Environmental considerations in construction contracts: focus on NEC Option X29 [Climate Change]

Background – net zero commitment

The Government has committed to achieve net zero by 2050 and after the High Court ruled in 2022 that the Government’s proposals were not sufficient to achieve this, the Government published its ‘Powering Up Britain’ strategy in March 2023.

There are many definitions of what net zero means, but put simply, it means not adding to the total amount of greenhouse gases in the atmosphere.

Option X29

In terms of how the construction industry is contributing to the global commitment to drive down carbon emissions, the NEC was the first drafting body to introduce specific clauses on climate change to its suite of contracts with its Option X29.

Whilst the JCT does have clauses on sustainable development and environmental considerations, they are much less detailed and focussed than X29.

Option X29 was published in July 2022 and according to the NEC, it is intended to be used to “tangibly demonstrate carbon reduction initiatives on future builds across the construction sector”.

Key concepts

The key concepts introduced by Option X29 are the Climate Change Requirements, the Climate Change Plan and the Performance Table.

And to reflect the fact that employers and contractors are often now required to disclose their climate change credentials, Option X29 also includes a clause that allows information relating to climate change to be disclosed and publicised to others.

Climate Change Requirements (CCRs)

The Climate Change Requirements are part of the Scope. They can be requirements relating to the works themselves or the way in which the Contractor Provides the Works.

In terms of what the CCRs might cover, the NEC guidance notes suggest they could include levels of recycling, the use of renewable power on-site or electric vehicles, reducing waste generation and designs which reduce carbon emissions.

A failure to comply with the CCRs is a defect and so must be corrected at the Contractor’s cost.

Similarly, anything that could adversely affect the achievement of the CCRs is something that triggers the need for an early warning notice.

Climate Change Plan (CCP)

The Climate Change Plan sets out the Contractor’s strategy for achieving the CCRs. It is in effect the contractor’s statement of intent.

Unlike the CCRs, the CCP is not part of the Scope. If the Contractor fails to comply with the CCP, that failure would not constitute a defect requiring remedy at the Contractor’s own cost.

The form and content of the CCP can be included in the CCRs.

Performance Table

The Performance Table sets out performance targets linked to incentives to encourage the Contractor to meet those targets, which can be positive or negative.

X29 therefore overlaps with Options X17 [low performance damages] and X20 [KPIs] so the NEC recommends it is not used in conjunction with these options.

The NEC guidance notes recommend that each performance target should be capable of objective measurement and suggest that the use of subjective phrases such as to the employer’s “reasonable satisfaction” should be avoided.

The guidance notes also give examples of the issues the performance table could address, for example; the subject matter, the target, unit of measurement, date when performance is measured.

The Contractor is required to report its performance against the Performance Table targets at regular intervals and the table is not part of the Scope, so a failure to achieve the stated targets is not a defect. However, a failure to achieve a target could trigger a negative incentive.

It’s also worth noting that where Option X18 is being used [limitation on liability], any amounts paid by the Contractor under X29 are excluded from the X18 cap on liability.

The Birketts’ view

As the NEC itself has pointed out, Option X29 is not a solution in itself, rather it provides a collaborative mechanism for addressing the issue of climate change and mitigating the impact of construction on the environment.

The key practical point is that the CCRs and any targets in the Performance Table will need to be clearly drafted. Subjective terms such as “to the Employer’s reasonable satisfaction” should be avoided, so that the CCRs and any targets are measurable and achievable, but not so onerous that they will either deter bidders or prompt an inflated tender return to enable the Contractor to mitigate the perceived risk.

Finally, clients should be careful that the CCRs do not amount to a fitness for purpose obligation which would be uninsurable.