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The publications listed below can be obtained from the EIC Secretariat only. All prices are net, exclusive of German VAT (currently 7%). For further information as to the content of the publication please click on the appropriate headline. Should you be interested in purchasing a hard copy of the specified publication, please order below:
Title Price Copy
EIC Blue Book on Sustainable Procurement
(Published: November 2004)
15.00 €
EIC Contracor's Guide to the FIDIC "New Red Book"
(Published: March 2002, Reprint March 2003 with editorial amendments)
30.00 €
EIC Contractor's Guide to the FIDIC "Gold Book"
(Published: May 2009)
30.00 €
EIC Contractor's Guide to the FIDIC "New Yellow Book"
(Published: March 2003)
30.00 €
EIC Contractor's Guide to the FIDIC "Silver Book" 2nd Edition
(Published: August 2003)
30.00 €
EIC Contractor's Guide to the MDB Harmonised Construction Contract, June 2010
(Published: April 2011)
30.00 €
EIC Memorandum on "Frequently Asked Questions on Public-Private Partnerships"
(Published: September 2006)
30.00 €
EIC Turnkey Contract
(Published: 1994)
20.00 €
EIC White Book on BOT / PPP
(Published: April 2003)
30.00 €
Personal Information

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EIC Blue Book on Sustainable Procurement

(November 2004)

15,- € excl. VAT and posting

 

Foreword


Throughout the 20th century, infrastructure facilities and services in the transport, energy, water and sewerage sectors provided by European international contractors have made significant contributions to the economic and social development of more than 150 countries in all continents. They have not only contributed to employment, income and taxation in the host countries, but generally enhanced the European image abroad. Through constant co-operation with local partners, suppliers and subcontractors, the transfer of technology and know-how and the training of local people, these companies have helped to create a climate for cross-cultural understanding as well as a potential for economic growth and thus made a contribution to what is nowadays labelled “sustainable development”. It is fair to say that internationalisation and globalisation have a long tradition in the European construction industry and, at the beginning of the 21st century, European international contractors, despite difficulties within the global business environment, are still committed to this tradition.

For a number of years, however, many European international contractors have actually ceased bidding for international infrastructure projects in developing and transition countries financed by international donor agencies, such as the Multilateral Development Banks (MDBs) and Bilateral Donor Organisations (BDO’s)*. This has not gone unnoticed by some donors who have questioned the limited interest of European companies in their multilateral infrastructure tenders. Whilst some observers assert that European construction companies are not prepared to enter into international competitive bidding any longer because of a lack of competitiveness, such conjecture is both simplistic and misconceived since a number of complex reasons underlie the poor appetite of European companies for multilateral infrastructure tenders. In hindsight, the drivers for the strategy change can be traced back to several complementary trends, which started in the 1990’s and continue today.

One important factor that emerged in the last decade of the 20th century is the fundamental shift of MDB funding away from the infrastructure sector to the social sectors and to programmatic adjustment lending programmes. During the 1990’s, the focus of MDBs switched form capital assets to so called “soft” projects, such as policy advice and institutional capacity-building, which, in reality, signified a sharp decline in multilateral infrastructure lending. Instead of funding new national road networks, mostly rehabilitation works or rural roads were financed; in some instances several times, and instead of large dams, donors preferred to fund the erection of smaller barrages.

This policy shift was justified in a number of ways: one was the notion that governments of developing and transition countries had only limited capacity to implement large infrastructure investments and little or no experience of operating and maintaining new assets once built; also governments in some developing countries had embarked on the privatisation of public assets and sought private participation in infrastructure investments in preference to multilateral lending, a trend that boomed in the mid-1990’s but collapsed in the wake of the Asian crisis in the late 1990’s. At the other end of the spectrum, some commentators questioned the significance of a modern infrastructure network developing economic growth and alleviating poverty in the light of the inadequacies in the economies of some developing and transition countries. Last, but not least, by the end of last century MDBs had adopted rigid environmental and social safeguard policies. As a consequence MDBs were prevented them from financing infrastructure projects where their clients were not yet ready to share their vision of sustainable development. These policy changes in the funding of infrastructure projects by international donors effectively prevented many European international contractors from maintaining a permanent presence in developing countries, especially in those countries where aid funds were the major source of infrastructure financing.

Also during the 1990’s the international construction business that did not depend on MDB funding changed significantly, particularly in the so-called emerging markets in Eastern Asia as well as Central and Eastern Europe. Following the economic upswing of these regions with the era of globalisation, market focus shifted away from the traditional construction export markets in Africa and parts of Latin America. Yet, the rapid development of domestic contractors intensified the competition and caused European international contractors to adopt new strategies, mainly the establishment of local subsidiaries, as a preferred way of doing business, rather than continuing the traditional export business of posting expatriate staff abroad. In this way, European companies clearly gave preference to countries offering investment-friendly conditions (such as political and economic stability as well as fair procurement and contract management practices) in preference to those countries with extensive bureaucracy and an inefficient business environment. The strong development of the construction sector in Central and Eastern Europe over the last decade clearly demonstrates that European international contractors have neither disregarded international contracting nor do they fear competition, provided it is organised in a reasonable, fair and transparent manner. However, in these times of particular focus on “shareholder value”, it is inevitable that market pressures will force European international contractors to withdraw from regions with a weak business and investment climate. This drift away from participation in this market will continue unless the project and contract management practices of Contracting Authorities and international donors improve.

Finally, with the new concept of “Public-Private Partnerships” gaining ever more attention and acceptance across the globe, the leading European international contractors have developed their construction core business “upstream” and “downstream” and have integrated new elements of financing, development, design and operation into their supply chain. Regrettably, until a short while ago, these innovative options of financing and procuring infrastructure services seemed to have gone almost unnoticed by the MDBs. After fifty years of experience in financing infrastructure projects, which was certainly not always satisfactory, MDBs were, until recently, reluctant to reconsider their procurement policies and appear reluctant to critically examine the value added by the conventional design-bid-build method of procurement. Preference still seems to be based on the “lowest evaluated tenderer”. Nevertheless, a high-quality, environmentally-friendly, socially responsible and transparent, “sustainable” finished product is expected.

EIC observes that the MDBs are conducting somewhat contradictory policies which will inevitably introduce tensions between conflicting goals. If the international donor community wishes to achieve the U.N. Millennium Development Goals by the year 2015, a change of paradigm is needed in the procurement policy, too.

In a nutshell: for sustainable development to be achieved, “sustainable procurement” is indispensable in both theory and practice.

The procurement process supervised by MDBs should inspire the participating tenderers to make optimal use of their experience, technological and financial capabilities and creativity to provide solutions which optimises the balance between technical and financial considerations. Against this background, we have prepared our “EIC Blue Book on Sustainable Procurement” which examines the current procurement philosophy and practice of MDBs and evaluates this philosophy and practice against the fundamental considerations that are generally guiding their procurement transactions:

  1.  The need for economy and efficiency in the implementation of the project, including the procurement of goods and works involved;
  2.  The interest in giving all eligible bidders the same information and equal opportunity to compete in providing goods and works financed by the MDB;
  3.  The interest in encouraging the development of domestic contracting and manufacturing industries in the borrowing country; and
  4.  The importance of transparency in the procurement process. 

 

Executive Summary


According to a recent World Bank analysis concerning the infrastructure needs for the years from 2000 – 2010, the annual investment needs for infrastructure facilities in the developing world amount to around 465 billion US$ of which 50% would be needed for new construction and the other 50% for maintenance and rehabilitation. Similar estimates show that meeting this challenge of increasing access to quality infrastructure services will require sizeable investments in the range of about 7% of GDP for all developing countries for both new investment and maintenance expenditures. Hence, creating capacity and incentives for ongoing maintenance of capital investments is a huge challenge across all infrastructure sectors.

In the past, however, the focus of tender procedures under MDB supervision has been focused solely on the lowest construction cost of an infrastructure facility rather than the optimisation of the project’s life-cycle costs. Inevitably, this practice has led to some frustration of donor efforts, with investment in capital works failing to produce satisfactory and sustained service levels. Rather, this practice has in fact tended to subsidise inefficient public utilities not connected to the existing networks. EIC is aware of such shortcomings and fully shares the vision of the international development community that MDB funded spending for infrastructure - whether provided in form of a grant, a loan or a guarantee, and whether these funds are collected directly from the taxpayer or through the issuance of debt securities based on the MDB’s subscribed capital (which is guaranteed by the taxpayer) - in fact reaches the poorer parts of the populations, that the services this money finances, respond to their needs and preferences, that these services are delivered efficiently and that public funds are used in a way that leverages private financing of service delivery. This holistic approach is particularly relevant for transport infrastructure, due to both the magnitude of the initial investment and the strategic importance for the economic development of developing and transition countries. EIC observes that if MDBs wish to achieve all the above-stated policy objectives, a change of paradigm is needed in their procurement policy, too.

 

Traditional Tender Process

In case of the traditional tender process, MDBs should place particular importance on the pre-qualification stage, the quality of the tender documents, the fairness of the Conditions of Contract and the adequacy of tender securities. Particular attention should be paid to the following

  1.  The selection process should commence with a standardised pre-qualification procedure aiming to establish a limited number of experienced and qualified bidders that demonstrably intend to submit competitive tenders and have the proven capability to live up to the MDB’s policy goals on environmental sustainability and social accountability;
  2.  In order to overcome notorious under-funding for the preparatory project stage and to improve the quality of the tender documents, EIC recommends that the Contracting Authority takes full responsibility for the quality and sufficiency of studies, specifications, drawings, etc. prepared by its consulting engineer(s) before it invites tenders;
  3.  It is of paramount importance that the procurement guidelines irrevocably obligate the Contracting Authority not to deviate in the Conditions of Contract from a fair balance of risk, either through the prescription of general principles or through the mandatory use of a standard contract form which also ensures the enforcement of dispute settlement decisions through a Dispute Board and/or International Arbitration.
  4.  The Standard Bidding Documents of MDBs should contain provisions for the use of either a Demand Guarantee or a Contract Bond as may be appropriate to the project.

Although the traditional method of project procurement may be a reliable form of procurement, it is certainly not the only viable form of procurement. In fact, there are inherent disadvantages associated with the design-bid-build method of contracting: a big challenge are the many interfaces in a traditional design-bid-build project which requires all parties to adopt complex management procedures and these procedures serve to increase costs with little added value. Furthermore, under conventional procurement arrangements, the knowledge and skills of contractors play no role at all in the design stage, although early involvement of such skills can significantly contribute to the efficiency of the entire process. The traditional method of procurement does not provide a mechanism to draw on the private sector’s capabilities to maintain and operate the facility.

 

Innovative forms of procurement

Therefore, it is one of the most firmly held beliefs of EIC that much benefit would accrue to Contracting Authorities and MDBs if innovative forms of procurement are more frequently adopted. Private sector practice shows that alternative approaches can be implemented without any trade-off on efficiency, competition and transparency – quite the opposite:

  1.  The first option for the Contracting Authority is to reserve more room for quality-based selection of tenders within the traditional procurement process. Apart from upgrading the procedures on pre-qualification, tender documentation, conditions of contract and securities, Contracting Authorities could foster the submission of reasoned tenders by adopting various selection criteria, such as basing the award on the Economically Most Advantageous Tender (EMAT) rather then the lowest price, inviting Alternative Proposals in appropriate cases and carefully applying a Two-envelope system.
  2.  The second option for the Contracting Authority is to make better use of the tenderers’ skills in the design phase by procuring a “turnkey” or “design-build” project. Under such a procurement scheme the Contracting Authority notifies the tenderers of the basic project parameters in its Employer’s Requirements and divides the selection procedure into a two-stage process where a certain degree of flexibility for discussions with tenderers is permitted in order to integrate their ideas and concerns.
  3. The third option for the Contracting Authority is to use a form of contract rewards the contractor for achieving a specified level of performance in terms of “outputs” rather than focusing on inputs. This arrangement may resemble a “design-build” or “turnkey” project, but the Contracting Authority can extend this principle and fully delegate the delivery of a service to a private third-party provider under long-term contracts that comprise planning, construction, rehabilitation, maintenance and operation. As a general rule, any defect – whether in the design or construction or operation phase – falling within the scope of the works under such Performance-Based Procurement will be the responsibility of the contractor.
  4. The fourth option for the Contracting Authority is to use a variant of the so-called Public-Private Partnership (PPP) model and to “outsource” the delivery of a public service to the private sector. It has to be borne in mind that there is not yet an overarching definition for PPP and that the term describes more generally a wider range of arrangements where the public sector and the private sector enter into a formal agreement in order to draw on private resources – either financial, commercial or technical – in providing infrastructure works and/or delivering public services. PPP models are most common in the infrastructure sector, both social and economic, but equally can be applied to public buildings. The common feature is that these projects comprise a substantial initial capital expenditure for construction and/or rehabilitation and they attract maintenance and operation costs after completion of the construction phase, for which no government up-front borrowing is required. These costs are refinanced over the project’s life-cycle either through “user” or “unitary” payments made by the state. PPPs involving a donor-funded grant element, such as the EU Structural or Cohesion funds or even MDB-funded schemes such as Output-Based Aid, would also be a facet of PPP with the payments, at least partly, disbursed from Official Development Assistance funds rather then the state budget or the users, but similarly paid over the duration of the private sector service delivery. Conversely, short term management contracts with little or no capital expenditure are not addressed in this document.

In conclusion, it can be stated that in order to achieve better value for money on projects financed under MDB supervision, MDBs should review and optimise their current procurement regime. EIC submits that “Sustainable Procurement” starts with an efficient pre-qualification of applicants, followed by a tender process based on high-quality documents and balanced contract conditions. The period that follows the submission of bids, and which runs until the contract becomes effective, is not only the part of the procurement process that is least prescriptive but is also the most under utilised. It is the period when the contractor’s offer must be rigorously tested to ensure that it is completely compliant with the requirements of the Contracting Authority. Such requirements must be technically robust, clear and unambiguous. Finally, to ensure the highest quality for the lowest price (i.e. the most sustainable project solution), MDBs should more often apply innovative tender procedures that allow qualified bidders to bring their expertise to the competition.

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EIC Contractor's Guide to the FIDIC "New Red Book"

(March 2002, reprint March 2003 with editorial amendments)

30,- €  excl. VAT and posting

 

Executive Summary


We readily accept that in some respects the Red Book is an improvement on the Fourth Edition. However, we believe that the balance of all amendments will increase the risk to contractors and have concluded therefore that the Red Book is a less satisfactory form of contract than the Fourth Edition. From a contracting perspective, the clauses dealing with the provision of confidential information, fitness for purpose, tests on completion and notice of claim represent a move in the wrong direction. Whilst we recognise that today’s engineer can no longer act impartially, we believe that some of his new powers could prove problematical in practice, especially where he is required to make judgements as if he were an experienced contractor.  

Improvements

The first of the welcome changes requires the Employer to demonstrate that sufficient finance is available to carry out the Works (Sub-Clause 2.4). This will be particularly important where the immediate client is a Special Purpose Company (SPC) and is funded by loans. For contracts placed by an SPC it is usual for the lending banks to put a Direct Agreement in place, which permits them to take over control of the contract should the SPC default. Where such an agreement exists it is important that the Contractor is given the opportunity to study and consider its terms and conditions before the construction contract is finalised. This clause will also prove useful where major variations are ordered or where the Employer has acknowledged the Contractor's right to any significant payment for additional works or major claims.

The procedure for dealing with Employer’s Claims (Sub-Clause 2.5) is also an improvement over the Fourth Edition. The Employer must now follow a set procedure if he considers himself entitled to any payment and must give notice as soon as practicable and provide particulars of the claim. These provisions are mandatory. The Engineer must then make a determination but the Contractor can refer such a determination to a new and independent body, the Disputes Adjudication Board (the DAB, Sub-Clause 20.2). These new provisions should go a long way to prevent any unreasonable actions of the Employer, especially in terms of the application of Delay Damages, a not uncommon practice with some employers in countering or indeed negating the legitimate claims of the Contractor. The DAB can comprise either one or three members, to be appointed by the Employer and the Contractor. The appointment of the DAB expires only after a written discharge by the Contractor has become effective and the DAB is therefore available throughout the duration of the Contract and provided both Parties agree they can refer any matter to it and this provision could prove useful in resolving disputes before they effect the progress of the works. The creation of the DAB is a welcome addition to the Red Book and the binding nature of its decisions, even if either Party is dissatisfied is an added benefit.

Our friendly and impartial Engineer has been laid to rest! The Engineer is now required to act for the Employer (Sub-clause 3.1) and no longer has a duty to act impartially. Why do we consider this a change for the better? Simply because it recognises what has long been the established custom and practice in the industry. In any event, we believe that any possible downside will be more than compensated for by the introduction of the DAB.

Whilst the Employer can still make claims on the Contractor’s Performance Security (Sub-Clause 4.2), any claim must now be made strictly in accordance with the terms laid down in the Contract. This is an improvement on the Fourth Edition and the Contractor is offered protection for all costs incurred should the Employer make a false claim and the Employer must indemnify the Contractor accordingly. Whereas the Fourth Edition merely required the Employer to notify the Contractor prior to making a claim, the Red Book limits the Employer’s claims under this guarantee to amounts to which the Employer is entitled.

Retrogressions

Regrettably there are a quite a few clauses in the Red Book which have been toughened up and whilst the principal obligations and risks carried by the Contractor are still construction oriented, they are generally more onerous than under previous construct only editions and the overall effect is to increase the risk profile by comparison with the Fourth Edition.

The Contractor is now required (Sub-Clause 1.12) to provide all such confidential information as the Engineer may reasonably require in order to verify the Contractor’s compliance with the Contract. This clause is overly demanding and could place the Contractor in a difficult position in situations where a dispute has arisen, especially with regard to third parties. A similar provision to that in the Silver Book would be more appropriate, which sets out a mutual confidentiality obligation and provides for agreement of privileged information pre-tender. This would be a more sensible approach.

The Contractor is entitled to time extension and payment of additional cost suffered due to errors in Setting Out information provided by the Employer (Sub-Clause 4.7). However, this entitlement is now subject to the test of whether an experienced contractor would spot the error and the Engineer will be the judge on this matter. Not only does the Engineer act for the Employer; he is also required to make decisions as if he were an experienced contractor!

Of particular concern for contractors working under English or Common Law is the introduction of an obligation (Sub-Clause 4.1), which stipulates that any designs by the Contractor must be fit for purpose. Under those jurisdictions, the Employer's designer will only have an obligation to design with reasonable skill and care and this could lead to some interesting disputes should difficulties arise as a result of any conflicts or anomalies that occur between the Employer’s and the Contractor’s designs.

A requirement to carry out Tests on Completion has been introduced (Clause 9) and is a novel concept for a construct only contract. It is difficult to see what type of contract would qualify and it is not the tests themselves that are the problem but rather the punitive sanctions that could be suffered in the event of failure to pass such tests. In extreme circumstances, these could include dismantling the structure, removing it and returning the site to its original condition and repaying all monies received by the Contractor. This clause, which may well be attractive to the less reasonable type of employer should be deleted in its entirety - a possibility that FIDIC actually provide for if the clause is inappropriate to the nature of work being carried out. This makes it even more difficult to understand why it is there in the first place.

Most parties to a construction contract would agree that the ability of any contractor to prepare an accurate cost estimate is completely dependent on the quality and comprehensiveness of the information provided at tender stage. In the Fourth Edition, the Employer was required to supply all available data on hydrological and sub-surface conditions. It is difficult to understand therefore the provisions of the Red Book (Sub-Clause 4.10) which modify that requirement to relevant data in the Employer’s possession. It is difficult to see how it will help employers to limit in any way the information provided to bidders and contractors should try to amend this requirement to reflect the terms of the Fourth Edition.

Where the Contractor encounters unforeseen conditions (Sub-Clause 4.12), the Engineer may now consider whether conditions in similar parts of the Works were more favourable than could have been foreseen before finally determining any entitlement to additional costs. If, in the Engineer's opinion such favourable conditions were encountered, the Engineer can take them into account when determining any entitlement to additional Cost. This provision could be extremely prejudicial to the Contractor and is open to widely differing interpretations. A further new concept permits the Contractor to provide evidence of the physical conditions foreseen in his tender calculation. However, if such evidence is provided, the Engineer may or may not take account of it and is not bound by it. It would appear that FIDIC’s objective is to use every means possible to reduce the financial impact of claims for unforeseeable conditions but the extent of the discretionary powers now at the Engineer’s disposal seem more likely to increase the potential for dispute and disagreement.

The Employer now has the right, not present in the Fourth Edition, to terminate for convenience (Sub-Clause 15.5). This right can be exercised at any time 28 days after giving written notice. The payment terms do not provide for loss of profit and are inequitable and inappropriate in the case of termination for the Employer’s convenience. In such circumstances, loss of profit should be payable to the Contractor. The clause states that the Employer may not terminate in order to undertake the Works directly or arrange for them to be completed by another Contractor.

The Contractor’s obligation to issue a notice has changed for the worse and he is now required to give notice 28 days after becoming aware, or when he should have become aware (Sub-Clause 20.1). Contractors should beware! Failure to comply with this provision will incur a fierce penalty and will result in the Contractor forfeiting his right to an Extension of the Time for Completion and to additional payment and the Employer is also discharged from any liability. The penalty for failure to comply with a purely technical requirement to give notice is unduly harsh. This is the first time that a FIDIC contract has removed the fundamental right of the Contractor to make a claim merely as a result of a failure to comply with a fixed period of time to submit the required notice. Whilst we accept that the Contractor may prejudice his entitlement by failing to comply strictly with a notice provision we cannot agree that he should forfeit his rights altogether and neither should the Employer be discharged from any and all liability. It becomes doubly unreasonable that this provision also applies when the Employer is responsible for causing the problem in the first case. It is revealing to compare these terms with the obligations of the Employer where either the Employer or the Engineer is only required to give notice as soon as practicable after becoming aware. This demonstrates once again the unfair imbalance between the respective obligations of the Employer and the Contractor that is becoming symptomatic of FIDIC contract forms. Comments on a number of individual clauses follow and deal with the matters referred to above in greater detail.

 

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EIC Contractor's Guide to the FIDIC "Gold Book" (May 2009)

30,-€  excl. VAT and posting

 

Executive Summary


EIC welcomes, in principle, that FIDIC have enlarged its suite of standard forms of contract with an innovative contract form which is destined to allow construction and engineering industries to compete on quality, efficiency and life-cycle cost. The FIDIC DBO Contract borrows in large parts from the structure and the wording of the FIDIC 1999 Yellow Book, whereas the requirements regarding the Operation Service Period have been inserted in various provisions and most prominently in Clause 10.

This is in itself a rather bold effort, since the FIDIC DBO Contract would then compete with the more usual separate forms of contracts, i.e. one covering Design-Build and the subsequent form covering the operations and maintenance phase of a project (or "Operation Service Period" as it is termed in the Contract).

In comparison, such contracts would comprise a substantial volume of pages and provisions, which would outnumber the FIDIC DBO Contract by far. This fact is not necessarily a drawback, but the key issue seems to be whether a combined format is sensitive enough to cater for the differences between the design-build and the operations and maintenance phases of a DBO project.
EIC cannot conceal a certain degree of uneasiness in that the FIDIC DBO Contract assigns to the Contractor a strict responsibility for the quality, or any loss or damage to the asset, or loss of production of the facility for a period of 20 years or more. By doing so, the Contract virtually puts the Contractor in a concessionaire’s role, however, exposing him to a much higher degree of financial liability, which might be unacceptable for contractors.

EIC, therefore, would have preferred that FIDIC had distinguished more clearly between the Design-Build Period and the Operation Service Period, for instance through the provision of a standard form of contract for Operation Service as an optional Annex to the FIDIC 1999 Yellow Book. Having said this, we respect the attempt of the drafting committee to combine the Design-Build Period and Operation Service Period in one comprehensive contract with on-going responsibilities and obligations for both Parties.

EIC would like to note, however, that there are important sector specifics and even sub-sector peculiarities which potential users of this form will have to consider. For instance, in the transport sector the “Contractor” of the FIDIC DBO Contract may be one or more companies of the same industry, whilst in the energy and water sectors the “Contractor” will necessarily be a joint venture composed of members drawn from different industries. Hence, EIC questions whether a “one size fits all approach” will do justice to such differences and also whether the insurance/surety industry will be ready to offer the corresponding products.

Comparing the FIDIC DBO Contract with the FIDIC 1999 New Books, and in particular the FIDIC 1999 Yellow Book, EIC found that the new standard form contains both improvements on and retrogressions from the 1999 editions.

 

Improvements over the FIDIC 1999 editions


EIC welcomes FIDIC's adoption of our proposal to group the 83 definitions in Sub-Clause 1.1 [Definitions] by alphabetical order, thus making the list of definitions more user-friendly.

It is positive that the Employer under Sub-Clause 2.4 [Employer’s Financial Arrangements] must detail his financial arrangements from the outset in a Financial Memorandum to be submitted at Tender stage in accordance with Sub-Clause 1.1.43.

EIC appreciates that, with respect to the Operation Service Period, FIDIC have inserted a third paragraph in Sub-Clause 13.1 [Right to Vary] which regulates the Employer’s wish to instruct a Variation during the Operation Service Period. This new paragraph clarifies that the Contractor shall not be obliged to proceed with the Variation unless both Parties have agreed on the price.

In our EIC Contractor’s Guides to the FIDIC 1999 New Books we have criticised the Employer's right to terminate for convenience under Sub-Clause 15.5. Under the FIDIC DBO Contract, this right can still be exercised at any time on 28 days' written Notice. Whilst the payment terms of the FIDIC 1999 New Books did not provide for loss of profit and thus were inequitable and inappropriate in the case of termination for the Employer’s convenience, the new Sub-Clauses 15.5 and 15.7 make reference to Sub-Clause 16.4 [Payment on Termination] which now does in fact provide under (c) for loss of profit following such termination.

EIC acknowledges that FIDIC have made a number of changes to the traditional approach of addressing the issues of risk allocation, insurance and force majeure in Clauses 17 – 19. These issues are now presented in a more logical order and the term “Force Majeure”, which has different legal interpretations and connotations under different jurisdictions, has been replaced by the more neutral term “Exceptional Event”. However, the new structure and wording carries some pitfalls which have to be closely considered by contractors (see retrogressions below).

Clause 20 [Claims, Disputes and Arbitration] has been restructured in the FIDIC DBO Contract and several important improvements have been made to this Sub-Clause in respect of: (i) the notice provisions under Sub-Clause 20.1 [Contractor’s Claims]; (ii) the use of a standing Dispute Adjudication Board (“DAB”) in place of an ad-hoc body as envisaged by the FIDIC 1999 Yellow/Silver Books; and (iii) the enforceability of DAB decisions under the new Sub-Clause 20.9 [Failure to Comply with Dispute Adjudication Board’s Decision].

 

Retrogressions from the FIDIC 1999 editions


Regrettably, there are also retrogressions from the previous standard forms of contract and quite a few clauses that are inappropriate for the type of contract covered by the FIDIC DBO Contract which, by comparison with previous editions, have the overall effect of increasing the risk to the Contractor.

FIDIC have chosen to label the representative acting on behalf of the Employer in Clause 3 as an “Employer’s Representative” (as in the FIDIC Silver Book), whilst in fact this representative has been vested with the power and authority of an “Engineer” (as in the FIDIC 1999 Yellow Book). Such regulation is inconsistent with the general philosophy of a DBO Contract according to which the Employer can make the choice of a comprehensive contractual package and should only do so if he has confidence in the competence, resources and experience of his potential Contractor. Given the fact that the FIDIC DBO Contract entrusts the Contractor with the entire responsibility for designing, constructing and operating the Works/facility, EIC would have expected that FIDIC adopt not only the same wording, i.e. “Employer’s Representative”, but in relation to his Determinations also the same mechanism as in Sub-Clause 3.5 of the FIDIC Silver Book where “Each Party shall give effect to each agreement or determination, unless the Contractor gives notice, to the Employer, of his dissatisfaction with a determination within 14 days of receiving it”.

The second paragraph of Sub-Clause 4.2 [Performance Security] implies that the Performance Security shall (albeit reduced) be valid also for the Operation Service Period. Notwithstanding the unlikely scenario where a Contractor would concede to provide such an instrument and thereby supposedly commit a considerable part of its existing credit facilities to one project only, EIC questions whether a security for such a long period of time would be issued at all by any bank or a surety. The concept will hardly be compatible with the North American performance bond system, but also bank guarantees will usually only cover the construction period and will certainly not be available for twenty years. In addition, EIC questions the need to extend the validity of the Performance Security into the Operation Service Period given the existence of Sub-Clauses 14.18 [Asset Replacement Fund] and 14.19 [Maintenance Retention Fund]. The existence of these funds justifies the concern that the project may be “over-secured” and thereby raising unnecessary additional costs.

Clause 9 [Design-Build] introduces a new term which is defined in Sub-Clause 1.1.29 as “all work to be performed by the Contractor under the Contract to design, build, test and complete the Works and obtain the Commissioning Certificate issued in accordance with Sub-Clause 9.12 [Completion of Design-Build]". EIC considers the interrelation between terms forming part of Design-Build and the subsequent Operations Service Period as fundamental. It appears, however, not entirely clear under the FIDIC DBO Contract how the term “Design-Build” interrelates with the definition of the “Works” under 1.1.82 on the one hand and, on the other hand, how Sub-Clause 9.12 interrelates with Sub-Clause 11.7 [Commissioning Certificate]. This confusion could be a regular source of disputes if not clarified by the Parties. For the purpose of this Guide EIC assumes that Design-Build + Operation Service = Works.

Clause 10 [Operation Service] is not adequate to regulate the Operation Service Period. In EIC’s experience, the contract provisions relative to the Operation Service Period need to be much more detailed than FIDIC has provided for under Clause 10. Thus, the FIDIC DBO Contract appears to be under-dimensioned in respect of the Operation Service Period.

The absence of a reasonable limitation of liability under Sub-Clause 17.8 adds to the Contractor’s risk in the FIDIC DBO Contract, which in consideration of the life span of a DBO project, is regarded as unsatisfactory and unjustified. The modifications introduced by the FIDIC DBO Contract water down the limitation concerning consequential damages and neutralises the benefit of this crucial Sub-Clause. By excluding Sub-Clauses 17.9 [Indemnities by the Contractor] and 17.10 [Indemnities by the Employer] from the limitation of liability both the Contractor and the Employer are fully liable for the events outlined in these two Sub-Clauses. Furthermore, the newly introduced last paragraph of Sub-Clause 17.9, which was not found in the FIDIC 1999 New Books, is entirely alien to the concept of “indemnities” that in the past only referred to the compensation for the violation of third party rights. It is not conceivable why FIDIC inserted a “fitness for purpose” obligation for the Works into the context of indemnities.

The total liability during the Operation Service Period should, in the view of EIC, be reduced and should not equal the amount of liability during the Design-Build Period. As regards delay damages, EIC does not understand why they are not the sole remedy for delay, as this is generally the position where a contract provides for liquidated damages.

As regards the procedure for Contractor’s claims, EIC does not agree with the effect of subparagraph (c) of Sub-Clause 20.1 [Contractor’s Claims], by which “the Notice given under paragraph (a) above shall be deemed to have lapsed and no longer considered as a valid Notice” if the Contractor fails to establish the principles of the claim within the said 42 days or other time allowed or approved. It may not be possible for the Contractor to establish these principles in such a short time-frame, particularly if (nominated) Subcontractors are involved. As stated in the EIC Contractor’s Guides to the FIDIC 1999 New Books, EIC believes that the general principle to remove the fundamental right of the Contractor to make a claim merely as a result of a failure to submit the required Notice within a fixed period of time is inequitable. EIC has been advised that such time bar would be regarded as onerous and not be upheld under some civil law jurisdictions. The prescribed provision would contribute to unnecessary discussions and ultimately disputes between the Parties rather than co-operation.

Comments on a number of individual clauses follow and deal with the matters referred to above in greater detail.

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EIC Contractor's Guide to the FIDIC "New Yellow book" (March 2003)

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Executive Summary


As we explain in the Introduction to this guide, it is EIC’s view that contracts for the design and construction of building and civil engineering works (even where equipment supply is included) require a different contractual framework to contracts which cover only equipment supply and installation. Consequently, the comments and recommendations contained within this guide are intended to assist contractors engaged in design-build contracts of a building or civil engineering nature regardless of whether or not equipment is included.

Improvements over previous forms


EIC welcomes the requirement whereby the Employer now has to demonstrate that sufficient finance is available to carry out the Works (Sub-Clause 2.4). This will be particularly important where the immediate client is a Special Purpose Company (SPC) funded by loans. For contracts placed by an SPC it is usual for the lending banks to put a Direct Agreement in place, which permits them to take over control of the contracts should the SPC default. Where such an agreement exists, it is important that the Contractor is given the opportunity to study and consider its terms and conditions before the construction contract is finalised. This clause will also prove useful where major variations are ordered or where the Employer has acknowledged the Contractor's right to any significant payment for additional works or major claims.

The procedure for dealing with Employer’s Claims (Sub-Clause 2.5) is also an improvement over previous FIDIC editions. The Employer must now follow a set procedure if he considers himself entitled to any payment and must give notice as soon as practicable and provide particulars of the claim. These provisions are mandatory. The Engineer must then make a determination but the Contractor can refer such a determination to a new and independent body, the Disputes Adjudication Board (the DAB, Sub-Clause 20.2). These new provisions should go a long way to prevent any unreasonable actions of the Employer, especially in terms of the application of Delay Damages, a not uncommon practice with some employers in countering or indeed negating the legitimate claims of the Contractor. The creation of the DAB is a welcome addition to the Yellow Book and the binding nature of its decisions even if either party is dissatisfied, is an added benefit.

The Engineer is now required to act for the Employer (Sub-clause 3.1) and no longer has a duty to act impartially. This is considered a change for the better because it recognises what has long been established custom and practice in the industry. In any event, we believe that any possible downside will be more than compensated for by the introduction of the DAB.

Whilst the Employer can still make claims on the Contractor’s Performance Security (Sub-Clause 4.2), any claim must be made strictly in accordance with the terms laid down in the Contract. This is an improvement on previous FIDIC editions, as the Contractor is offered protection for all costs incurred should the Employer make a false claim and the Employer must indemnify the Contractor accordingly. Whereas previous editions merely required the Employer to notify the Contractor before making a claim, the Yellow Book limits the Employer’s claims under this guarantee to amounts to which the Employer is entitled.

 

Retrogressions


Regrettably there are a quite a few clauses that are inappropriate for the type of contract covered by the Yellow Book and by comparison with previous editions have the overall effect of increasing the risk to the Contractor.

The Contractor is now required (Sub-Clause 1.12) to provide all such confidential information as the Engineer may reasonably require in order to verify the Contractor’s compliance with the Contract. This clause is overly demanding and could place the contractor in a very difficult position in situations where a dispute has arisen, especially with regard to third parties. A similar provision to that in the Silver Book would be more appropriate, which sets out a mutual confidentiality obligation and provides for agreement of privileged information pre-tender. This would be a more sensible approach.

The Contractor is entitled to claim for time extension and payment of additional cost suffered due to errors in Setting Out information provided by the Employer (Sub-Clause 4.7). However, this entitlement is now subject to the test of whether an experienced contractor would spot the error and the Engineer will be the judge on this matter. Not only does the Engineer act for the Employer; he is also required to make decisions as if he were an experienced contractor!

Of particular concern for contractors, working under English or Common Law is the introduction of an obligation (Sub-Clause 4.1) which stipulates that the works, including design, must be fit for purpose. Under those jurisdictions, the obligation is to design with reasonable skill and care and this could lead to some interesting disputes should difficulties arise as a result of any conflicts or anomalies that occur between the Employer’s and the Contractor’s designs. The Yellow Book contains no obligation on the Employer to provide a definition of “Intended Purpose” and this should be agreed by the Parties before contract signature.

The concept of an Employer nominating a subcontractor in connection with Variations (Sub-Clause 4.5) is unacceptable in a design and build contract. The Contractor must have an absolute right to choose his subcontractors and the opportunity offered by the Yellow Book, which is only to raise reasonable objection to such nomination, is unacceptable. Contractors would be well advised to avoid or renegotiate the terms of any contract that permits the interference of the Employer in the selection of subcontractors.

Most parties to a construction contract would agree that the ability of any contractor to prepare an accurate cost estimate is completely dependent on the quality and comprehensiveness of the information provided at tender stage. It is difficult to understand therefore the provisions of the Yellow Book (Sub-Clause 4.10) which requires that only relevant data on sub-surface and hydrological conditions, which is in the Employer’s possession has to be provided. In previous editions, the Employer had to supply all such available data. It is difficult to see how it will help employers to limit in any way the information provided to bidders. Contractors should try to amend this requirement to reflect the terms of previous editions.

Where the Contractor encounters unforeseen conditions and submits a claim (Sub-Clause 4.12), the Engineer may now consider whether conditions in similar parts of the Works were more favourable than could have been foreseen before finally determining any entitlement to additional costs. If, in the Engineer's opinion, such favourable conditions were encountered, the Engineer can take them into account when determining any entitlement to additional Cost. This provision could be extremely prejudicial to the Contractor and is open to widely differing interpretations. A further new concept permits the Contractor to provide evidence of the physical conditions foreseen in his tender calculation. However, if such evidence is provided, the Engineer may or may not take account of it and is not bound by it. It would appear that FIDIC’s objective is to use every means possible to reduce the financial impact of claims for unforeseeable conditions but the extent of the discretionary powers now at the Engineer’s disposal seem more likely to increase the potential for dispute and disagreement.

Although Sub-clause 5.1 is considerably different from the corresponding sub-clause in the Silver Book, the contractor should be aware that the Yellow Book still requires the Contractor to diligently scrutinise the Employer’s Requirements, including design criteria and calculations. After commencement of the Works, the risk (and consequences) of any errors in the Employer’s Requirements will pass to the Contractor, unless such errors could not have been discovered by an experienced contractor. The application of the test as to what an experienced contractor should have foreseen will pose similar problems to the situation where unforeseeable physical conditions are encountered (Sub-clause 4.12 refers).

The Employer now has the right to terminate for convenience (Sub-Clause 15.5)! This right can be exercised at any time 28 days after giving written notice. The payment terms do not provide for loss of profit and are inequitable and inappropriate in the case of termination for the Employer’s convenience. In such circumstances, loss of profit should be payable to the Contractor. The clause states that the Employer may not terminate in order to undertake the Works directly or arrange for them to be completed by another Contractor.

The Contractor’s obligation to issue a claim notice has changed for the worse and he is now required to give notice of claim 28 days after becoming aware, or when he should have become aware (Sub-Clause 20.1). Failure to comply with this provision will incur a fierce penalty and will result in the Contractor forfeiting his right to an Extension of the Time for Completion and to additional payment. The Employer is also discharged from any liability. The penalty for failure to comply with a purely technical requirement to give notice of claim is unduly harsh. It is inequitable to remove the fundamental right of the Contractor to make a claim merely as a result of a failure to submit the required notice within a fixed period of time. Whilst we accept that the Contractor may prejudice his entitlement by failing to comply strictly with a notice provision we cannot agree that he should forfeit his rights altogether and neither should the Employer be discharged from any and all liability. It becomes doubly unreasonable that this provision also applies when the Employer is responsible for causing the problem in the first place. It is revealing to compare these terms with the obligations of the Employer where either the Employer or the Engineer is only required to give notice as soon as practicable after becoming aware. This demonstrates an unreasonable imbalance between the respective obligations of Employer and Contractor that is becoming symptomatic of FIDIC contract forms.

Comments on a number of individual clauses follow and deal with the matters referred to above in greater detail.

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EIC Contractor's Guide to the FIDIC "Silver Book", 2nd Edition (August 2003)

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Executive Summary

 

In their Introductory Note to the Silver Book, FIDIC describes the benefits to the Employer of turnkey project execution and state that passing responsibility for designing and constructing the works to the Contractor will relieve the Employer of responsibility for close supervision of the design and construction processes. FIDIC also maintains that there will be an increased certainty of the final price and fewer disputes if the Contractor assumes responsibility for the wide range of risks set out in the Silver Book. Regrettably, EIC cannot endorse this view and believes that the Silver Book falls a long way short of meeting the objectives which FIDIC set down for it.

Contractors accept that, by choosing a turnkey approach, Employers can reasonably expect the Contract to transfer as much risk as practicable to the Contractor, offer a high degree of certainty on the final price, facilitate the speedy completion of the Works and, in the event of dispute, provide for their rapid resolution. Contractors on their part, are quite prepared to contract on a turnkey basis and accept additional risk, provided that risks can be identified, priced and managed, design and construction of the works is free of disruptive interference and disputes are resolved quickly and equitably.

In a number of important respects, the Silver Book does not adequately satisfy the respective aspirations of Employer and Contractor and its failure to do so is best illustrated by consideration of those matters that most commonly give rise to disputes in turnkey projects;

  • inadequate definition of the scope of work,
  • disruption of the design and construction process,
  • inequitable allocation of risk and
  • claims and dispute resolution.  

 

Definition of the scope of the works

It is stating the obvious to say that an offer to work on a fixed lump sum basis can only be made if the Works are sufficiently well defined. This requires an adequate preliminary design, comprehensive technical specifications and clear and unambiguous performance criteria. The Contractor will carry out the majority of these tasks in a turnkey project. However, it is essential that the Employer fully understands and accepts what is on offer and the required clarity of understanding will only be achieved through detailed and lengthy negotiation between employer and contractor. Manifestly, this cannot possibly be achieved during the tender period with all bidders and, until such time as agreement has been reached, any offer should remain conditional.

The obligations placed upon contractors by the Silver Book are onerous, whereas the Employer's most significant responsibility is limited to providing a definition of the intended purposes of the Works and setting criteria for testing and performance. The Employer is not even responsible for the accuracy of the "Employer’s Requirements"! The Contractor is required to make all necessary investigations, verify relevant information and carry out design in sufficient detail to price the Works. Such demands, combined with the allocation of risks to the Contractor which may be impossible to predict or cost accurately, may make it impossible for the Contractor to establish precisely the full scope and extent of his liability. In particular, it will be practically impossible for the Contractor to fully comply with all of these obligations during the tender period especially the full verification of the Employer's Requirements and the development of a fully detailed design. Contractors must decide whether it will be feasible to clarify all of these matters following tender submission and prior to the signature of a binding contract. In most circumstances, contractors will be well advised to submit an appropriately conditioned offer which makes it clear that a full and binding offer will only be made (to the extent that this is practically possible) following extensive and conclusive negotiations.

Arguably, the submission of a qualified bid might lead to disqualification of the Contractor's tender despite FIDIC's recommendation in their Introductory Note that it should be used as a starting point for negotiations. Clarification of the Employer's position on qualified tenders should be established before any decision is made to submit a bid. In many instances, clauses in the Silver Book are in direct conflict with the obligations placed on Contractors. Not only is the obligation to define the scope of the Works loosely defined, it is also subject to reviews by the Employer who has the same power to interfere through instructions, approvals, variations and determinations as the Engineer in a conventional construct only contract. Paradoxically, should any Employer exercise his right to interfere in this way it will inevitably undermine FIDIC's primary objective, certainty of the final price.

 

Disruption of the design and construction process

Only the Employer can make the choice of a turnkey contract and should only do so if he has confidence in the competence, resources and experience of his potential Contractor. To achieve this level of confidence demands a serious and comprehensive pre-qualification and tendering process aimed at selecting the best contractor for the project. Thereafter, there can be no justification for detailed supervision and interference and clearly specified monitoring at defined milestone events should be perfectly adequate. For a Contractor to enter into a contract of fixed time and price his obligations must also be fixed and once the contract is signed, the Employer should not be able to unilaterally impose his will on the design and construction process.

The extent to which the Employer might disrupt the design and construction process is the most fundamental area of concern for contractors working on turnkey projects. FIDIC would appear to accept this important principle by stating in the Introductory Note to the Silver Book,

"the Employer should exercise limited control over and should in general not interfere with the Contractor’s work".

Consequently, in the event that the Employer orders the Contractor to design or construct all or part of the works in a particular way, then the Employer must accept full responsibility for the consequences of his actions. Should the Contractor be responsible for the achievement of any Performance Criteria then the Contractor must have the right to refuse an instruction, which, in his opinion, is likely to have an adverse effect on the achievement of the Performance Criteria.  

 

Allocation of risks and responsibilities

EIC accepts that Contractors will bear considerably more risk under a turnkey contract compared to that of a conventional construct only contract but EIC cannot accept the extent to which the Silver Book goes in attempting to make the Contractor responsible for almost every eventuality however unforeseeable. EIC believe that the Employer cannot pass liability for all risks to the Contractor and any contract signed under the Silver Book should clearly define where liability lies to ensure that contractors are in a position to accurately identify, price and manage those risks which are to be their responsibility.

The Contractor must be especially alert to uninsurable risks, risks that are completely out of his control or risks that are likely to increase as a consequence of the actions of the Employer or third parties. Contractors should also be wary of those clauses, which, as drafted, could leave the Contractor at the mercy of an unscrupulous Employer.

However, it is probable that the greatest challenge and consequently the greatest risk will be the difficulty of checking and confirming the accuracy or adequacy of the information and data supplied by the Employer. Contractors who accept contracts under the Silver Book are responsible for the accuracy and correctness of all information and data regardless of its source. Contractors are advised to take particular care with clauses dealing with the definition of fitness for purpose and liability for unforeseeable difficulties and adverse physical conditions.

 

Claims and disputes management

Despite FIDIC's claims to the contrary the Silver Book is likely to give rise to disputes between the Parties unless several of its provisions are modified during negotiation. In particular due to the time constraints placed on the Contractor to submit a notice of an intention to claim are impractical and the sanctions for non-compliance are unreasonably punitive. By contrast the Employer is neither required to observe similar time limits nor suffer any sanction provided he gives notice as soon as practicable. This is yet another example of an inequitable contract. The Contractor should only be required to advise the Employer of an intention to claim as soon as reasonably practicable and there should be no time deadline after which the contractor would lose his rights. This should also apply to the procedure to be followed where details of the claim are to be submitted. Events may have a continuing effect and it is not always possible to establish the final effect resulting from an event until later.  

 

A comparison of FIDIC's Conditions of Contract for Plant and Design-Build (the Yellow Book) and EPC Turnkey Projects (the Silver Book)

If further evidence is required to demonstrate EIC's concerns regarding the Silver Book the following comparison of these two books highlights how far FIDIC has departed from its normal fair-handed and equitable distribution of risk and responsibility. Consequently the Yellow Book provides a useful source of reference when drafting an alternative allocation of risk and design responsibility. It is also extremely important to remember and to point out to clients at every opportunity that FIDIC is well aware of the fact that the Silver Book is highly unsuitable for certain types of turnkey projects. FIDIC makes this clear in the Introductory Note to the First Edition by stating that it is not suitable in the following circumstances and that the Yellow Book should be used:

  1.  If there is insufficient time or information for tenderers to scrutinise and check the Employer’s Requirements or to carry out the necessary designs, risk assessment studies and estimating (taking particular account of Sub-Clauses 4.12 [Unforeseeable Difficulties] and 5.1 [General Design Obligations])
  2. If construction will involve substantial work underground or work in other areas which tenderers cannot inspect.
  3. If the Employer intends to supervise closely or control the Contractor’s work, or to review most of the construction drawings.
  4. If the amount of each interim payment is to be determined by an official or other intermediary.

EIC considers that the following circumstances could be added to the list;

Where part of the design is made by the Employer and is binding on the Contractor – see also comments on Sub-Clause 5.1 [General Design Obligations] in this Guide. In competitive bidding without negotiations.  

 

As a final word the principal differences between the Yellow and Silver Books are worth highlighting:

The Yellow Book

  •  Responsibility for the design provided by the Employer and for providing specifications rests with the Employer.
  •  Responsibility for the correctness of information provided by the Employer remains with the Employer.
  •  The risk for unforeseen physical conditions is borne by the Employer.

The Silver Book

  •  Responsibility for all designs and specifications rests with the Contractor, including those provided by the Employer.
  •  The Contractor is responsible for the correctness of information provided by the Employer.
  •  The risk for all unforeseen difficulties, including unforeseen physical conditions is borne by the Contractor.

 It should be noted however, that the above only describes the overall responsibilities of the parties and that important exceptions apply in each particular case. Comments on a number of individual clauses follow and deal with the matters referred to above in greater detail. Where considered appropriate comparative references are made to the Yellow Book.

 

 

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EIC Contractor's Guide to the MDB Harmonised Edition of the FIDIC Conditions of contract for Construction (June 2010),  "The Pink Book Guide" issued April 2011

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Foreword to the

FIDIC June 2010 MDB Edition of the

FIDIC Conditions of Contract for Construction


Since the publication of the FIDIC “Red, Yellow and Silver Books” (so-called “New Books”) in 1999, EIC has published four “EIC Contractor’s Guides” to the new FIDIC suite of standard contract forms for major works, namely the

  • EIC Contractor's Guide to the FIDIC Conditions of Contract for EPC Turnkey Contracts (hereafter referred to as the FIDIC 1999 “Silver Book”), published in March 2000, with subsequent revision published in August 2003;
  • EIC Contractor's Guide to the FIDIC Conditions of Contract for Construction (hereafter referred to as the FIDIC 1999 “Red Book”), published in March 2002, reprinted in March 2003;
  • EIC Contractor's Guide to the FIDIC Conditions of Contract for Plant and
    Design-Build
    (hereafter referred to as the FIDIC 1999 “Yellow Book”), published in March 2003:
  • EIC Contractor’s Guide to the FIDIC Conditions of Contract for Design, Build and Operate (hereafter referred to as the FIDIC “Gold Book”), published in September 2009.

As was the case with the Fourth Edition of the old “Red Book” (1987) the FIDIC 1999 “Red Book” was adopted by the World Bank as the basis for the General Contract Conditions of its Standard Bidding Documents for Works, however with significant modifications reflecting the Bank’s standard procurement practice.  In the light of the ongoing process of issuing harmonised procurement documents for construction projects for which the Multilateral Development Banks (MDBs) are providing finance, the World Bank and most of the other MDBs resolved that there should be a modified standard form of the FIDIC 1999 “Red Book” for use by the MDBs in which the General Contract Conditions would contain the standard wording which previously had been incorporated by the MDBs in the Particular Conditions. 

EIC has been consulted several times during the drafting process of the MDB Harmonised Conditions of Contract for Construction as a “friendly reviewer”.  As early as December 2004, FIDIC invited EIC to review a first draft version that was, at the outset, to become the Second Edition of the FIDIC 1999 “Red Book”

Notwithstanding the reservations expressed by EIC, the World Bank published in conjunction with FIDIC in May 2005 a first harmonised version of the FIDIC 1999 “Red Book” for use by the MDBs.  The 2005 version was scrutinised by EIC and a summary of EIC’s early comments was publicised in the January 2006 volume of the International Construction Law Review.

Following EIC’s critical remarks, as well as those from other commentators, the 2005 version was reviewed and superseded by an update in March 2006 which to some extent addressed the comments of EIC on the FIDIC 2005 version, one such comment regarding the confusing definition of “Unforeseeability”. 

However, the March 2006 updated version was still criticised by contractors from all continents and, therefore, the World Bank decided to enter into more comprehensive deliberations with the global construction federation, the “Confederation of International Contractors’ Associations” (CICA), in order to discuss in detail the wording of particular clauses.  These talks came to a close in spring 2010 and, subsequent to a renewed consultation with the MDBs, FIDIC published the 3rd version of its MDB edition in June 2010 (hereafter referred to as the “FIDIC 2010 MDB Harmonised Construction Contract”).

Upon analysing the FIDIC 2010 MDB Harmonised Construction Contract, EIC remained concerned that several clauses, for example, those dealing with the Engineer’s Duties and Authority, the Replacement of the Engineer, the Performance Security, Termination by the Employer in case of corrupt, fraudulent, collusive or coercive practices, Limitation of Liability and Arbitration, represented a move in the wrong direction and might deter experienced international contractors from tendering for MDB financed construction works. 

Tenderers for World Bank-financed works contracts should be further aware that the FIDIC 2010 MDB Harmonised Construction Contract has again been modified by the World Bank in August 2010, in particular with respect to Sub-Clauses 1.12 [Confidential Details], 1.15 [Inspections and Audit by the Bank], 6.20 [Forced Labour], 6.21 [Child Labour], 15.6 [Corrupt or Fraudulent Practices], 20.5 [Amicable Settlement] and 20.6 [Arbitration]. 

This observation extends also to the question of guarantees.  Whereas the FIDIC 2010 MDB Harmonised Construction Contract provides in Sub-Clauses 4.2 [Performance Security], 14.2 [Advance Payment] and 14.9 [Payment of Retention Money] that the Performance Security / Advance Payment Guarantee / Retention Money Guarantee shall be “issued by a reputable bank or financial institution selected by the Contractor”, the World Bank in the respective Sub-Clauses still requires that the security shall be “issued by an entity and from within a country approved by the Employer”.  The overall impression is that the changes introduced by the World Bank are disadvantageous to the Contractor when compared to the original FIDIC wording.  EIC has thus asked the World Bank to revert to the standard FIDIC text.

As a result of this somewhat uncoordinated drafting policy and practice, users must be conscious that there are currently (at least) four standard forms relating to the MDB Harmonised Conditions of Contract, i.e.:

1.               The May 2005 MDB Harmonised Construction Contract, published by FIDIC;

2.               The March 2006 MDB Harmonised Construction Contract published by FIDIC;

3.               The June 2010 MDB Harmonised Construction Contract published by FIDIC; and

4.               The World Bank General Conditions of Contract published by the World Bank (in their latest version) in August 2010. 

Employers and contractors are well advised to pay particular attention to exactly which version they are dealing with in an individual tender as all four versions vary to some extent from each other.  This EIC Contractor’s Guide relates to the FIDIC 2010 MDB Harmonised Construction Contract only.

EIC wishes to make it clear that this document is not exhaustive and is intended for guidance only.  Expert legal advice should always be obtained before submitting an offer or making any commitment to enter into a contract.  Neither EIC nor the authors of this document accept any responsibility or liability in respect of any use made by any person or entity of this document or its contents which is and shall remain entirely at the user's risk.

 

Executive Summary on the

FIDIC 2010 MDB Harmonised Construction

Contract

 

In view of EIC´s previous statements concerning the FIDIC´s 1999 standard forms of contract, we have used our EIC Contractor’s Guide to the FIDIC 1999 “Red Book” dated March 2003 as a baseline and reference in the preparation of this commentary on FIDIC´s 2010 MDB Harmonised Construction Contract.  This approach has been chosen mainly for ease of reference and to further emphasise the position of EIC on the provisions of the FIDIC 1999 “Red Book”

Improvements

EIC is pleased to note that several comments made earlier by EIC, either in relation to the FIDIC 1999 “Red Book” or with regard to the May 2005 and the March 2006 versions of the FIDIC MDB Harmonised Construction Contract have been rectified in the FIDIC 2010 MDB Harmonised Construction Contract, such as:

  • Sub-Clause 1.12 [Confidential Details]  –  The parties’ obligations with regard to Confidential Details are now mutually binding;
  • Sub-Clause 1.13 [Compliance with Laws]  –  Obtaining the building permit is now the explicit responsibility of the Employer;
  • Sub-Clause 2.5 [Employer’s Claims]  –  The 28-days notification deadline contained in Sub-Clause 20.1 now also applies to the Employer;
  • Sub-Clause 3.5 [Determinations]  –  The time limit for the Engineer to make a Determination has been fixed to 28 days;
  • Sub-Clause 7.7 [Ownership of Plant and Materials]  –  The ownership subrogates only with incorporation in the Works or with actual payment.
  • Sub-Clause 8.1 [Commencement of Works]  -  The commencement of Works is now subject to conditions precedent;
  • Sub-Clause 13.1 [Right to Vary]  –  An additional reason entitling the Contractor to reject a Variation has been introduced;
  • Sub-Clause 14.2 [Advance Payment]  –  The purpose of the advance payment as cash flow injection enabling investment and mobilisation is demonstrated more clearly given that the amortisation schedule is to become less burdensome on the Contractor;
  • Sub-Clause 14.9 [Payment of Retention Money]  –  The repayment of the Retention Money has been modified in favour of Contractor; and
  • Sub-Clause 20.1 [Contractor’s Claims] - The Dispute Board can be activated if the Engineer fails to respond within the given deadline.

Retrogressions

Whilst the aforementioned amendments are appreciated by EIC, it must also be kept in mind that the new wording will significantly increase the risks for contractors and thus the overall costs due to some retrogression, for instance:

  • Sub-Clause 3.1 [Engineer’s Duties and Authority]  –  The Employer now has a right to unilaterally change the authority of the Engineer;
  • Sub-Clause 3.4 [Replacement of the Engineer]  –  The Employer now has a right to unilaterally replace the Engineer;
  • Sub-Clause 4.2 [Performance Security]  –  The Employer now has an expanded and thereby discretionary right to make a claim under the Performance Security;
  • Sub-Clause 12.3 [Evaluation]  –  The thresholds for claiming a new rate due to a change in quantities have increased significantly;
  • Sub-Clause 15.6 [Corrupt or Fraudulent Practices]  –  The Employer has now a unilateral right to terminate the Contract if it determines that the Contractor has engaged in corrupt, fraudulent, collusive or coercive practices;
  • Sub-Clause 17.6 [Limitation of Liability]  –  The coverage of the well-established principle of mutual Limitation of Liability has been significantly reduced at the disadvantage of the Contractor; and
  • Sub-Clause 20.6 [Arbitration]  –  The arbitration clause introduces separate mechanisms to final dispute resolution depending on whether the Contract has been awarded to a foreign or a domestic Contractor.

In addition, EIC is very concerned about the combined effect that some of the aforementioned retrogressions may lead to.  The newly introduced alterations of Sub-Clause 3.1 [Engineer’s Duties and Authority], Sub-Clause 3.4 [Replacement of the Engineer] and Sub-Clause 4.2 [Performance Security] may represent an opportunity for abusive behaviour towards the Contractor since the Employer is granted discretionary rights to alter the fundamental balance of the contract.  EIC would rather have seen that the express policy of the World Bank and the other Regional Development Banks to combat corruption also appears in their standard form of contract to the appropriate extent, i.e. that focus would be to close every window of opportunity for corrupt behaviour, rather than to introduce such indirect opportunities, which regretfully now are part of the standard form of contract. 

EIC is particularly missing a balanced provision which would entitle the Contractor to suspend or terminate the contract in the case of unethical practices (extortion) by the Employer.

Bearing in mind the MDBs' wish to reverse the trend whereby experienced international contractors have over time demonstrated less interest in participating in MDB funded projects, EIC cannot see the logic behind the aforementioned provisions in their standard form of contract. 

Comments on a number of individual clauses follow and deal in greater detail with the matters referred to above. 

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EIC Memorandum on "Frequently Asked Questions on Public-Private Partnerships" (September 2006)

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With the “EIC White Book on BOT/PPP” (April 2003) we already highlighted the most important technical risks and pitfalls during the crucial stages of a PPP project and we have given more then 20 concrete recommendations for the technical implementation. When we presented these recommendations in the political debate, we noticed, however, several recurring misconceptions with a potential to undermine the credibility of the entire PPP philosophy.

EIC, therefore, believes that it is crucial to supplement the “White Book” with a more general response to some “Frequently Asked Questions on PPP” in order to contribute the European industry’s viewpoint to the ongoing debate on the national, European and international levels. With this Memorandum, EIC advocates the concessionaire’s perception, i.e. the perspective of those companies that actually are prepared to put their shareholders’ money at risk in connection with a PPP project. In our Memorandum, we seek to explain why the PPP concept has a strategic advantage over the conventional project programming and for which types of infrastructures or public sector buildings a Government would benefit from entering into a comprehensive partnership instead of separating the design, construction and operation phases. By referring to some – positive and negative – example cases, we try to illustrate the practical impact of the issues discussed.

When using the term “Public-Private Partnerships”, it must be kept in mind that there is not yet an all-encompassing definition. For the purpose of this Memorandum, readers will recognise that the PPP approach is often described as an alternative and innovative procurement method through which the Contracting Authority purchases from the private sector not merely an infrastructure facility or a public sector building, but beyond the construction of the physical asset also the asset-related operation and maintenance service over the entire life-cycle of the project. The public sector gains through this procurement method additional Value for Money because it will pass on the project performance risk to the private sector which is only remunerated if and when it performs the infrastructure service to the previously agreed standard. The fundamental “PPP Principles and Concepts” are summarised in a short version in the Appendix.

Concluding, we wish to quote from a World Bank Working Paper on Public-Private Partnerships dated March 2003 which will remain, in our view, topical around the globe for the foreseeable future:

“Whatever policies countries choose, governments cannot avoid the inescapable realities that infrastructure services have to be paid for, whether provision is public or private. Most of the concerns about the sustainability of private infrastructure really reflect the difficulties governments have in sustaining cost-recovering tariffs and commercial principles in these sectors. This is likely to be a bigger problem when provision is public rather than private; hence we are likely to see less resources flowing to the infrastructure sectors under public provision, everything else being equal. The real issue is not public infrastructure versus private infrastructure. Put this way, it is more simple the argument is about less infrastructure versus more.”

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EIC Turnkey Contract (1994)

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EIC published its EIC Turnkey Contract in May 1994. As may be concluded form the subtitle "Conditions of Contract for Design and Construct Projects", this standard form applies to projects where the contractor is responsible for the design and the construction of the works. It comprises a new approach in the field of design and construct contracts in that it offers specific solutions to the user in key issues, such as design procedure, variations and allocations of risks. In the meantime it has been distributed widely and has been recognised by the construction industry.

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EIC White Book on BOT/PPP (April 2003)

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Executive Summary


General preconditions for BOT schemes

  1. Governments should adopt a realistic and consistent strategy for BOT / PPP projects.

  2. Governments should set up a specialised unit to define and implement the country-specific BOT / PPP policy, with a global approach designed to ensure horizontal co-ordination between the various governmental departments and public bodies involved.

  3. Accounting standards should take into account the peculiarities and general economics of concession contracts. Accounting methods for depreciation and financing costs have to be linked with the profile of the revenue stream. 

  4.  

    Project Preparation

  5. The success of individual BOT / PPP projects depends on a thorough and objective assessment of their key economic, financial and technical parameters within the framework of a transparent and well-defined competitive tendering process.

  6. Governments should carefully tailor the procurement strategy to the needs of the particular BOT / PPP project in order to benefit from the expertise and potential for innovation of Contractors in the design of solutions best able to meet the Authority’s needs.

  7.  The quantity and quality of general information made available to all bidders should be improved in order to minimise the necessity of bidders making their own costly technical investigations. The tender documentation should provide sufficient information to enable the bidder to (i) assess the technical risks and commercial costs of the project, (ii) evaluate the economic basis and market risks involved, and (iii) understand the procedure and criteria of bid evaluation.

  8. Governments should carefully select the payment mechanism and – where necessary – guarantee sufficient financing and / or modest subsidy in order to make feasible projects otherwise not commercially viable.

  9. The uncertainty linked to the level of volume and tariff must be reduced as much as possible by a joint effort of the partners to build cautious mechanisms aimed at ensuring a steady flow of revenue.

  10. Governments should specify a tariff indexation formula in order to take into account (hyper) inflation and (hyper) deflation over the life of the concession.

  11.  

    Tender Process

  12. Authorities should engage in pre-qualification procedures with a view to identifying bidders that are suitably qualified to effectively carry out the envisaged BOT / PPP project.

  13. The Authority should precisely define all criteria on project performance and tender evaluation, facilitating consistent offers and true comparability of submitted bids.

  14. The contract award criteria must be made clear in the tender documents beforehand and may not be changed during the tender.

  15. The Authority shall ensure the strict confidentiality of all discussions, communications and negotiations with all bidders at all stages of the procedure. As a corollary, no information relating to the content of a bidder’s proposal, including design ideas, shall be disclosed without the bidder’s prior authorisation.

  16. The Authority should provide for adequate bid cost compensation in order to ensure best quality bids.

  17. Authorities should encourage the private sector to submit unsolicited proposals and provide an adequate framework to protect the interests of both public and private partners.

  18.  

    Financial Risk Mitigation in BOT/PPP projects

  19. Availability of proper risk mitigation is one of the key elements for project success. More accurate and specific guarantee mechanisms will contribute to the establishment of a climate of confidence and security for lenders, investors and insurers.

  20. Risks should be borne by the party which is in the best position to assess and influence the probability of financial impact as well as to manage and bear the consequences of their materialisation.

  21. The role of international financial institutions, multilateral development banks and export credit agencies is of crucial importance in the development of BOT / PPP projects in order to compensate for the deficiencies of local financial markets. Their intervention should be concentrated on the following two aspects:

(i)              Improvement, design and development of specific tools to respond to the particular needs of BOT / PPP projects;

(ii)            Intensification of efforts to build capacity in host countries.

    19. Governments should take adequate steps to reduce currency risks to facilitate implementation of desirable projects.

        20.  Guarantees in respect of political risk from multilateral financing agencies represent an important mitigation tool for privately financed infrastructure projects. The agencies should review and extend their political risk cover programmes in terms of scope and volume in order to adapt their products to the specific requirements for such projects.

21. BOT / PPP financing requires the improvement of the financial capacities of host countries. A better use of the socio-economic benefits   generated by public infrastructures, coupled to an innovative financial engineering could achieve this objective. To this end, a significant reform of public budgetary and accounting frameworks is required.