The NEC’s term service contract (TSC) is essentially a maintenance contract. One of its key selling points is that is considered to be more of a “Botham” than a “Boycott”: it’s an all rounder, it can be used for the provision of any type of service.
As the TSC is a service contract, the language differs from other NEC contracts. The TSC talks of the “service”, the “service manager” and the “service information”. However, the underlying structure of the TSC is consistent with the NEC’s general approach. For example, the parties have to choose a payment option, decide which secondary options are relevant and the core clauses follow the same format as other NEC agreements.
There are a few “gaps” in the TSC and the parties will have to decide whether to use Z clauses to fill in the gaps. This article looks at some of those gaps in more detail.
General issues
The TSC does not define the contract documents or include a priority clause. This can create confusion, particularly as the TSC includes an entire agreement clause. It would be clearer if the contract listed the contract documents and included a priority clause, so that the parties are aware at the outset how the contract should be interpreted. The parties may also wish to strengthen some of the boilerplate provisions by including Z clauses to deal with issues such as change in control, waiver, severability, exclusive remedies, third party rights, publicity and fraud.
Price
Most service contracts run for a number of years and the parties should ensure that throughout the contract term, the price is fair for both parties. Option X1 of the TSC provides for indexation. Parties may wish to review this option to make sure that it is applicable. For example, it may not be relevant to apply indexation to all services as some of the services could be treated as a pass through cost. For instance, where the contractor is providing soft FM services, such as catering and cleaning services, the contractor’s utilities costs will be an issue. It can be difficult for a contractor to price that risk across the term of a contract and indexation is unlikely to be the appropriate mechanism to deal with this type of cost.
Employers may wish to carry out a benchmarking or market testing exercise to monitor costs across the contract term. This provides employers with more control over costs. The TSC does not provide for benchmarking or market testing and a Z clause will have to be used if the employer wants to benchmark the contractor’s costs.
Another area that the parties may wish to consider is a payment mechanism for performance. Most complex service contracts rely on a performance based payment mechanism to assess how much is due to the contractor each month. The payment mechanism often takes into account factors such as:
- Service failure points, which are based on an agreed set of KPIs and reports prepared by the contractor.
- Failure events, including the extent of each failure event and the number of events occurring in any given period.
- Unavailability of any service or affected property.
- Volume adjustments.
The TSC does not provide for this type of payment regime. It follows the traditional NEC format and suggests that the parties should choose the relevant option. That may work for straightforward service contracts, but it may not be appropriate for complex and long term service contracts. If a payment mechanism is required, the parties will have to use a Z clause to fill in the gap.
Service
The TSC states that the contractor shall provide the service in accordance with the service information. That places a lot of strain on the service information. It assumes that the service information will deal with all the performance obligations, such as making sure that the contractor carries out the service using good industry practice, adequate resources and satisfactory goods and materials. Most employers prefer to use a Z clause to include that type of “performance” obligation in the main body of the contract.
The TSC also assumes that there is one type of service and one plan. This may not provide flexibility for the parties. For long term service contracts the employer may require the contractor to produce a general service plan and to refine this each year with an annual plan. This approach is often used where the service includes a lifecycle replacement programme. An annual plan also provides flexibility if there is a transition period at the beginning and the end of the contract term. It allows the parties to consider how the contractor will liaise with the outgoing and incoming contractors.
Other issues
Often where a contractor is required to carry out a service the parties should deal with TUPE and pension liabilities. The TSC does not address these issues and the parties will have to include a series of Z clauses to make sure that the correct party is responsible for the relevant risk.
The parties may also wish to consider how they deal with changes in law. Option X2 is a straightforward clause and it states that any change in law should be treated as a compensation event. However, the parties may wish to deal with a change in law in a more sophisticated way. For example, they may wish to differentiate between how operating costs and capital costs are treated. They may also wish to clarify whether all changes in law result in a compensation event. In long term service contracts there is often a distinction between different types of change in law and the contractor is not entitled to claim compensation for all types.
Conclusion
The TSC is a good all rounder. The TSC, however, has a few gaps. Z clauses can help to address the gaps. This becomes more important where you enter into long term, complex service contracts.
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