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      The Procurement Act 2023 (the Act), which establishes the new legislative framework governing how the public sector procures goods, works and services, came into force in February last year. It represents a fundamental shift in the public procurement regime - not only via the introduction of new processes and procedures, but also through the need for a corresponding change in mindset and organisational culture.

      One of the most significant changes under the Act, aligned to its objective of increasing visibility of public sector expenditure, is the introduction of a new transparency regime. This brings with it additional obligations across the contract lifecycle, with a particular emphasis on contract management; a key area of focus under the new Act.

      This article will explore the impact of the Act¹ on the NEC4 standard forms of construction contract²; the suite of contracts which are recommended by the Cabinet Office for use by the public sector. It will provide guidance and key considerations for public sector buyers (Contracting Authorities) when using this standard form.

      The article will focus on three key areas of the Act which relate to the contract management phase which Contracting Authorities should give attention to when compiling their NEC4 contracts. The three focus areas are:

      1. Measuring and reporting performance and other requirements
      2. Implied Terms
      3. Contract Modifications
      Alice Ellaby
      Alice Ellaby

      Associate Director, Major Projects Advisory

      KPMG in the UK

      Romi Alboreto
      Romi Alboreto

      Partner, Major Projects Advisory

      KPMG in the UK

      Focus Area 1

      Measuring and reporting performance and other reporting requirements

      PA 23 obligations³

      • Setting KPIs

        The Act places increased emphasis on the setting of key performance indicators (KPIs) and the assessment of performance throughout the duration of the contract term. Under the Act, for contracts with an estimated value of more than £5 million, Contracting Authorities must set and publish at least three KPIs.⁴ If there are more than three KPIs set as part of the contract, Contracting Authorities need to specify in the Contract Details Notice which of the KPIs are most material to performance of the contract obligations at the time of publication.⁵

      • Assessing KPIs

        At least once every twelve months, Contracting Authorities must assess performance against those KPIs, publishing specified information about that assessment. The assessment information is to be published by way of a Contract Performance Notice on the Central Digital Platform.⁶

      • Publishing performance in the event of breach

        Contracting Authorities must also publish a Contract Performance Notice when a supplier:

        • Has breached a public contract and the breach results in termination of the contract, award of damages or a settlement agreement or
        • Is not performing the contract to the Contracting Authority’s satisfaction and the supplier has been given the proper opportunity to improve performance but has failed to do so.⁷

        This applies to performance of the entire contract and not just performance against KPIs.

      • Performance based exclusion

        In addition, the Act introduces new discretionary exclusion grounds⁸ which permit exclusion of a supplier on the grounds of poor performance. Following an investigation by the Procurement Review Unit, suppliers can also be placed on the debarment list; a central list of suppliers published on the Central Digital Platform setting out excluded and excludable suppliers.⁹

      Setting and assessing KPIs:

      To meet their obligations under the Act, Contracting Authorities need to ensure they include at least 3 KPIs within contracts over £5 million with clear metrics against which performance can be measured. Under NEC4, there are a number of secondary Option clauses which can accommodate setting and measuring KPIs, including X12 (Multiparty collaboration), X20 (KPIs) and X29 (Climate change).¹⁰ NEC does not prescribe a particular format for documents like the Incentive Schedule (X20) or what needs to be contained within it, although NEC does offer guidance around this in the NEC user guides.¹¹

      When setting KPIs and using these secondary Option clauses, in addition to the NEC guidance, Contracting Authorities should consider:

      • Number of KPIs

        Whether the number of KPIs is proportionate given the value and complexity of the contract, noting that at least three need to be published. If more than three are published, Contracting Authorities must be able to set out which of the published KPIs are the most material to the contract.

      • Subject/content of KPIs

        Whether these have been designed around the most important contract deliverables and if they align with the wider contract objectives.

      • Frequency of assessment

        The frequency of assessment and how that aligns with requirements in the Act for publication.

      • Metrics for assessing performance

        How each KPI will be assessed, the measurement scale/rating and how this aligns to the Act’s rating requirements¹² and what evidence the Contractor is required to submit for its performance to be assessed and in what format. Contracting Authorities should consider the creation and use of templates and proformas to support this where appropriate.

      • Consequences and procedures relating to rectification of underperformance

        Making clear, in addition to the improvement process contained in the relevant secondary Options, any procedures for rectification of underperformance (for example, performance improvement plans and processes) and what steps the Contracting Authority would expect the Contractor to take. Contracting Authorities should set these requirements out in the Scope.

      Publishing performance information (right to publish)

      To meet their obligations under the Act, Contracting Authorities need to ensure that they have the right within the contract to publish information in relation to the assessment of performance and that these are not subject to any confidentiality provisions. NEC contracts contain a standard clause on disclosure of information. Whilst the standard provision is broad and  enables parties to disclose information to carry out their duties under the contract, Contracting Authorities may want to consider supplementing this, through entries in the Scope or possibly via a Z Clause amendment, to make clear that this also applies to information which may need to be published to comply with the Act.

      This will include, as noted above, the information required in relation to KPIs but also poor performance more generally or breach of contract, including where this results in termination, award of damages or settlement. Z clauses of this nature have previously been published by Crown Commercial Services, which amongst others, allow for disclosure of information in accordance with the Freedom of Information Act (FOIA), information sharing and confidentiality as well as more generally.¹³

      Contracting Authorities may also want to consider using proformas and templates to set out the detail that will be published as part of a Contract Performance Notice.

      Contracting Authorities that are central government departments and their associated arm’s length bodies were required under the previous regulations to comply with the government’s policy on reporting requirements for KPIs set out in the Cabinet Office’s Commercial Playbooks and their accompanying guidance notes. The Act has adopted the same rating as the Commercial Playbooks. Hence, some Contracting Authorities may already be going some way to addressing the new requirements in relation to setting and measuring KPIs. However, the obligations under the Act remain separate and Contracting Authorities still need to comply with the requirements in relation to publication under the Act.

      Publishing other information (right to publish)

      Contracting Authorities should also be aware that under the Act, Contracting Authorities are required to publish a Contract Payment Notice which provides information about individual payments of more than £30,000 made by the Contracting Authority under a public contract, on a quarterly basis.¹⁴ Contracting Authorities need to therefore ensure they have the right to publish such information as required by the Contracts Payment Notice without breaching any confidentiality provisions under the contract.

      As a general note, where information is required from the supplier, whether it be in relation to KPIs or other reporting requirements which the Contracting Authority needs to be able to publish in line with its obligations under the Act, Contracting Authorities should ensure this is captured in regular reporting cycles and detailed in the sections of the Scope that deal with management and reporting.¹⁵

      • New obligations in relation to the setting, monitoring and reporting on performance under the Act

        The Act introduces new requirements in relation to performance of public contracts, namely in relation to the setting of performance criteria, monitoring performance against the criteria and publication of performance results at set intervals, as well as reporting any breaches of public contract (including poor performance).

      • Poor performance as a ground for exclusion from future opportunities

        Suppliers can be excluded from public sector opportunities on grounds of poor performance, and a new debarment list has been introduced which is a central list of suppliers published on the Central Digital Platform setting out excluded and excludable suppliers.

      • Incorporating new obligations regarding performance into NEC contracts

        NEC has a number of secondary Option clauses which can accommodate setting and measuring KPIs (e.g. X12, X20, X29). When Contracting Authorities are creating KPIs and performance regimes they should carefully consider the number of KPIs, frequency of reporting, metrics of assessment (and alignment to the Act’s ratings) and how a Contracting Authority would expect a Contractor to go about rectifying underperformance.

      • Restrictions on the right to publish information

        Contracting Authorities should ensure they are content that existing disclosure provisions are sufficient to publish any information required by the Act (in relation to performance, breaches of contract and other reportable information such as payments), supplementing these via Z clauses and/or entries in the Scope where required.

      Focus Area 2

      Implied terms

      PA 23 obligations³

      • Payment

        Under the previous regulations (Public Contract Regulations), there was an implied term that invoices were required to be paid within 30 days of the invoice being regarded as valid and undisputed.¹⁷ Under the Act, 30-day payment terms are also implied into most public contracts however Contracting Authorities are required to pay valid, non-disputed invoices within 30 days of receipt.¹⁸ This change means that the default timescale in which the invoice must be paid is 30 days from receipt, rather than from validation (provided the invoice is not invalid or disputed or a later date is not specified in the invoice).¹⁹ The Act is also clear that any terms within contracts which purport to restrict this are without effect.²⁰ The effect of this requirement when applied to standard forms of contract such as NEC4, which has more complex payment mechanisms, is yet to be tested.


        Further, under the Act, implied 30-day payment terms are extended to subcontracts placed under contracts covered by the Act, meaning suppliers must also pay valid, non-disputed invoices from members of their contract supply chain within 30 days of receipt.²¹

      • Termination

        Under the Act, there are three implied rights to terminate²²:
         

        • Where the Contracting Authority considers the contract was awarded or modified in breach of the Act
        • Where a supplier (or associated persons) has, since the award of the contract, become excluded or excludable
        • Where a subcontractor has become excluded or excludable.
           

        Contracting Authorities are also required to publish a Contract Termination Notice on termination of a contract.²³

      • Payment

        Under the NEC4 ECC there is no requirement for an invoice²⁴  to be issued by the Contractor. The Contractor submits an application for payment to the Project Manager before each assessment date and payment is made by the Client of the amount certified by the Project Manager in the payment certificate. The Project Manager’s obligation to certify the amount due to the Contractor is still required even if the Contractor fails to submit an application for payment.

         

        For UK construction projects, Contracting Authorities usually select the secondary Option clause Y(UK)2 as this payment regime is compliant with the Housing Grants Construction and Regeneration Act 1996 (as amended by the Local Democracy, Economic Development and Construction Act 2009). By selecting Y(UK)2, Contracting Authorities should also be compliant with the obligations within the Act. This is based on the assumption that the implied term of 30-day payment would, in relation to the NEC4 ECC, be the period between the assessment date and the final date for payment (rather than from the date of receipt of the payment application submitted by the Contractor which would be in advance of the assessment date). NEC standard Y(UK)2 wording allows for 21 days in total from the assessment date to the final date for payment (7 days from the assessment date to the due date and the final date for payment being 14 days after the due date).

         

        The courts have yet to rule on the interpretation of section 68 of the Act, so we await confirmation of this. However, the Act is a piece of legislation written for use in relation to all public contracts, with the intention of ensuring the principles of prompt payment so such assumption would align with the spirit and intentions of the Act. It would also mean it aligns with the Housing Grants Construction and Regeneration Act 1996 and payment regimes within construction contracts which are more complex.

         

        In any case, Contracting Authorities should be aware that the Y(UK)2 provisions within the NEC4 ECC do allow Contracting Authorities to specify alternative payment periods in the Contract Data to the standard 21 days. Contracting Authorities will need to be careful if looking to deviate from the default period and ensure if they are amending the payment period that they remain compliant with the Act.

      • Termination

        As noted above, the Act provides additional implied rights for Contracting Authorities to terminate and therefore if Contracting Authorities are using NEC4 it does not require an amendment to the NEC4 standard form to accommodate such rights.

         

        However, in NEC, reasons for terminating are set out within the Termination Table. The Termination Table specifies the procedure as well as the cost implications for each reason for termination. If these implied rights are not addressed in the Termination Table, it would mean that the procedures and costs that apply upon termination for these implied grounds are not set out in the contract. It may be that the implied rights for termination would be considered a substantial breach of the Contractor’s obligations and so already addressed under the contract, however,  Contracting Authorities may want to consider drafting a Z Clause amendment to be explicit as to which procedures apply and the amounts payable in the event of termination to avoid any ambiguity or risk of dispute.

         

        Contracting Authorities also need to ensure there are clear provisions allowing Contracting Authorities the ability to publish information required by the new Contract Termination Notice and that these do not conflict with any confidentiality provisions or settlement agreements, as discussed above under Focus Area 1 (‘Measuring and Reporting Performance and Other Reporting Requirements’).

      • Change in the payment obligations under the Act

        Invoices have to be paid within 30 days of receipt rather than when invoices are regarded as valid and undisputed. How this applies to more complex payment mechanisms like contained within NEC4 is yet to be tested. Contracting Authorities should seek legal advice when compiling their contracts to ensure they are compliant with obligations under the Act and take particular care if they are deviating from the default period specified when selecting Y(UK)2 as part of the NEC4.

      • Dealing with implied rights to terminate when compiling NEC contracts

        The Act sets out three implied rights Contracting Authorities have to terminate contracts. Whilst it may be that these implied rights are considered substantial breaches of the contract by the Contractor under NEC4 (and as such the procedures and amount payable for substantial breach would be applicable as set out within the Termination Table), Contracting Authorities may want to consider drafting a Z Clause amendment to make sure any procedures and amounts payable should these implied rights be exercised are explicit to avoid any disputes.

      • Restrictions on the right to publish information

        As with Focus Area 1, Contracting Authorities should ensure they are content that existing disclosure provisions are sufficient to publish any information required by the Act in relation to termination (and the publication of the details as required by any Contract Termination Notices), supplementing these via Z Clause and/or entries in the Scope if required.

      Focus Area 3

      Contract modifications

      PA 23 obligations²⁵

      Under the Act, there are ten grounds under which contract modifications are permitted²⁶, which include four new grounds which were not present under the previous regulations. Contracting Authorities are now permitted under a new ground to modify a contract based on the materialisation of a known risk, where the impact of that risk is unknown (often referred to as a ‘known unknown’ risk). Such ‘known unknown’ risks are those where it is possible to identify a potential risk prior to commencing a new procurement (noting it must be set out in the Tender Notice or Transparency Notice), and are risks that could potentially jeopardise performance of the contract, but the parties are unable to calculate the impact of that risk until it actually materialises. Where there is a contract modification under any of the permitted grounds, Contracting Authorities must publish a Contract Change Notice containing the required information and publish a copy of the contract as modified²⁷.

      Further, Contracting Authorities should also be aware that they must publish a Contract Change Notice before modifying the contract²⁸ and, following modification, must publish the modified contract (where value is over £5m) or the modification itself²⁹.

      Contract modifications such as the materialisation of known risks can be dealt with under the standard NEC4 change control process as compensation events. Contracting Authorities can also list further compensation events in addition to those set out in the core clauses and selected main and secondary Options in Contract Data Part One. Contracting Authorities could therefore list out the applicable ‘known unknown risks’ in Contract Data Part One.

      Although in accordance with Government guidance, Contracting Authorities should be highly selective when identifying the ‘known unknown risks’ as the ground is not intended to capture all risks that may emerge during the lifetime of the contract. Contracting Authorities should also be as specific as they can in relation to these risks.

      • Incorporating new grounds for modification in NEC contracts

        Under the Act, one of the new grounds under which contract modifications are permitted is in the event of materialisation of a known risk. Such contract modifications can be accommodated under standard NEC4 compensation event process and the Contract Data Part One allows the specification of additional compensation events. Contracting Authorities should though be selective when capturing known risks and be as specific as they can.

      • New obligations in relation to publication of modifications under the Act

        Contracting Authorities should also be aware that any ‘known risks’ must be set out in the Tender Notice or Transparency Notice and the Contracting Authority must publish a Contract Change Notice before modifying the contract and, following modification, must publish the modified contract (where value is over £5m) or the modification itself.

      Overall Conclusion

      Overall, the NEC4 suite of contracts provides the flexibility to accommodate the obligations set out within the Act, for example, use of provisions within the Contract Data Part One, selection of the appropriate secondary Options clauses and the inclusion of relevant content within the Scope. NEC may though want to consider updating its guidance or having a practice note for use with the Act to address certain issues that arise from its application which capture some of the elements discussed in this article.

      Authorship/contributors

      This article was written by Alice Ellaby, Associate Director in the Major Projects Advisory team at KPMG with special thanks to Ian Heaphy (NEC Board Member) for his contributions.

      Some or all of the services described herein may not be permissible for KPMG audited entities and their affiliates or related entities.

      The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

      ¹It should be noted that the Act is used in this article to mean the Procurement Act 2023 as well as associated legislation that support implementation of the Act such as the Procurement Regulations 2024.

      ²It should be noted that this article most of the examples used focus on the NEC4 ECC specifically however may be applicable to other contracts within the NEC suite of contracts, depending on the form of contract. ‘Contractor’ is the NEC term used for the supplier under the NEC4 ECC and the Contracting Authority would be the ‘Client’.

      ³Note that this section sets out a summary of the general obligations in the the Act in relation to performance and other reporting requirements. Note that within the the Act there are exemptions to the general obligations and Contracting Authorities should make sure they check these and whether they are applicable.

      ⁴Section 52 of  the Act. It should be noted this is subject to the exceptions in relation to certain types of contracts and where the Contracting Authorities considers that the supplier’s performance under the contract could not appropriately be assessed by reference to KPIs.

      ⁵Regulation 32(2)(r) of the Procurement Regulations 2024.

      ⁶Section 71 of the Act and Regulation 39 of the Procurement Regulations 2024.

      ⁷Section 71 of the Act and Regulation 39 of the Procurement Regulations 2024. Contracting Authorities should note that this provision was effective from 1st January 2026 (noting that not all provisions within the Act where effective from the ‘go live date’).

      ⁸Schedule 7, paragraphs 12(3) and 12(4) of the the Act

      ⁹‘Excluded’ referring to an instance where a mandatory ground for exclusion applies and ‘excludable’ where a discretionary ground for exclusion applies. 

      ¹⁰NEC also provides for KPIs in other contracts, for example the FAC-1 Framework Alliance Contract. 

      ¹¹For example, in the NEC User Guide ‘Preparing an Engineering and Construction Contract’.

      ¹²Regulation 39(5) of the Procurement Regulations 2024 prescribes that the rating system for KPIs is to be based on a scale of: Good – Performance is meeting or exceeding the KPI, Approaching Target – Performance is close to meeting the KPI, Requires Improvement – Performance is below the KPI, Inadequate – Performance is significantly below the KPI. Other – Performance cannot be described as good, approaching target, requires improvement or inadequate. 

      ¹³See example boilerplate clauses for use with the NEC4 ECC - Construction Works and Associated Services 2 (CWAS2) / ProCure 23 (P23) - CCS.

      ¹⁴Section 70 of the Act. Contracting Authorities should note that this provision was effective from 1st April 2026 (noting that not all provisions within the Act where effective from the ‘go live date’).

      ¹⁵For example, S 800 in the NEC4 ECC or S 500 in the NEC4 Professional Services Contract (PSC) if using the standard scope sections.

      ¹⁶Note that this section sets out a summary of some of the obligations in the Act in relation to implied terms. Note that within the Act there are exemptions to the general obligations and Contracting Authorities should make sure they check these and whether they are applicable.

      ¹⁷Public Contract Regulations 2015; Regulation 113(2)(a) and Regulation 113(6)(a).

      ¹⁸The ‘Electronic Invoicing and Payment’ Guidance published by the Government in February 2026 confirmed this to be the case and that there is an intention to clarify the wording of section 68(2)

      ¹⁹Section 68 of the Act.

      ²⁰Section 68(6) of the Act.

      ²¹Section 73 of the Act.

      ²²Section 78(2) of the Act. 

      ²³Section 80 of the Act.

      ²⁴Note that invoices though are a feature of other NEC4 contracts such as the Professional Services Contract (PSC) and Facilities Management Contract (FMC).

      Procurement Regulations 2024

      ²⁵Note that this section sets out a summary of some of the obligations in the Act in relation to contract modifications. Note that within the Act there are exemptions to the general obligations and Contracting Authorities should make sure they check these and whether they are applicable.

      ²⁶Section 74 and Schedule 8 of the Act.

      ²⁷Regulation 40 of the Procurement Regulations 2024 and Section 77 of the Act.

      ²⁸Section 75 of the Act. 

      ²⁹Section 77 of the Act.

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