LCQ19: Public works projects adopting "New Engineering Contract" form

Following is a question by the Hon Tony Tse and a written reply by the Secretary for Development, Ms Bernadette Linn, in the Legislative Council today (November 23):
Since 2009, the Development Bureau has been adopting the "New Engineering Contract" (NEC) form in public works projects, which, through collaborative partnership, enables the contracting parties to complete the works on time and within budget, thereby enhancing management efficiency and cost-effectiveness of the projects. In this connection, will the Government inform this Council:
(1) of the following information on the public works projects that have adopted the NEC form so far: (i) the number of projects (including the respective numbers of completed and ongoing projects) and its percentage in the total number of public works projects, (ii) the original cost estimate and the actual expenditure of each completed project, and (iii) the cost estimate of each ongoing project;
(2) whether it has assessed the management efficiency and cost-effectiveness of the public works projects adopting the NEC form (including the effectiveness in terms of construction time, cost (e.g.‍ the amount of savings in project cost and its percentage in the original project cost estimate) and risk management); if so, set out the relevant assessment results by completed projects; and
(3) whether it has reviewed what types of public works projects are suitable for adopting the NEC form; if so, of the details; if not, the reasons for that?
 The Development Bureau (DEVB) has introduced the New Engineering Contract (NEC) form in public works contracts with a view to advocating the spirit of collaborative partnering and bringing the project team together to tackle difficulties, which would be conducive to the smooth implementation of the project. The conventional form of the contract previously adopted in public works, focusing more on the obligations and responsibilities of the two contracting parties, often put them in adversarial positions. Once problems or foreseeable risks occurred during the construction period, both parties tended to focus on identifying the responsible party, and hence more disputes arose in the process. As a result, the problem was not dealt with promptly and it might take more time or even cost to complete the works, which was not conducive to the smooth implementation of the project. In contrast, the NEC embraces a collaborative culture and through contractual mechanisms fosters the building of a mutual assistance/trust partnering relationship between the contracting parties as well as joint risk management, thereby enhancing project management performance and cost-effectiveness.
The reply to the three parts of the question is as follows:
(1) In 2009, the DEVB piloted the first public works contract in the NEC form. Since 2013, we have been extending the application of the NEC in a progressive manner. In 2017, we issued guidelines (Note 1) requiring all large-scale public works contracts to adopt the NEC form. From 2009 to now, there have been over 400 public works contracts adopting the NEC form with a total value of over $250 billion, of which over 80 works contracts have been completed with the accounts finalised. 
Since the issue of the above guidelines, the ratio of the NEC contracts to all public works contracts has been increasing, from 22 per cent in 2017 to 47 per cent in 2022. Over 90 per cent of the large-scale public works projects commenced this year have adopted the NEC form.
The forecasted expenditure and actual expenditure of the completed NEC contracts and the forecasted expenditure for each ongoing NEC contract are given in Annex (Note 2).
(2) Consolidating our experience in managing the NEC works contracts and the feedback collected from the sector and various stakeholder groups through questionnaire surveys, focus group interviews and workshops, the NEC form in general has an advantage over the conventional contract form, in the following three aspects:
(i) Enhancing risk management
With the introduction of an early warning mechanism in the NEC, both the client's representative and the contractor are encouraged to identify and raise potential risks that may affect the project as early as possible, and when construction difficulties and problems are encountered, to negotiate and formulate the optimal solution for the smooth implementation of the project according to the prescribed procedure framework and timeframes in the contract.
     Taking the "Tung Chung New Town Extension - Major Infrastructure Works in Tung Chung East" contract as an example, the contractor originally planned to procure precast concrete drainage pipes manufactured in the Mainland and deliver them to Hong Kong by land transport. As a result of the tightening up of the cross-border land transportation arrangements by the Mainland due to the COVID-19 pandemic, the contractor envisaged that the precast drainage pipes would not be delivered as scheduled via land transport. Under this situation, the NEC early warning system exhibited its effect positively, with the contractor promptly notifying the client's representative of the problem and the likely impact. The parties then went into an active discussion in a collaborative manner and reached timely agreement to change the land transport to marine transport, which enabled the delivery of the precast concrete drainage pipes to Hong Kong as scheduled without causing delay to the works. 
We also notice that the project team of the "Improvement of Water Supply to Sheung Shui and Fanling" contract fully displayed the partnering spirit under the NEC in dealing with construction problems or difficulties. Under the contract, part of the mainlaying works was affected by existing underground utilities, geological conditions, traffic issues, etc. The client's representative and the contractor made concerted efforts to work out the optimal solutions, including changing the alignment or the laying method of part of the water mains, etc. As a result, there was no delay to the project with the budget under effective control, thus achieving a win-win situation.
In addition, the risk management system of the NEC has helped shorten the actual construction period of some construction projects. For example, the Drainage Services Department has been carrying out the construction of sewerage works in various rural areas in the New Territories. After adopting the NEC form, the actual construction period has been shortened by about six per cent on average as compared with the conventional contract form. 
(ii) Optimising claim management
The NEC has a mechanism to deal with compensation events, which serves to compensate the contractor resulting from unforeseeable or uncontrollable difficult situations, etc. that take place at the construction stage. Compared with the conventional contract form, the NEC expressly prescribes the timeframes for handling compensation events, thus making it possible for the majority of the compensation events to be properly dealt with in a timely manner during the course of the contract. This effectively reduces claim disputes and the need to refer such disputes to mediation, arbitration or even litigation, and in turn significantly shortens the time required for finalising the account. Based on statistical analysis, there is a time saving of over 30 per cent on average to finalise the NEC contracts as compared with conventional contracts.
(iii) Enhancing cost effectiveness
The "Target Contract" option (Note 3) of the NEC form provides a mechanism for the contracting parties to share the difference between the actual construction cost and the Target Cost, which offers incentives for the client's representative and the contractor to work in collaboration and formulate the optimal construction method, rendering the smooth implementation of the project and avoiding budget overrun. Taking the "Happy Valley Underground Stormwater Storage Scheme" contract as an example, with the concerted effort of the project team, a number of cost-saving measures were implemented. At last, there was about a five per cent saving in the construction cost to the Government.
To sum up, under the NEC's collaborative partnering principle, the project team works together proactively to resolve construction problems and difficulties in a timely manner, thereby reducing the risk of time or cost overrun in works contracts.
(3) Upon review, we consider that the NEC form is suitable for application in the majority of public works contracts. As mentioned above, we have issued guidelines requiring all large-scale public works contracts to adopt the NEC form, making it the dominant form of contract in large-scale public works. For small- and medium-scale contracts, as the contractors are mainly small- and medium-sized companies, we will consult them in due course for mapping out the timetable of full implementation of the NEC form, so as to allow sufficient time for them to get familiar with the contract form. 
Note 1: For public works contracts engaging Group C contractors (viz. contract value above $400 million), the NEC form shall be adopted unless there are justifications with prior endorsement.
Note 2: Since there are over 400 contracts involved in total, the Annex only provides the data on the capital works contracts in the past three years.
Note 3: The actual construction cost of a "Target Contract" is based on the actual expenses of the contractor which is to be calculated on a reimbursement basis. When the actual construction cost is lower than the Target Cost, both contracting parties will share the difference equally. On the contrary, the client has to bear half of the difference subject to a cap of five per cent of the Target Cost. "Target Contract" is suitable for adoption in projects with higher complexity or risk level, or where the scope of works cannot be clearly defined. 
Ends/Wednesday, November 23, 2022
Issued at HKT 15:00