Choosing the Right Set of FIDIC Conditions of Contract
for your Project
Special Advisor, M.Sc., Michael Mortimer-Hawkins.
Project Director, B.Sc., EE, Svend Poulsen, Atkins Danmark A/S, Denmark.
Introduction
FIDIC, the International Federation of Consulting Engineers (the acronym stands for the French version of the name), represents, globally,
the consulting engineering industry. As such, the Federation promotes
the business interest of firms supplying technology-based intellectual
services for the built and natural environment.
This paper gives an introduction to the first set of Conditions of Contract written and issued by FIDIC.
The history
At the mid of the 1950’s FIDIC decided to issue a standard form of
Contract for international construction projects. This was the first Red
Book. At the time it was felt that such a document would be suitable
for all international work. Soon it became apparent that this was not
the case and it was found that the Red Book was not suitable for Electrical and Mechanical projects. The Red Book did not deal with for instance plant life, design responsibility, guarantees etc. which just
proved that it was impossible to include for everything in just one set
of standard conditions of Contract.
In 1963 FIDIC issued the first Yellow Book written especially for E & M
projects. From the issue of the Yellow Book and until the end of the
80’s there was a choice of FIDIC Conditions of Contract:
•
The Red Book if the project mainly involved construction, and
•
The Yellow Book if the project involved mainly Electrical and
Mechanical work.
The two books reflected the differences in the disciplines or type of
work.
The Red Book was primarily covering civil works such as roads, dams,
tunnels, bridges etc. The Red Book is based on the Works being designed by the Employer’s Consulting Engineer supported by detailed
specification and drawings.
The Yellow Book was tailored for electrical and mechanical work such
as power stations, production facilities, plant etc., usually designed by
the Contractor or the Supplier. The works would have a limited expected life depending on the nature of the facility and the normal life
of an electrical and mechanical facility.
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The contracts also differed in that for a construction project the Engineer (on behalf of the Employer) produced a detailed Specification
showing exactly what the Contractor was required to do and how to
do it, with a detailed Bill of Quantities and the Contractor being paid
for the work he did based on measurement of actual quantities, and
the Contractor’s job was in effect, to do what he was told. Whereas
with an E & M project, the Employer’s specification was often in the
form of a Performance Specification which gave the Contractor the
basic performance requirements which the Employer was looking for
in the way of output and production and maybe layout etc. and it was
the Contractor who made the design and constructed the facility to
meet those performance requirements. Payment was usually based on
unit item prices, such as 1 turbine or 1 generator, rather than detailed
re-measurement.
As a result the type and allocation of risk between the Parties differed
between the Red and Yellow Books.
The 1999 versions and the suite of Conditions of Contract
Since then, the range of FIDIC contracts has increased considerably,
mainly to meet the increasing demands of the market and the industry for more sophisticated contractual arrangements and procurement
strategies. In 1999 FIDIC issued a totally revised set of Conditions of
Contract, and we now have:
Conditions of Contract for Construction (the Red Book),
Conditions of Contract for Plant, Design-Build (the Yellow Book),
Conditions of Contract for EPC/Turnkey (the Silver Book).
Not surprisingly, these documents are now referred to as The FIDIC
Rainbow Suite. The family has grown and now also includes:
Conditions of Contract for Design-Build and Operate (Gold Book),
Conditions of Short Form of Contract (Green Book), and
Conditions of Contract for Dredging Work (Blue Book).
Also, with the 1999-editions, the difference between the books is now
not so much the discipline of the work to be done, whether it is a road
or a power station, but more a question of design responsibility. The
key question is “who is doing the design?” This is the key factor in determining who carries the major financial and commercial risks during
the execution of the project. It is more a question of risk – and risks
cost money.
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Choosing the right Form of Contract
When the Employer chooses the form or book he intends to use for a
given project, it is very important that he chooses the right book – the
right set of conditions of Contract. The consequences of using the
wrong book will be very serious and lead to all the things which the
parties to a Contract are trying to avoid – divided responsibilities, confusion, disputes, delays, cost overruns etc. It is unfortunately the case
that the contracts with problems often are the ones where the Employer has chosen to use the wrong form of Contract.
Choosing the right form of contract involves a number of factors. Employers are generally looking for certainty of price and minimum risk.
They see words like “Contractor’s Risk” and “fixed price”, and irrespective of any other considerations – that is what they want and that
is the book they choose. They may also prefer an “Employer’s Representative” to an “Engineer” believing it puts them one step ahead
when it comes to claims and disputes. And of course, any reference to
“Employer’s Risks” is to be avoided at all costs. So changes are introduced into the Conditions of Contract by the Employer where all “Employer’s Risks” mysteriously become Contractor’s Risks, and where
disciplines and time bars etc. against the Employer fade away in some
strange re-wording of the offending clauses. All these changes move
the set of conditions away from the intention of having a balanced set
of contract conditions which is one of the fundamental issues of the
FIDIC Conditions of Contract. And yet Employers will still call it ‘a
FIDIC Contract’.
It is not only important to use the right set of Conditions of Contract,
but it is also equally important – especially for the Contractor – to
make sure that the Contract is what it is made out to be e.g. that it is
in fact a Red Book contract and not a somewhat distorted form of the
Red Book.
Some key FIDIC issues
Principles of the FIDIC Conditions of Contract
The FIDIC suite of Conditions of Contract (CoC) is based on 20 clauses
in the different CoC and the same structure can be found throughout
the different set of conditions.
Generally, FIDIC Conditions of Contract (CoC) include three parties
Employer, Engineer, Contractor.
Also, as you will note, all defined terms are written with capital letters
throughout the conditions of contract. The purpose of this is to make
the interpretation of key words, and terms, exact.
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Reasonable risk sharing
FIDIC also firmly believes that the way to handle project risk is one of
fair risk sharing; FIDIC finds this approach will lead to better and
more successful projects. By allocating the risk to the Party that is
best placed to control it and deal with it, will result in more efficient
and effective risk handling.
The role of the Engineer
The Engineer acts as an agent of the Employer. This is often criticised
by contractors that find it difficult to see that the Engineer can indeed
act fairly when deciding matters under the Contract, while being paid
by the Employer. Some Employers even omit the Engineer when using
FIDIC CoC and replace the Engineer by a person within their own organisation or the Employer may even redefine the role of the Engineer
to a more project management role. To make the FIDIC CoC work
properly it is paramount that the Engineer has a technical insight.
The basis for the FIDIC CoC is that the Engineer has a very important
role in administering the Contract and in making fair decisions. His
authority is described in the Contract and he cannot amend the contract. For this to work, the Engineer shall act impartially when carrying out certain actions, which include making determinations in accordance with sub-clause 3.5. The philosophy is that fair decisions by the
Engineer keep the focus on the execution of the Works. Should any
party not be satisfied with the Engineer’s determination, that party
can raise the Engineer’s determination to a Dispute Adjudication
Board (DAB); a body that is jointly appointed by the Parties for prearbitral decision. The intention of having the DAB is to allow for disputes being handled in a real-time fashion and to avoid disputes, if
practicable, from being settled through costly arbitration.
Design obligations of the Contractor
In the FIDIC Contracts, the Contractor has design obligations under
the Plant and Design-Build CoC (The Yellow Book), the EPC Turnkey
CoC (The Silver Book) and the Design, Build and Operate CoC (The
Gold Book).
The Contractor obligation is to carry out the design in a way that ensures that the Works are fit for the purposes for which the Works are
intended (see for instance P&DB scl. 4.1). This does not only put a
major responsibility on the Contractor, but also gives the Employer an
obligation to describe the purpose of the Works in a very unambiguous and exact fashion. This is accomplished in the Employer’s Specifications or Employer’s Requirements depending on which form of
Contract is used.
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Finding the suitable Form of Contract
The principles of Risk sharing
The principles of risk sharing and Employer’s involvement and influencing the project during design and construction decide some of the
fundamentals in choosing the right form of contract.
“There is no such thing as a free lunch” – the same counts for the
transfer of risk without it having influence on other factors. The price
the Employer pays to let the Contractor handle the risk is losing influence under the design and construction phase.
The traditional set up with the Employer transferring his ideas and
thoughts into drawings and specifications lets the Employer be in control of every solution to his indentified needs and ideas. This also includes the ownership of the major part of the risks. The Employer has
the ability to control these risks and can raise a budget to mitigate
risks occurring.
In the other end of the spectre is the situation where the Employer
looks for a high level of certainty and will pay for the Contractor to
take all risk. This is the argument for using the EPC/Turnkey set up.
The price is that the Employer cannot interfere with the design or
make changes without taking over some risk and also the costs related to the “disturbance” of the Contractor’s work.
Small projects
If the project is of relatively small value, say under US$ 500,000, has
a short construction time (less than 6 months) or involves well know
products/work the Short Form of Contract (Green Book) would be sufficient for such projects.
It doesn’t matter whether the design is provided by the Employer (or
his Engineer) or by the Contractor and it doesn’t matter whether the
project involves construction, electrical, mechanical, or other engineering work.
Large complex projects
The Employer could have an interest in conducting the design himself
or hire a team of consultants to do the necessary design. Employers
with complex projects and a need for maximum influence before the
works are contracted and the right to vary during construction should
decide for the “traditional” form of contract i.e. the Conditions of Contract for Construction for Building and Engineering Works Designed by
the Employer (Red Book).
The Conditions of Contract for Construction is typically used for projects, such as infrastructure, buildings, hydropower, roads and bridges
etc, with the Engineer administering the Contract, and certifying payPage 5 (9)
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ment, and with payment according to bills of quantities or lump sums
for work done, and with variations being controlled and ordered by the
Engineer.
Should the Employer decide to contract the works based on a performance specification or a set of Employer’s Requirements to let the
Contractor take care of the detailed design another type of FIDIC
Conditions of Contract should be used.
Performance specifications prepared by the Employer can be used for
traditional electrical and mechanical projects including the supply of
plant and equipment where the majority of the design will be done by
the Contractor. Also other engineering and construction projects
where the Contractor is responsible for carrying out most of the design work based on an outline or performance specification prepared
by the Employer requires another type of contract. In these types of
projects the Engineer will administer the project and certify payment
is usually based on milestones or lump sum basis.
In these cases the Conditions of Contract for Plant and Design-Build
for Electrical and Mechanical Plant and for Building and Engineering
Works Designed by the Contractor (Yellow Book) should be used.
Where the Employer is looking or higher degree of certainty that the
agreed contract price and time will not be exceeded and the Employer
wishes to use his own (Employer’s) Representative rather than an Engineer and does not wish to be involved in the day-to-day administration of the project, then the Employer should choose the Conditions of
Contract for EPC Turnkey Projects (the Silver Book).
For major infrastructure projects (e.g. road, rail link, bridge, water or
sewage treatment plant, transmission line, even dam or hydropower
plant or similar) where the Employer provides the finance there is often a requirement for a high level of certainty to cost and time. The
straight forward choice is to use a contract form suited for Turnkey or
EPC projects. FIDIC has the Conditions of Contract for EPC/Turnkey
projects (the Silver Book) for use in these situations.
If it is a Building Project where the Employer wishes to have his building(s) constructed on a Fixed-Price Turnkey Basis generally complete
with all furniture, fittings and equipment, then again, the Employer
should consider the Conditions of Contract for EPC Turnkey Projects
(i.e. the Silver Book) but, depending on the nature of the project, certain modification may be necessary.
Using the EPC/Turnkey contract form it is important, that the Contractor has sufficient time to inspect and assess the risks he will be expected to carry under the Silver Book. The Contractor will for instance
need to examine the ground conditions as he is to carry the risk of
unforeseen conditions etc. If the time does not allow for thorough inPage 6 (9)
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vestigations by the bidders (Contractors) and also if the Employer is
not capable of precisely issue a set of Employer’s Requirements he
should not choose the Silver Book. It would then be more suitable to
use the Yellow Book as mentioned above.
Projects involving the operational phase
With a Design Build project where the Employer wishes the Contractor
to provide a long term operation service of the plant or facility and
where the Contractor is responsible for the design and construction of
a facility based on an outline or performance specification prepared by
the Employer and then operates the facility for a long term (typically
more than 20 years) including the maintenance and replacement of
parts and assets as necessary, before handing it over to the Employer
for him to continue operating the facility himself, then, if it is a new
facility (a Green Field scenario), the Employer should be looking at the
Design, Build and Operate form of Contract (the Gold Book)
If the work involves the refurbishment or renovation of an existing
facility this is called a Brown Field scenario. FIDIC is currently preparing a new set of conditions especially for this type of projects.
The FIDIC Suite of Contracts covers the majority of projects
FIDIC provides a wide range of Books to choose from, and as mentioned, it is essential that the Employer selects the right form. Each
form has been written to minimise the risk of disruption and dispute
for the particular type of work and/or project, and if the wrong form is
chosen, not only will these benefits be lost, but the likelihood is that
the project will cost more for both parties.
Upcoming Conditions of Contract
After the successful issuing of the FIDIC Conditions of Contact for Design-Build and Operate (DBO) it has been decided to also produce a
set of conditions of contract that will be suitable for major plants or
infrastructure where the owner wants to hire a contractor for the continued operation and upcoming refurbishment of the facilities. This is
what is classified as a brown field scenario that comprises Operation,
Design and Build (ODB). FIDIC expects to issue this form in 2013.
In cooperation with the International Tunnel Association (ITA) FIDIC is
working to produce a form of contract suitable for tunnel works.
In general FIDIC is very aware of market requirements for new types
of contracts. Often the existing suite can cater for the requirements in
the industry but if a special field of business calls for a new contract
form this is considered. For instance the growing market in sustainable energy that for instance includes wind farms and not the least
off-shore wind farms could trigger a combination of the Dredging and
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Reclamation Conditions of Contract combined with the set of condition
for Plant and Design-Build.
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Contact Details
FIDIC
World Trade Center 2
Geneva Airport
PO Box 311
CH-1215 Geneva 15
Switzerland
Tel:
+41 22 799 49 00
Fax: +41 22 799 49 01
[email protected]
www.fidic.org
Managing Director
Enrico Vink
General Manager
Francois Baillon
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