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School of Construction Management and Engineering

FIDIC Contracts

Construction Contract LawDr Sam Laryea

Murdoch & Hughes (2008) Construction contracts: law and management; London, Spon. Chapter 9

FIDIC – the organisation

• International Federation of Consulting Engineers – who are they and what do they do?

– Founded in 1913 and located in Geneva, Switzerland– Represents the global consulting engineering industry.– Enhance the image of consulting engineers.– Be the authority on issues relating to business practice.– Promote the development of a global and viable consulting

engineering industry.– Promote quality.– Actively promote conformance to a code of ethics and to business

integrity.– Promote commitment to sustainable development.– Developed conditions of contract for use anywhere in the world.

– Further information at www.fidic.org

• International Federation of Consulting Engineers – who are they and what do they do?

– Founded in 1913– Represents the global consulting engineering industry– Enhance the image of consulting engineers– Be the authority on issues relating to business practice– Promote the development of a global and viable consulting

engineering industry– Promote quality– Actively promote conformance to a code of ethics and to business

integrity– Promote commitment to sustainable development– Developed conditions of contract for use anywhere in the world

FIDIC contracts• Key questions

1. What is a FIDIC conditions of contract?2. What will make the initiators of a construction project

decide to use a FIDIC conditions of contract and what form of contract will they use? What factors will the choice depend on?

3. What are the basic contents of a FIDIC contract book?4. Who are the main parties in a FIDIC contract and what

are their roles and responsibilities?5. How many different FIDIC contract books are there and

what are the key differences between them?6. How are FIDIC contracts used in practice?7. How are disputes resolved?

FIDIC conditions of contract

• The FIDIC conditions of contract provide the rights, obligation and responsibility for the parties concerned in the execution of international engineering projects.

Features of FIDIC contract• FIDIC contracts are drafted in a way which enable them

to be used internationally - anywhere in the world

• Special provisions enable parties to decide which nation’s legal system to use for executing the contract

• The contract is normally split into two parts:– Part 1 of the conditions is for general applicability– Part 2 is for optional clauses specific to the project

• Engineer employed in the contract acts as client’s agent and representative / contract administrator

• New editions are organised around extent of design and responsibilities assumed by employer and contractor / procurement strategy rather than nature of construction works

FIDIC suite of contracts

FIDIC Conditions of Contract - Types of Manuals• Red Book 1999

• Yellow Book 1999

• MDB Harmonised Red Book 2006

• Green Book1999

• Orange Book 1995

• Silver Book 1999

• Gold Book 2008

• Blue-Green Book 2006

• White Book 2006

• Standard Prequalification Form 2008 (3rd edition)

The Traditional FIDIC Forms of Contract

• Conditions of Contract for Works of Civil Engineering Construction (Red Book) Fourth Edition 1987

• Conditions of Contract for Electrical and Mechanical Works including Erection on Site (Yellow Book) Third Edition 1987

• Between Employer and Contractor• Red Book: payment monthly for work done• Yellow Book: lump sum on milestones• Part I – General Conditions• Part II – Conditions of Particular Application

The 1999 Suite of Standard Conditions of Contract

• Conditions of Contract for Construction - design by Employer: The Construction Contract (The New Red Book)

• Conditions of Contract for Plant and Design-Build -design by Contractor: The Plant and Design/Build Contract (The New Yellow Book)

• Conditions of Contract for EPC Turnkey Projects: The EPC/Turnkey Contract (The Silver Book)

• Short Form of Contract: The Short Form (The Green Book)

• The FIDIC Contracts Guide (2000)

The New Red and Yellow Book

• Emphasis changed to party responsible for design

• New Red Book is update of Old Red Book

• New Yellow Book replaces both Old Yellow Book and Orange Book

• Traditional competitive tendering procedures

• Risk sharing is balanced

• All claims, from either Party, have to follow a strict procedure

• Engineer is no longer stated to be ‘impartial’: he ‘shall be deemed to act for the Employer’, except when fair determinations are required

FIDIC Contract Books

Red Book 1999

The Conditions of Contract for Construction

• For building or engineering works designed by the Employer, or by his representative, the Engineer.

• The Contractor constructs the works in accordance with a design provided by the Employer. However, the works may include some elements of Contractor – designed, civil, mechanical, electrical and/or construction works.

Red Book 1999

Basic Principles and Selection – New Red Book

• Design primarily undertaken by Employer or his agent

• Works are to be re-measured

• Employer appoints Engineer to administer contract on his behalf

• Engineer has power to vary works, but not change contract

• DAB appointed within 28 days of commencement date and has powers to resolve any dispute and change “determinations” of Engineer

The MDB Harmonised Edition “Pink Book” 2005

Harmonised Conditions of Contract for Construction

• Issued after several Multilateral Development Banks (MDB) agreed certain modifications for some Clauses, for better reflecting their financing principles.

• Used for construction and engineering works, designed by the Employer (as in the Red Book)

• Allows the Bank to suspend payments to Borrower – Sub-Clauses 2.4, 14.7 and 16.1

• Engineer’s Authority may be unilaterally changed by the Employer – Sub-Clause 3.

• Modifications concerning selection and activity of DAB

Yellow Book 1999

Conditions of Contract for Plant Design – Build

• For the provision of electrical and mechanical plant, and for the design and execution of building or engineering works.

• The Contractor designs and produces, in accordance with the Employer’s Requirements, plant and/or other works; which may include any combination of civil, mechanical, electrical and/or construction works.

Yellow Book 1999

Basic Principles and Selection – New Yellow Book• The Employer provides project requirements as defined under

item “Employer’s Requirements” (ER)

• The “ER” are the basis for the contractor to design and build the project. Errors within the “ER” are the liability of the Employer.

• The contract is for a fixed sum and not re-measured.

• The contract is administered on behalf of the Employer by the Engineer,

• Provision is made for variations by the Engineer.

• The general conditions (clauses 1 to 20), except clauses 5 & 12, are principally the same as red book.

Basic principles of Red/Yellow Book

Green Book 1999 – “Mini-Red Book”

Short Form of Contract• For building or engineering works of relatively small

capital value (usually US$ 500,000 and six months’ duration).

• Depending on the type of work and circumstances, this form may also be suitable for contracts of greater value, particularly for relatively simple or repetitive work or work of short duration.

• Balanced risk sharing - no Engineer

• Design by either party - all types of construction

• Payment on lump sum or any other basis.

Silver Book 1999Conditions of Contract for EPC/ Turnkey Projects• Suitable for the provision on a turnkey basis of a process or

power plant or factory or similar facility, or of an infrastructure project or other type of development– a higher degree of certainty of firm price and time is required– Contractor takes total responsibility for the design and

execution of the project, with little involvement of the Employer.

• Contractor carries out all engineering, procurement, construction, ready for operation at the ‘turn of a key‘

• Contractor carries majority of risks, so Employer pays more• Small number of tenderers with negotiation• Lump Sum Contract Price (adjustments in limited specified

cases)

The main parties in a FIDIC contract

• Contracting Authority/ Employer

• Contractor – Contract between Employer & Contractor under Red/ Yellow FIDIC

• Engineer – Contract between Employer & Engineer

• Engineer to administer FIDIC Contract on behalf of Employer

Role of the engineer• Client’s agent and representative

• Designer

• Supervisor / contract administrator

• Issuing instructions

• Certifying payments / issuing certificates– Interim payment certificates– Taking-over certificate (confirmation of works completion)– Performance certificate (similar to certificate of making good)– Final payment certificate

• Determining completion

• Dispute resolution / decision maker

Payment• The final contract price will reflect adjustments to the

accepted contract amount (sum in letter of acceptance)

• Re-measurement /lump sum– Payments are normally determined by measurement and applying

the rates and prices from the bill of quantities– Payment could also be on a lump sum basis

• Retention money (parties have to agree, no fixed percentage)

• Delay damages (parties have to specify the percentage for LAD)

• Value engineering (Clause 13.2 of Red Book)– Incentivizes the contractor to suggest changes which can benefit the

employer. Contractor shares 50% of any financial benefit from their suggestions.

Dispute Resolution• Dispute resolution steps

– Engineer consults with parties to reach agreement– If agreement cannot be reached the engineer must make a fair

determination taking due regard of all relevant facts. Note: It is unwise for engineer to make unfair determination against contractor

– If engineer’s determination is not agreed by either parties the dispute will be referred to a Dispute Adjudication Board (DAB) or Dispute Review Board (DRB)

– If the decision of the dispute board is not accepted by any of the parties then resolution through an international arbitration (ICC rules)

• The Dispute Board– The DAB or DRB – what is the difference?– How many people? How are members appointed?– Full time or ad hoc dispute board?

Dispute Resolution Board• The use of a Dispute Board is a highly successful and cost effective

contractual process for the avoidance and resolution of disputes during the course of the project. The two most popular types are:

• The Dispute Review Board (DRB) ... provides non-binding recommendations; or The Dispute Adjudication Board (DAB) ... gives a decision that is interim binding.

• Typically the DRB or DAB is established at the outset and comprises of three individuals who are experienced, impartial and respected construction professionals from different disciplines. The Board members are selected and approved by both the contractor and owner/client who share the costs equally. For smaller projects, the Board may comprise just a single member.

http://www.nigelgrout.com/services_dispute_boards.htm

Dispute Review Board• A Dispute Review Board (DRB) generally comprises a panel of three

experienced, respected and impartial members.  DRB’s are most often used in the construction and engineering industries and are generally established at the commencement of a project.  The members are kept informed of progress and matters pertaining to the project by receipt of reports and periodic visits to the site.  When a difference or dispute between the parties cannot be resolved internally then it is referred to the DRB.  The Board reviews submissions and convenes a hearing giving the parties an opportunity to state their case. The Board makes a written, non-binding recommendation for resolving the dispute. 

http://www.alway-associates.co.uk/alternative-dispute-resolution.asp

Dispute Board features

• Features of a Dispute Board– Tribunal (1 or 3 people)– Independent– Impartial– Familiar with project– Encourages resolution of issues at job site level– Resolves disputes in 84 days

• Formation of a DAB - FIDIC– Cl. 20.2 Formation (Red Book)– 1 or 3 members– Each party nominates one member– Parties consult members and agree a chairman– List of potential members in tender– No Agreement: FIDIC President will nominate

Dispute resolution• FIDIC procedures - contract conditions

– Cl.20.2 Disputes shall be adjudicated by DAB– Cl.20.2 Appointment of DAB– Cl.20.3 Failure to agree DAB nomination– Cl.20.4 Obtaining a Decision– Cl.20.7 Enforcement

• Post decision of DAB– Shall be binding …promptly give effect– May be reversed by amicable settlement or arbitration– Dissatisfaction (issue a notice of dissatisfaction within 28

Days)– Otherwise after 28 days - binding – Failure to comply Failure to comply – arbitration– Compliance is a contractual requirement

Risk management• All contracts contain risks for both Contracting

Authorities/ Employers and Contractors – There is no risk-free contract

• FIDIC attempts to rationalise and allocate responsibilities for main risks

• A key requirement is for the Contract Parties to fully understand the FIDIC General and Particular Conditions of Contract that set out their Responsibilities and Risks within a Project

• Every risk given to the other party has its cost, no Party assumes a risk for free.

Further reading• Rights and responsibilities of parties in a FIDIC contract

• The contractual or legal basis of claims

• Defined procedures for dealing with Extension of Time

• Quantifying and measuring delay, disruption and acceleration

• Contract programmes and float

• Substantiation of costs

• Substantiation of value

• Presentation of claims for loss and expense and claims for EOT

• Risk allocation, responsibility and insurance

• Negotiation and settlement

• Dispute resolution procedures