NEC 3 Contract: Early Warnings Tutorial (2023)

NEC 3 Contract: Early Warnings Tutorial

Early Warnings are one of the most powerful and most important features of the NEC suite of contracts. If you are to be an effective Project Manager or user of the NEC Contracts, then understanding how and when to use Early Warnings is critical.

This guide will set out:

What an early warning is,
How an early warning is administered under the contract,
When to use them,
What to use them for,
Practical examples of early warnings in real situations,
The responsibilities of the parties,
A flowchart of the early warning workflow.

Early Warning Definition

Early Warning’s are covered under the NEC 3 Contract by Clause 16.1. It places an obligation on both the Project Manager and the Contractor to give an early warning to the other as soon as either becomes aware of any matter which could:

Increase the contract price,
Delay completion,
Delay meeting a key date,
Impair the performance of the works in use.

The intent of the early warning, as with the whole philosophy of the NEC contracts, is to foster good project management and collaboration. It is intended to be used as a risk reduction tool and to improve communication. Ideally, both the PM and Contactor will not be shy in raising all the potential issues as they inevitably arise.

In my experience, the onus is on the Project Manager to show leadership here in encouraging an open and honest project culture. The Contractor should be encouraged to raise Early Warnings and depending on the previous experience of all of the parties, this may take some effort and coaching.

A good starting point would be for the Project Manager to openly raise Early Warnings about their own issues. Is therea risk of late access to the site? Design progress going slower that hoped? Take ownership and raise an Early Warning. Lead by example. As Jocko Willink, former US Navy Seal Commander puts it:

“On any team, in any organisation, all responsibility for success and failure rests with the leader. The leader must own everything in his or her world. The leader must acknowledge mistakes and admit failures, take ownership of them, and develop a plan to win”

In the case of the Early Warning process the Project Manager should be first to take this ownership. Of course, the Contractors leadership also has a big part to play.

Early Warning Example

The Contractor receives back some early concrete cube tests showing that there may have been a problem with a concrete pour.

It is in the interest of the Project that the Contractor is open and honest about this, and it would be a straightforward early warning. Let the PM and Client know, and let them have input on the decision on how to handle the situation.

In reality, the Contractor may want to keep an issue like this under their hat so as to not look bad and hope it gets resolved before the Client hears about it. The onus here is on the PM fostering an open and collaborative culture. When the Contractor does raise an issue - don’t jump down their throat. Thank them for being open and be constructive to help find solutions.

Below are a few other examples of typical Early Warnings.

During site setup the contractor discovers an invasive species i.e Japanese Knotweed.
Contractor is notified that a supplier is in financial difficulties.
A site engineer discovers a clash in drawings that will require rework.
Mechanical equipment fails its site acceptance test.
Unexpected heavy rain causes damage to a concrete pour.

It will take some judgement to determine what is, and what is not, an early warning. On the one hand, we don’t want issues to get lost in a sea of early warnings, and we want them to keep some impact. On the other hand, we never can be sure which small issues might flare up, and having all the potential issues logged in one place is a useful management tool.

It is important to remember that if a Contractor does not give an early warning for an event of which they were aware it will compromise their entitlement under the compensation event, i.e they may get less compensation. The process works better when both parties can look at early warning’s as being a collaborative process and something that helps everyone get the project completed on time.

Rudy Klein. NEC Users Group President puts it this way:

“Early warning notices should not be issued for the purpose of allocating responsibility or liability. A party attempting to do this could be failing to act in the NEC clause 10, 'spirit of mutual trust and co-operation'. When dealing with matters which are the subject of an early warning notice, the emphasis should be on agreeing the steps required to address the matter rather than allocating blame.”

Administration of an early warning

As noted earlier, the starting point for administration of an Early Warning is ECC Clause 16.1 - The Contractor or Project Manager must notify the other of an early warning as soon as either becomes aware of any matter which could:

increase the total of the Prices
delay Completion
delay meeting a Key Date
impair the performance of the works in use.

Notification:

Many larger organisations now use automated contract management systems, such as CEMAR or CCM. These provide online systems for sending and logging communications. These make it very easy to raise and send Early Warnings and usually require the user to implement specific information, such as:

Description of the issue
Which aspect of the clause is being invoked, i.e increase in prices, delay meeting a key date etc.

They may also include aspects such as a severity, risk, or cost impact score. These items, while potentially useful, are also very subjective and could equally cause controversy and confusion. Per Nassim Taleb, Distinguished Professor of Risk Engineering at NYU's Tandon School of Engineering,

“...the casino is the only human venture...where the probabilities are known...In real life you do not know the odds, you have to discover them…”.

It is probably useful to have some kind of flag for issues that are particularly impactful and urgent. However, when new issues arise it is often not obvious which ones are going to become critical to the project outcomes. In my experience this is best managed by ongoing monitoring and review of the Project Risk Register.

If you don’t have an automated system, then it would be prudent to develop a standard template for Early Warnings, these could then be filled out and transmitted attached to an email or letter and assigned suitable reference numbers. You don’t want early warning’s to be lost in emails or to get confused with other issues.

Under the NEC Contract, allowable forms of communication are covered under Clause 13. The key requirement being that it is, “communicated in a form which can be read, copied and recorded.”, and it also must be in the language of the Contract.

Once notified, the early warning is to be recorded on the risk register (early warning register in NEC4) by the Project Manager. Once this has been done, there is no other specific requirement for action by either party with respect to the early warning.

Clause 16.2 and 16.3 of the ECC introduce the Risk Reduction Meeting. Either party, the Project Manager or Contractor may instruct the other to attend a risk reduction meeting, the parties are then expected to cooperate in finding solutions to avoid or reduce risks and impacts associated with the Early Warnings. The Project Manager is then required under Clause 16.4 to update the RIsk Register in line with the agreements from the meeting.

In practice it may be useful to schedule a risk reduction meeting as a regular occurence where the risk register is reviewed and any new Early Warnings can be discussed as needed. This could also form part of a weekly progress meeting. In practice a bi-weekly or monthly formal risk reduction meeting can be very useful as it brings a specific focus to the risks. When warranted an ad-hoc risk reduction meeting can then be called to discuss a specific early warning when it is urgent and can’t wait until the next planned meeting.

The risk register is invaluable as a tool to keep track of the early warnings and should be carefully updated at each meeting. As risks are mitigated and become historical they can be hidden to prevent the register from becoming cluttered and maintain focus on the most pressing issues.

TQs and RFIs - how to handle them?

Most projects use some kind of TQ (Technical Query) or RFI (Request for Information) process. This may or may not be a formal procedure that has been developed by a Contractor or Client. The NEC Contracts do not recognise either of these documents. It is good practice for Contractors and Engineers to have written procedures for handling these issues. For example, what to do with missing design information? What to do with an unexpected design clash on site? This is another management issue for project teams to deal with. However, are these types of issues Early Warnings?

Let’s consider some examples:

The contractor is installing services and finds that there isn’t room in a wall opening for all the utilities specified in the design. Input is needed from the Designer on how to fix this. This could then require a ‘TQ’ or ‘RFI’. Is it an EW? I think, yes. If the information isn’t forthcoming, or if it required a design change, it could well increase costs or impair performance of the works.

On large projects, there can easily be 100s or 1000s of these issues arising, many will be answered quickly and easily, with no impact.

Going by the letter of the NEC, then these probably should all be raised as Early Warnings. However, it would be useful to differentiate them from larger commercial or schedule type issues. This may be as simple as having some filters that can prioritise and classify Early Warnings so that they can be addressed by the necessary people in a timely manner.

Positives in Early Warnings

Early Warnings can, and should, be used to record positive opportunities. Being realistic this is not often done,but it could have a hugely positive effect on a Project. An example could be where a contractor identifies a potential design change that could significantly speed up the project, but it may need some additional capital expenditure or some change to the design. The Contractor could raise it as an Early Warning to allow discussion with the Project Manager to see if they would be willing to pursue it.

NEC 4 Changes

While the NEC3 is still the most widely used NEC contract, NEC 4 is becoming more popular and hasa couple of changes regarding Early Warnings to be aware of:

The Risk Register is now called the Early Warning Register.
The Project Manager is to prepare an Early Warning Register within two weeks of the contract start.
The contract advises there should be regular risk reduction meetings following the first register being issued after 2 weeks..