When it comes to construction contracts, the allocation of risk is a critical component. One such contract that deals with risk allocation is NEC, which stands for New Engineering Contract. NEC is a contract that is widely used in the construction industry, particularly in the UK and Malaysia. It is a contract that is known for its collaborative approach, which allows for joint responsibility for the success of a project. In this article, we will examine the risk allocation in NEC contracts.

Risk allocation in NEC contracts

NEC contracts have a unique approach to risk allocation, which is based on the principle of joint agreement. Unlike traditional contracts, where one party assumes most of the risk, NEC contracts allocate risks to the party best placed to manage them. The risks allocated in an NEC contract can be broadly categorized into four categories:

1. Employer risks

2. Contractor risks

3. Project risks

4. Compensation events

Employer risks

Employer risks are the risks that the employer assumes, such as the risk of obtaining planning permission, regulatory approvals, or obtaining finance. In an NEC contract, the employer is responsible for identifying and managing the employer`s risks.

Contractor risks

Contractor risks are the risks that the contractor assumes, such as the risk of delivering the project within the agreed timeframe, cost, and quality. The contractor is responsible for identifying and managing the contractor`s risks.

Project risks

Project risks are the risks that are not specifically the responsibility of either the employer or the contractor. These risks can include risks such as natural disasters, unexpected delays, or supply chain issues. In an NEC contract, the parties must agree on how to manage these risks jointly.

Compensation events

Compensation events are events that can delay the project or increase its cost. These events can be caused by the employer, the contractor, or a third party. In an NEC contract, the compensation events are allocated to the party who is best placed to manage them.

Conclusion

NEC contracts are known for their unique approach to risk allocation. The collaborative nature of these contracts means that risks are allocated to the party best placed to manage them. In an NEC contract, each party assumes some risks, and the parties must work together to manage any unexpected events. By allocating risks in this way, NEC contracts encourage cooperation and collaboration between the parties, which can lead to better project outcomes.