NEC 101 Series: Option X29 Climate Change

July 25, 2023

Rachel Murray-Smith and Allan Owen examine the key features and implications of the Option X29 (Climate Change) clause in the NEC4 suite of contracts (the ‘Contracts’) which aims to enable users to reduce the climate change impact of the construction operations.

What is the new Option X29 Clause?

Option X29 was implemented principally to tackle ‘greenwashing’ whereby unsubstantiated, misleading, or false information in relation to the environment is put forward in bids. ‘Greenwashing’ is particularly prevalent in the construction industry where misleading green claims are often expounded in response to the weighting of green credentials in evaluation criteria. Option X29 aims to incentivise meaningful positive action in relation to carbon reduction and to hold suppliers to account in relation to their climate change promises. Before Option X29 was introduced, sustainability goals were traditionally addressed only within the contract Scope as a technical issue, but Option X29 has created an operative provision in the conditions of contract through which suppliers’ environmental activities can be focused and measured.

Option X29 contratualises and formalises climate change obligations by establishing a legal obligation to achieve the Client’s “Climate Change Requirements” (the ‘Requirements’) for reducing the environmental impact of built assets. In addition, suppliers are incentivised (either through bonus payments or deductions) to meet climate change specific key performance indicators, for example relating to carbon reduction and meeting net zero commitments.

For those that are familiar with the NEC4 suite of contracts, you will notice that Option X29 utilises and builds upon familiar features of the Contracts, for instance:

The definition of “Climate Change Requirements” simply refers to a specific section of the Scope in which such requirements are detailed,
in relation to the “Climate Change Plan”, an acceptance process is set out akin to that used for the submission of programmes, particulars of design, and subcontractors,
the “Performance Table” provides an incentivisation regime that closely resembles the regime under Option X20 (Key Performance Indicators), and
it also echoes the principle of collaboration previously seen in the Contracts (notably in Option X12 (Multiparty Collaboration)) by requiring that the Contractor collaborates with other ‘Climate Change Partners’ to meet the requirements on climate change.

How is Option X29 used in practice?

Climate Change Requirements

The Requirements are set in order to address key climate change issues which may include methods such as recycling, reducing waste generation, reducing carbon emissions and/or designing with a focus on reducing whole life carbon emissions. Ordinarily, these Requirements will be set by the Client, though in some instances these may be decided jointly or proposed by the bidder. In addition to selection of Option X29, it is recommended that the parties include a specific section in the Scope for these Requirements which can then be used to help administer the clause. Clients can face difficulties and challenges in establishing a baseline for their Requirements and targets. It will be important for clients to consider and utilise the flexibility afforded by Option X29 in order to gather data, where necessary, and adapt their Requirements, noting also the opportunities that may be presented through the Contractor’s proposals as noted further below.

Climate Change Plan

A Climate Change Plan must also be prepared outlining in detail how the Contractor plans to achieve the stipulated Requirements. This plan is expected to be a fluid document throughout the Contract term, adapting as the Contract progresses and issues arise.

Performance Table

A Performance Table can be created and used in conjunction with Option X29, although it is not mandatory, to set targets with positive and/or negative financial incentives based on the achievement of the targets. Clients should use these targets to drive desired behaviours and outcomes from their suppliers and must consider whether positive or negative incentives (or a mixture of both) will best achieve their goals. Periodic assessments of the supplier’s performance against the targets are carried out at intervals set by the Client. It is important to note that Performance Table targets do not constitute Scope requirements and therefore will not be considered a “Defect” if not achieved.

The Guidance Notes for Option X29 indicate that it combines the features of the secondary Options X20 (Key Performance Indicators) and X17 (Low Performance Damages) and as such should not be used in the same contract as these – albeit that we consider Option X29 could be used in tandem with either X20 or X17 under a single contract with each clause providing an incentivisation regime linked to different areas. It should be noted that if secondary Option X18 applies, an excluded matter is the amounts stated in the contract as payable by the supplier in accordance with the Performance Table.

Compensation events are also built into Option X29 to provide relief through adjustment to the targets and amounts in the Performance Table where necessary as a result of a compensation event. This includes the standard NEC4 early warning regime which incentivises the raising of potential issues at an early stage. An Option X29 specific compensation event assessment process is set out for compensation events which only affect the Performance Table and would therefore not be covered by the standard compensation event clauses.

Contractor’s proposals

Option X29 allows the Contractor to propose changes to the Scope to achieve carbon reduction. If the Project Manager is willing to consider the change, the Contractor submits a quotation detailing the change, any risks associated with it, and an analysis of the impact the change would have. The Project Manager may opt to accept or reject the proposal for any reason, but the aim of the clause is that the parties will work together to enable proposals to proceed in a way which will deliver optimal climate change benefits and reductions.

How does the Clause align with the Construction Playbook?

Option X29 echoes the fourteen key policies within the Construction Playbook and the Government’s desire for contracting authorities to set achievable, sustainable strategies and plans on net zero. As the Climate Change Plan is an adaptable document, this will allow suppliers to adopt the most up-to-date methodologies and principles as guidance develops in order to minimise their climate impact. Clients should use Construction Playbook guidance including the “Net Zero Carbon and Sustainability” guidance note to inform themselves of their obligations in relation to climate change and to inform the process of setting Requirements and baselining and benchmarking Contractor targets.

Option X29 provides that the parties may disclose and publicise information relating to climate change as specified in the Climate Change Requirements. This aligns with the Construction Playbook’s emphasis on the importance of disclosing the project’s sustainability impacts and analysing the work done in relation to carbon reductions. Through utilising the right to disclose information as permitted by Option X29 parties can share identified best practice and lessons learned in relation to climate change which can be applied in the future both by the contract parties and the wider industry.

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