NEC4 - All change please?

This article provides an introduction to the new NEC4 Term Service Contract (TSC4), which updates and replaces the NEC3 Term Service Contract April 2013 edition (TSC3). Fans of TSC3 shouldn’t be too worried. The changes introduced in the TSC4 appear to be helpful and to build on the good points in the TSC3. Users do however need to be aware of the changes since entering into a TSC4 will inevitably mean changes to some of the previously familiar terms and processes.

All NEC contracts are designed to embrace partnering and be flexible to use. The TSC4 is no different. It is for use when an employer needs to receive services to an existing asset. In my field of work (construction) the most common uses of the TSC are for FM and for maintenance and recurring works requirements. The TSC focuses on proactive risk management and its philosophy is to deal with risks as and when they arise, which requires both employer and contractor to proactively solve problems.

As with the TSC3, the TSC4 booklet is made up of the core clauses (the main terms and conditions), main option clauses (the pricing and dispute resolution basis), secondary option clauses, cost components and contract data. So far so good. In addition to the TSC4 booklet other documents that form the contract and which either the employer or the contractor are to provide are the Scope (formerly the Service Information), the Contractor’s Plan, the Contractor’s Scope for its plan, the Price List.

Other documents may also be required depending on which secondary option clauses are chosen: X10 requires an information execution plan (BIM); X12 requires a Schedule of Partners and Partnering Information (where multiparty collaboration is chosen); X17 requires a service level table when including low service damages; and X20 requires an incentive schedule if KPIs are to be used.

So what’s new?

Terminology

New features – Optional clauses

New optional features of the TSC4 include:

• Option X1 – Price adjustment for inflation: This now enables the parties to list the various elements which make up the Price in order to apply different elements of the total Price to different indices. This is something I have been doing for a while with a Z clause and so is a welcome addition to the TSC4. 
• Option X8 – Undertakings to the Client and others: Previously only used in the Professional Services Contract, this is a new addition to the TSC4 and is effectively a mechanism for third party rights to be created in favour of the Client and others from Subcontractors and in favour of others from the Contractor. 
• Option X10 – Information modelling: This introduces the concept of BIM into the TSC4. 
• Option X11 – Termination by the Client: Previously contained in core clause 91.1, this has been removed and made optional but if selected the consequences of termination by the Client in this circumstance remain the same as in TSC3. 
• Option X19 – Termination by either party: This enables either party to terminate the contract at will after expiry of a minimum service period without the cost consequences of A2 to A4. 
• Option X21 – Whole Life Cost: This enables the Contractor to make proposals for changes to the Scope which reduce the cost of maintaining the Affected Property, as well as a process for quotations and implementation, without it being administered as a compensation event. 
• Option X23 – Extending the Service Period: Something a lot of clients used to require bespoke drafting for in the TSC3. It enables the contract to run for a fixed term with optional extension periods. 
• Option X24 – The accounting periods: This enables the Client to achieve financial closure at set periods throughout the contract. This may be chosen to coincide with each anniversary after the mobilisation period has ended (in an FM contract for example) or more generally to align with the Client’s financial year. 
• W1 – Resolving and avoiding disputes: This introduces a dispute resolution mechanism to be used before the parties resort to adjudication. In option W1 (when the Construction Act does not apply) the escalation procedure is mandatory before adjudication, litigation or arbitration. In option W2 (when the Construction Act applies) it is optional since the right to adjudicate is a statutory right and a contractual dispute resolution clause cannot fetter that right. It is effectively an escalation procedure for senior representatives of the parties to attempt to resolve disputes before they escalate. 
• Task Orders in TSC3 were an option to be included but now form part of the core clauses.

New features – Core clauses

• TSC4 introduces an express prohibition on corrupt acts which includes offering, promising, giving, accepting or soliciting an advantage as an inducement for an action which is illegal, unethical or a breach of trust. The contract is drafted to work in an international setting and so there is no express reference to English laws but this would cover the Bribery Act. 
• Disallowed Cost has disappeared from the core clauses and has instead been placed in main options C and E. This means that for priced contracts (option A) Disallowed Cost is no longer removed from Defined Cost when assessing a compensation event in certain circumstances. 
• There are new concepts of Service Area and shared services. The former covers the Affected Property and other areas used solely to provide the services. The latter covers areas used by the Contractor to provide services for more than one contract (the TSC4 guidance gives an example of a Contractor’s call centre used across multiple contracts). 
• Core clause 3 relating to time has been expanded from three to fifteen clauses and provides a more prescriptive process for submitting, revising and approving the Contractor’s plan, which makes the processes clearer for all concerned. Service Managers need to be aware however that failure to respond in the way and in the times set out lead to deemed acceptance of the plan. 
• The TSC4 now expressly refers to a quality management system (details of which are to be set out in the Scope) and a quality policy statement. 
• A final assessment process has been included in the contract which requires the Service Manager to make a final assessment of the final amount due (and certifying a final payment) within thirteen weeks of expiry or termination. 
• Compensation events now also include: 
  • a change to a Task or to the Affected Property, 
  • an instruction to correct a mistake in the Price List (this places the risk of mistakes on the Client regardless of who prepared and completed the Price List),
    and may not be notified after eight weeks after the end of the Service Period, leaving the Service Manager with five weeks to assess and certify the final payment. In the TSC3 compensation events could not be notified after the end of the Service Period, so this change allows compensation events to be raised for a further eight weeks after the end of the Service Period. 
• There is now a mechanism for the Service Manager to request a quotation from the Contractor for a proposed instruction, which the Service Manager can accept before giving the instruction or reject. If the Service Manager does not accept this or reply then the quotation is not accepted. If this happens the Service Manager can instruct a change and use the compensation event process to ask the Contractor to submit a quotation instead. 
• There is now a right for the Contractor and Subcontractors to use materials provided by the Client. The TSC4 however does not provide a reciprocal licence back to the Client.

The TSC4 contains some welcome updates and nothing too radical. The key to making it work remains the same. That is, a good Scope document, a detailed Price List and a Service Manager with the time, skills and experience to administer the contract in the way it was designed to be administered.