The NEC4 Alliance Contract offers a fresh perspective within the NEC framework, taking collaboration and interdependency to new heights. While all NEC contracts emphasise mutual trust and cooperation, the Alliance Contract goes further by requiring all members—including the client—to fully embrace joint responsibility.
This model challenges the tier 1 supply chain to move away from conventional practices and adopt a more unified, transparent approach to delivering projects. One of the most innovative aspects of the NEC4 Alliance Contract is its payment structure. Let’s break it down.
Payment Structure in the NEC4 Alliance Contract
At its core, payment under this contract is based on “Defined Cost plus Fee,” similar to Option E in the NEC4 Engineering and Construction Contract (ECC).
Payments are made through a Project Bank Account (PBA) established by the Alliance, with flexibility to include Named Contractors and Suppliers. This ensures transparency and fairness in the distribution of funds.
What Is “Defined Cost”?
“Defined Cost” is calculated as:
The cost of components in the schedule of cost components, minus disallowed cost.
- Eligible Costs: Any expense supported by evidence such as invoices, diaries, or site records.
- Disallowed Costs: Expenses that cannot be justified in a partner’s accounts and records.
This approach ensures that only substantiated costs are reimbursed, keeping the process accountable and efficient.
The Payment Process
- The Alliance Manager assesses the amount due, based on the Defined Cost plus Fee of all partners and any additional relevant amounts.
- This assessment is submitted to the Client’s Representative, who reviews and verifies the claim.
- Any required corrections are communicated back to the Alliance Manager for adjustment.
- Once corrected, the assessment is resubmitted for final approval.
This structured process promotes accuracy and transparency across all payment claims.
Incentivisation Through the Performance Table
To encourage efficiency and innovation, the NEC4 Alliance Contract incorporates The Performance Table, which sets out agreed performance targets and review dates.
- Exceeding Targets: Partners are rewarded with bonus payments for achieving savings or outperforming expectations.
- Falling Short: If targets are not met, partners may face financial penalties.
This system works much like a pain-gain mechanism, ensuring that risks and rewards are shared fairly across the alliance.
Client’s Costs
A unique feature of the NEC4 Alliance Contract is the inclusion of Client’s Costs. These may include:
- Costs calculated using the client’s own cost schedule.
- Payments made to other members for defect rectification.
- Adjustments for sums recovered from insurers.
Factoring in Client’s Costs ensures a holistic view of total project expenditure, allowing these figures to influence incentive payment assessments.
Final Thoughts
The NEC4 Alliance Contract is more than just another NEC option—it represents a new way of working. By aligning risks, rewards, and responsibilities across all parties, it fosters collaboration, transparency, and accountability at every stage.
With its payment process rooted in Defined Cost plus Fee, backed by incentivisation and the inclusion of Client’s Costs, the NEC4 Alliance Contract is designed to deliver better value, reduce disputes, and build stronger partnerships across the construction industry.
