Defects under NEC4 Contracts – summary of key terminology and mechanisms

The concept of Defects under NEC contracts is central to the management of risks and liabilities related to the quality of works and services provided.

The ethos of Defects in NEC contracts is rooted in the principles of mutual trust, flexibility, and clarity. In this article, we outline the key principles and mechanisms relating to Defects in NEC4 contracts.

TERMINOLOGY SUMMARY

There are a variety of often confused defined terms relating to Defects under NEC contracts, we summarise these below based on the specifics of the NEC4 Engineering and Construction Contract.

Note that there are nuances in the defined terms/mechanisms used for Defects across the NEC suite, please refer to the specific forms for details.

*The relevant dates and periods for these terms are stated by the Client within Contract Data Part 1.

GENERAL DEFECT PRINCIPLES ACROSS NEC4 CONTRACTS

Early Warning

• Contractors and Project Managers must give early warnings as soon as they are aware of any matter which could:
  • Increase the cost; or
  • Delay completion.
• This could include a requirement to provide early warnings in respect of Defects.

Identification of Defects

• Identification of Defects can occur through numerous means under NEC contracts, including via testing, inspections, specific searching for Defects, or generally during the course of the works and services.
• The Contractor and the Supervisor are each required to notify the other of identified Defects prior to the defects date.
• NEC contracts make a point of encouraging a proactive approach to identifying, and then managing, Defects.

Correction and re-inspection

• As outlined in the table above, the defect correction period identifies the length of time within which Defects must be rectified.
• It is often misconstrued that the defects date sets the date by which Defects must be corrected, however, the defects date is the deadline by which all Defects must be notified.
• If a test or inspection identifies a Defect, the Contractor then corrects the Defect, and the test or inspection is then repeated.
• Re-inspection of Defects ensures compliance with duties to rectify Defects.

Payment for correction of Defects

• Under NEC4 contracts using Main Payment Option C (Target contract with activity schedule) and Option E (cost reimbursable contract), the cost of correcting Defects prior to Completion is paid by the Client. The exception to this is when the Defect is caused by the Contractor’s failure to comply with a constraint in the Scope regarding how the service is to be provided.
• After Completion, the cost of correcting Defects constitutes Disallowed Cost and is not payable by the Client.
• Although this is often an unpopular position with clients, this aims to incentivise the Contractor to actively search for and identify Defects prior to Completion.
• Under Main Payment Option A (Priced contract with activity schedule), the cost of rectifying Defects is the Contractor’s risk unless a compensation event applies to the applicable Defect.

Acceptance of Defects

• There may be circumstances in which notwithstanding the identification of a Defect, the Contractor and/or the Project Manager do not consider it necessary to correct the Defect. For instance, this may be where a piece of work is not in strict compliance with the Scope but would not impact the Client’s use of the works.
• The Contractor or the Project Manager can propose to accept Defects, which involves changing the Scope, so that the Defect no longer needs to be corrected.
• A quotation is submitted by the Contractor for the Defect being accepted, which includes an earlier Completion Date or a reduction in the Prices (or both).
• If a Defect is accepted, then it is no longer treated as a Defect and the relevant party is no longer liable for it.

Remedies for uncorrected Defects

• Remedies under NEC4 for uncorrected Defects are viewed as consistent with the common law approach.
• The Contractor is liable where a Defect is not corrected within the applicable defect correction period.
• If a Contractor has had an opportunity to correct a Defect, via access during the defect correction period, the Contractor’s liability is the cost (as assessed by the Project Manager) of the Client having the Defect rectified by a third party.
• If the Contractor was not given access, then their liability is be limited to the cost (again, as assessed by the Project Manager) of the Contractor rectifying the Defect itself.
• These provisions therefore aim to balance incentivising (i) the Contractor to correct notified Defects within the required period, and (ii) the Client / Project Manager to provide access for the Contractor to rectify such Defects.

PSC4 AND TSC4 DEFECTS PROVISIONS

Below is a summary of the key nuances in respect of Defects under two other commonly used NEC4 forms (Term Service Contract and Professional Services Contract).

NEC4 Term Service Contract (“TSC”)

Defect definition

• As per the NEC4 ECC definition above, with Defects also including any part of the service which is not in accordance with the Accepted Plan (being the Contractor’s plan for providing the service, as accepted by the Service Manager.

Notification requirements

• Defects must be notified by either the Contractor or the Service Manager until the end of the Service Period.

Correction period

• The Contractor must correct a notified Defect within a time which minimises the adverse effect on the Client or Others.

NEC4 Professional Service Contract (“PSC”)

Liability

• Whilst the Defect definition in the PSC aligns with the ECC definition above, under the PSC the Consultant is only liable for Defects which arises out of the Consultant failing to carry out services with the skill and care normally used by professionals providing services similar to the service in the contract.

Allan Owen is a Partner at Sharpe Pritchard LLP.

This video is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published. If you would like further advice and assistance in relation to any issue raised in this article, please contact us by telephone or email enquiries@sharpepritchard.co.uk