Optional clauses in Hong Kong SAR NEC forms can boost construction project outcomes

Certain NEC ‘optional clauses’ provide a way for incentive mechanisms to be embedded into the contract. For example, Option X20 can be used to apply incentives to maximise performance on the project via the inclusion of key performance indicators (KPIs), and Option X29 – intended to reward ‘green’ construction practices - can be used to drive better project performance and outcomes.

In addition, the newly created Option X30 - which is unique to the Hong Kong SAR edition of NEC - can be leveraged to incentivise clients, contractors and consultants to adopt innovation and technology (I&T) in their work projects, while also enhancing decarbonisation efforts and contributing to more sustainable project outcomes.

Using key performance indicators under NEC Option X20

In its current form, Option X20 only uses ‘positive’ payments which reward a contractor for meeting certain KPIs set out in an the ‘incentive schedule’. Bespoke drafting would be required to bring into effect ‘damages for non-achievement’.

In practice, Option X20 can be applied to ongoing projects in many different ways. Typical uses include monitoring and managing critical project performance aspects like health and safety, public complaints, and environmental impact. In Hong Kong SAR, Option X20 has also been used as the basis for a ‘pay for safety performance merit scheme’ in projects. Parties interested in continuing this practice are able to include a suitable Z clause under this scheme from the ‘library of standard additional conditions of contract’ for the NEC engineering and construction contract (ECC) HK Edition.

Extending the use of Option X20 beyond these current uses may have a powerful role to play in delivering the mutual trust and cooperation intended by the NEC and help parties realise the proactive contractual and risk management that is envisaged. This can include KPIs to:

• incentivise prompt preparation and acceptance of the programme as a key document in the NEC;
• monitor progress and scheduled completion and reward accepted programmes which show completion ahead of schedule;
• incentivise frequent early-warning notifications and meetings, and reward implementing risk management plans that can result in the resolution of identified risks as a manifestation of the proactive risk management philosophy of the NEC; and
• monitor the number of compensation events notified, the value of the delay and change to the contract price that relate to unimplemented compensation events, and the average time it takes for a compensation event to be notified, quoted and implemented.

This innovative use of KPIs can help parties manage the contract and the full project lifecycle together and better align expectations, creating a win-win situation.

Read more of our series on Hong Kong SAR NEC forms

• Using the NEC4 standard form contract for construction projects in Hong Kong SAR

• Clarity on compensation events in Hong Kong SAR NEC forms can help to avoid construction disputes

• Impact of potential variations of scope in Hong Kong SAR NEC forms must be thoroughly assessed

• Hong Kong SAR NEC forms encourage proactive communication

• Hong Kong SAR NEC forms hold limits to instructing changes to construction works’ scope

Rewarding ‘green’ construction under NEC Option X29

Option X29 reflects the growing imperative to incorporate climate action into project management. This imperative is underscored by governments’, clients’, and contractors’ carbon neutrality commitments. Given these policy drivers and corporate priorities, it is prudent and timely for construction projects to leverage Option X29 to actively address environmental impact.

To implement a ‘carrot-based’ approach, clients are prompted to incorporate incentives to fulfil sustainability-linked or other targets into a performance table to encourage contractors to reduce the whole-life costs of a project. Not only does the application of a robust Option X29 framework help with cost management, it also aligns with various stakeholders’ broader climate and decarbonisation goals.

The effective implementation of Option X29 requires considerable know-how, diligence, and sound judgment on the part of clients, consultants, and contractors. They need to define the appropriate climate change requirements and calibrate the accompanying performance table to ensure meaningful targets are achieved on the ground. Additionally, meeting ambitious climate goals requires changes beyond the scope of Option X29. Issues such as early contractor involvement, appropriate pricing, and the use of the right technology may also need to be considered.

It is worth noting that industry guidance suggests that Option X29 combines certain features of Option X17 (‘low performance damages’) and Option X20 (KPIs). As a result, clients should avoid using Option X29 in the same contract alongside Option X17 or Option X20.

Adopting innovation and technology under NEC Option X30

The new Option X30 serves as a reminder to contractors or project managers to consider changes to the ‘scope’ (scope of the works) to adopt more innovative and advanced technologies (referred to in the contract as ‘innovation and technology’, or I&T) strategically. It is intended to encourage the adoption of I&T which is more advanced than the requirements in the scope, enhance site safety and site supervision efficiency and promote decarbonisation.

The Hong Kong SAR Development Bureau’s ‘practice notes’ for the NEC ECC for public works projects in Hong Kong SAR appears to indicate that the primary focus of Option X30 is decarbonisation, looking at reducing and recycling of materials, using battery energy storage systems, eliminating diesel fuel and using more renewable energy on site.

The option allows contractors and project managers to make I&T proposals which are then tracked in an I&T register and discussed at I&T meetings. Any decision reached in an I&T meeting is then recorded in the I&T register. If it requires a change to the scope, the project manager can instruct this when a revised I&T register is issued.

Delivering superior performance

All clients, contractors and consultants have a desire to deliver superior performance. Having KPIs which identify and reward this can offer a financial incentive to contractors and consultants to improve performance.

A three-pronged incentive-based approach should be implemented when using the NEC. Firstly, clients should set up worthwhile and graduated incentives for contractors to reach the target level of performance. Secondly, clients’ expectations for what can be realised through KPIs should be realistic and achievable so they will be motivational - rather than seen as impossible or aspirational. Lastly, exceptional performance in achieving KPIs should correlate to clients and contractors achieving exceptional returns on the project.

In addition, to bring contractors closer to the finishing line of reaching decarbonisation goals, Option X30 should be used not only to invite innovation and support the use of technology on a project, but also to reduce the project’s carbon footprints more cost-effectively, leading to a win for the contractor and the client and for all stakeholders in the project.

Ensuring the effective interaction all three incentive-based optional clauses in the NEC can keep contractors focused on achieving the overall project objectives and lead to satisfied clients.

Co-written by Jade Wong of Pinsent Masons.