differences in this regard.

Three bullet points in the NEC2 schedule of cost components describe various definitions of people. The first of these points has not been amended between the two editions. The second has the wording “...for a period of not less than one week” deleted. This is a wise amendment, as the contractor would often have essential people visiting the working areas for less than one continuous week at a time and, under NEC2, would not have been reimbursed for these people. However, the most significant amendment is moving the third bullet point from NEC2 to a new people item 14 within NEC3, which reads:

“The following components of the cost of people who are not directly employed by the contractor but are paid by him according to the time worked while they are within the working areas. Amounts paid by the contractor.”

I would contend that this point deals specifically with labour-only subcontractors or agency staff (quantity surveyors, engineers etc) who are paid either hourly or daily by the contractor. This is a significant amendment, as under NEC2 the contractor would have had to break down the hourly rates of these labour only subcontractors or agency staff into the cost components under the people items 11, 12 and 13 in order to be reimbursed. Whilst these individual components of people costs would be known for the contractors own in-house labour and staff, they clearly would not be for people it was employing on an invoiced hourly or daily rate.

However, under NEC3 these invoiced costs are allowed as people costs, to which the working areas overheads percentage is simply added. I would therefore consider this to be a workmanlike amendment, which makes the operation of the assessment of the amounts due much more practical.

An interesting aside to this issue is with regard to the worked examples of the contract data part two within the guidance notes for NEC2 and NEC3. In the worked example on page 129 of the NEC2 guidance notes, a working areas overheads percentage of 20% is inserted. From my own experience, I would consider this slightly low in practice, with a figure in the region of 25% more typically being inserted. However, within the NEC3 guidance notes, to be found on page 153, a higher percentage of 371⁄2% has been inserted. One would have expected this to be somewhat lower than the figure inserted in NEC2, as the uplift does not now have to cover site accommodation orientated items — and the people cost components that generate the percentage are broadly the same. Whilst it is recognised that these are only guidance notes, and do not form part of the contract, I still find this somewhat odd.

In concluding, I would have to say that the amendments made to the calculation of working areas overheads within NEC3 have generally been thought through well and make the mechanism more practical in real life situations.

Alan Williamson MRICS MInstCES MBIDP, is a Senior Consultant with Schofield Lothian.
e: alanwilliamson@schofieldlothian.com