Managing Contracts Under FIDIC Conditions PDF

‘s-Heer Hendrikskinderendijk 105, 4461 EA Goes, Nederland Tel +31 (0)113 246 400 Fax +31 (0)113 246 409 Web www.drivertrett.com WORKSHOP FOR VSMC “MANAGING CONTRACTS UNDER THE FIDIC CONDITIONS” INTRODUCTION Each of us is employed solely because our employer considers it profitable to do so. The c...

‘s-Heer Hendrikskinderendijk 105, 4461 EA Goes, Nederland Tel +31 (0)113 246 400 Fax +31 (0)113 246 409 Web www.drivertrett.com WORKSHOP FOR VSMC “MANAGING CONTRACTS UNDER THE FIDIC CONDITIONS” INTRODUCTION Each of us is employed solely because our employer considers it profitable to do so. The company exists to make a profit. If it doesn’t make a profit it will cease to exist and we are all employed to contribute to that profit. If we do not contribute as we employed to do, then we are failing in our obligations and become a burden on the business. So how exactly can this be achieved? Well as you know, the profits of your business come from projects. Profit is the difference between income and expenditure; so increased profitability on projects arises from:


Contracting at the right price. Executing the works efficiently. Getting paid what you are properly due. This workshop will look at what is one of the ways of improving the prospects of profitability. All projects are subject to contracts. This workshop will therefore show you how a basic understanding of the contract (FIDIC in particular) and adoption of simple procedures can improve the prospects of profitability for your business. It must be stressed that this will apply to everyone in the project team as everything we do in construction is subject to the contract we make. It is not restricted to the lawyers, financial people or senior management but includes the tendering personnel, engineers, supervisors and line management. The basis of the material I will share with you is what Trett would describe as ‘good practice’ in the management of contracts. It is not just theory taken from a book. It is based on real projects and many years of experience of what really does go wrong. I hope this will give you all something to think about and take away with you. You will note that we’ve called this a workshop rather than a seminar or training session. This is for two particular reasons:

Best results from our time together will come from three-way dialogue, me to you, you to me and also between yourselves, but not all at the same time. It is therefore very important that you raise any issues or ask any questions at the time so please feel free to interrupt me. We will be introducing exercises and case studies along the way to help give context. THE MANAGEMENT OF CONTRACTS PROCESS Contracts can be very complex documents that are often the domain of lawyers. So how do technical people effectively deal with these contracts? Driver Trett is the trading name of Trett Consulting B.V. BTW-nr: 808209814B01 | Rabobank 389383791 | KvK Middelburg 22044617 www.drivertrett.com Many contracting organisations have a contracts management manual, basically a document that sets out the standardised manner in which it undertakes its management of contracts. It should cover everything from receiving tender documents to issuing a bid, planning the works, record keeping, filing systems and correspondence registers, project close out and archiving files. Its purpose is to spread the knowledge of the organisation through the organisation and the main problem is enforcing its use. The management of contracts has therefore been viewed as a process, but can this process be explained more simply? The process of Managing a Contract cannot clearly start without a contract.







The first stage is therefore the formation of a legal agreement. This element covers the bid or tender stage, any negotiations and/or clarifications of what is required and what is offered and of course the execution of the actual contract itself. Every contract sets out responsibilities, liabilities and obligations. These are fundamental to the future management of the agreement and must clearly be understood. It is important to constantly monitor these obligations in order to see whether there are any changes. The management of change within a contract is an important part of the overall process and fundamental to maximising commercial returns. To do this, it is necessary to appreciate what change is and the different types of changes that can arise. Procedures and processes can be used to aid the identification of change at the earliest opportunity. This again assists in maximising commercial returns. Once change is identified, something must be done. This is normally set out in the contract but the exact procedure depends on the type of change. Of course, there are circumstances that are not specifically catered for in contracts, what are these and what should then be done? Another crucial part of this overall process is claiming for payment from others, whether of the contract works or extras / changes and claiming for extra time, in other words an extension of time. What processes are involved? How can you be more successful with any claims that need to be made? Of course, when employing subcontractors or suppliers, the whole process is repeated but from the other side. As a contractor employing others, you receive requests for payments and probably additional money and time. What processes are available to assist this eventuality? Finally, all matters whether financial, technical or contractual need to be agreed and any disagreements settled. As I have already indicated, the process of managing contracts covers the whole period from the contract’s inception (i.e. conception) to its conclusion (i.e. its death). It is important for you all to appreciate that profitability is affected at all stages of a project’s life. THE TENDERING PROCESS This is the conception of a contract. It is important at tendering stage to understand exactly what the employer expects and for the employer to understand exactly what he is being offered; equally, for the contractor to appreciate the responsibilities and obligations that the proposed contract places on him. The contracting business also carries with it certain risks. There is therefore a need for risk analysis during the tendering stage; in other words, identification, quantification and evaluation of the commercial risks. Pagina 2 van 34 www.drivertrett.com In addition however, contractors should look to identify opportunity. The details of the employer’s requirements, the proposed contractual obligations and responsibilities are all, or should all be contained in the tender documents. These documents are also the basis of the tender risk analysis. As we all know, tender documents are often revised following the initial submission, so is the element of managing contracts during this period not just a matter of managing data? Clearly it is not the whole picture, but there are some processes that should be used that would assist the overall management of the contract should it be subsequently awarded: Pre-tender
Before an employer issues tender documents, a list of the exact documents enclosed should be made and documents actually sent checked off against the list.
When tender documents are issued to a contractor, they should be checked off against the contents list to ensure that everything has been received. If any are missing, they should be immediately formally requested.
A clean set of the tender documents should be kept in a master file available for future reference and retained by the estimating manager.
The file should also include a copy of all correspondence requesting clarifications or further information. Nowadays, as much communication is by e mail, hard copies can be printed and filed or a soft copy sent to an electronic storage folder accessible to all working on the project. Pre-contract
A schedule should be maintained that summarises all the changes resulting from negotiations. The schedule should state the date, the document (i.e. letter date and reference, or meeting date) and what the change was.
Minutes of meetings should be issued, preferably in the form of a schedule of agreed changes at the end of any meetings. This should be signed by both parties at the time. The same procedures are equally applicable for a sub-contract order, in which case the contractor acts as employer and the sub-contractor as contractor. We will be looking at sub contracting in more detail later. CONTRACT AWARD Earlier we were looking at the importance of the management of data during the tender phase. So having been successfully awarded a contract, the processes should be continued: Contract Signature
Both employers and contractors should ensure that all the agreed changes are clearly noted within the documents comprising the agreement.
A list of all the contract documents with full references should be part of the agreement and copies of all documents within an Appendix. It is common that letters or faxes can be sent on the same date; hence individual reference numbers are required. Pagina 3 van 34 www.drivertrett.com CONTRACTS We use the phrases ‘contractual agreement’ or ‘contract’ a lot. Perhaps we should remind ourselves what it actually means. Is it simply that agreed between the parties? What form does this take? What form should it take? What documents does it include? Of course there is not one simple answer to those questions. Without looking in detail at legal issues, a contract must, at a minimum be legal. To be legal, there must be a requirement to do something, i.e. to build a road or install some ducts. There must be willingness on the part of the parties that the work shall be done. There must also be terms to govern the work. These terms should set out the responsibilities of the parties and matters such as timing, payment and the standards of work. They should describe procedures for dealing with change to the scope, schedule or conditions, by any of the parties involved. It is these terms that we need to concentrate on when looking at the management of the contract. The Contract will include express conditions which are written down (i.e. expressed) and implied conditions, which are not written anywhere, but which apply just the same. The express terms will be written out in the Conditions of Contract, in the Specification, the drawings, and in the other documents which are included in, and form part of, the Contract. There they are, they can be referred to at any time to see what the requirements are. The implied terms, though, aren't there for reference. They exist in three broad categories but differ according to the legal jurisdiction. These categories are; Statute or Civil Code terms, warranty terms and terms of necessity. Any contract we make is subject to the law of the land, for a UK contract; it is Statutes and Common Law and in the Netherlands for example, the Civil Code applies. Because the law of the land applies anyway, there is no need to write it down to render a contract subject to it. Warranty terms, under English law are concerned with 'unwritten undertakings' we give each other: That we are competent and able to fulfil our obligations, that we know what our business is, that we will provide services and materials which are fit for purpose and of acceptable quality, that we won't obstruct each other, and so on. The third category comprises terms which are required to make the Contract work, and which, although not written down, must have been clearly in the intention of the parties when the Contract was made; to be so obvious as to go without saying. Implied terms cannot override an express term, and if they cannot be expressed simply (i.e. if they are not obvious) and equitable they will fail. Contracts in the Construction and Engineering Industries There is no one common contract that is used in these industries. There is therefore, no common baseline that can be understood and applied to all projects. The contract used will Pagina 4 van 34 www.drivertrett.com depend on certain variables. Each type of industry has its own specific circumstances and needs that have to be reflected in the specific contract document. The FIDIC forms of contract are meant for use on many types of projects, but they are not suitable for a ship conversion for example. There are often many contracts in use on one project. The employer will have an agreement with the contractor; the contractor will have contracts with each of its sub-contractors. The contents of each should be different as there are different obligations placed on the parties. There are many different levels of responsibility for contracting for the projects you undertake. At one extreme is turnkey, where a contractor has virtually complete responsibility for design, manufacture, installation and commissioning the equipment and then at the end, ‘hands the key to the employer’. Alternatively, the contractor may only be required to construct the equipment, the installation being done by the employer or someone employed by him, with or without supervision. Some projects have a combination of these different types within the various contracts. Lastly, different obligations and responsibilities arise from the method of payment. A contractor may be paid a fixed lump sum or may be reimbursed its costs plus a fee. Again, this may not be consistent throughout all the contracts on a project. The important point is that the contract sets out the baseline albeit the baseline will be different for every project and every contract. Contractual Matters Whatever contract is chosen, its terms must cover certain issues. It must stipulate who does particular things, what should be done and when it should be done by. This is just not confined to the definition of a specification and start and completion dates, but procedures to deal with anticipated events. A contract must define who pays who, how is the payment made, what does the payment comprise or how shall it be calculated and also when it should be made. The contract terms allocate risk. Ideally, risk is placed in the hands of the party who can best manage it. This should be the aim of a good contract and standard forms are normally drafted on this basis. Contracts should provide for change in scope and conditions. If there is no ‘change’ clause, a employer cannot instruct a variation, it can only be undertaken with the contractors agreement. Similarly, in a sub-contractor agreement with no ‘change’ clause, a contractor cannot instruct a variation without the sub-contractors agreement. Contracts should provide for a period for completion and for changes in that period either due to delays or increased work. If no period for completion or no completion date is defined, then the works must be completed with a 'reasonable time'. If the contractor fails to complete by the contracted date, then he is in breach and the employer is entitled to damages arising there from. If the contractor is prevented from completing by the contracted date by matters outside Pagina 5 van 34 www.drivertrett.com his responsibility, then time will be 'at large' and his obligation will be to complete in a reasonable time. Unless, that is, there is provision in the contract to change the completion date by awarding an extension of time for completion of the works. There usually is. Such a provision thus protects the employer’s entitlement to damages in the event of delayed completion. Similarly, award of extension of time postpones the contractor’s liability to pay damages. If either party fails to comply with the express or implied terms of the contract, then he is in breach of contract. In that event the simple consequence is that the wronged party is entitled to be compensated by payment of the costs, or damages, he has suffered as a direct result of the breach by the other. The intention is to restore him to the position he would have been in had the breach not occurred. However, certain limitations apply:


The damages must stem directly and reasonably from the breach; They must be such as might have reasonably been within the contemplation of both parties when the contract was made, and; There is a duty (not an obligation) on both parties to mitigate the damage. This means that they must try and avoid action which makes the damages worse. Construction and engineering being as uncertain as it is, most contracts recognise that breaches will occur. Though made with the best intentions, our contractual obligations are not always met. It may at first sight seem a contradiction, but contracts can and do include terms for dealing with specific breaches of the same contract by either party. An example might be the failure of the employer to provide design information within the prescribed period. Subject to certain defined procedures the contractor is effectively entitled, under the contract, to recover the damages he suffers as a result. That is, he will be entitled to recover his consequential costs and have his period for completion extended if appropriate. Damages for late completion can be expressed within the contract. This means that the damages are effectively defined and agreed from the beginning. In the event that the contractor completes late, then he pays the employer the amount regardless of the actual damages suffered by the employer. If stated as Liquidated Damages (under English Law), the specified figure must represent a genuine estimate of the likely damages, it cannot be a punitive figure chosen to frighten the contractor into due completion without reference to the actual likely costs. The advantage of defining damages for late completion, as opposed to damages at large, is that the employer does not have to demonstrate his actual damages and the contractor can define his risk with regard to late completion. Extension of time does not in itself entitle the contractor to any additional payment. Any such entitlement flows from the contractor’s entitlement to be paid the costs arising from the events which give rise to the extension, a matter dealt with under other provisions of the contract. So finishing our brief look at contracts, it is important, wherever possible; to obtain agreement before the work actually starts. This is not always possible and often contractors are asked to start work before complete agreement of all the details. In these cases, the last communication or letter on the un-agreed points, especially if unanswered, may be taken as that binding on the parties. Pagina 6 van 34 www.drivertrett.com In some cases, agreement is not finally reached and it may be held that there is no formal contract between the parties. If this is the case, reimbursement and the time for completion will be what is reasonable. Lastly, a word on letters of intent (LOI), why do I say they can be dangerous? LOIs can solve time pressures and offer the recipient protection. LOIs can also cause problems if not worded in a correct manner so as to clearly define what is to be carried out, when it is to be done by, who does what and what the payment provisions are. We have encountered many problems on projects where the entire works have been undertaken on a letter of intent and there is subsequently much confusion as to what has been agreed and what is the basis of the contract. I would recommend that there are four elements that a LOI should cover:



A full description of the work to be done and a direction to start work The time period or end date that the work must be done by The payment to be made – maybe a maximum The terms and conditions governing the work I quote below the exact wording of the LOI issued by the main contractor on a project I was involved in: “As you know from our meeting this morning, we have just received a letter of intent from [X] for the [Y] project, which includes your [equipment]. In our turn, we are pleased to confirm that it is our intention to enter into a sub contract with [you] for your [equipment], this will be generally be on the basis of the Sub Contract document that we discussed this morning (ref…) We also agreed that we would incorporate your final comments on the draft Sub Contract and that you would provide details of the Advance Payment Bond, on-demand Performance Bond and insurance that you can offer. The main contract commencement date is… Please acknowledge receipt.” It does not meet the recommendations. OVERVIEW OF THE F1DIC FORMS OF CONTRACT Construction as we know it developed with the building and utilisation of the railways in the nineteenth century and as such work became more extensive the benefits of Standard Forms of Contract became increasingly apparent. Forms drafted by independent bodies, rather than the contracting parties, were better able to demonstrate fairness between them, and to incorporate the wider experience of the industry and of the use of the forms themselves. The Institution of Civil Engineers in the UK, working with a body representative of the contractors, issued the first edition of the ICE Conditions of Contract in 1945, combining elements from an assortment of contract forms which had been in use prior to that date. The Pagina 7 van 34 www.drivertrett.com document was well received and has now reached the 7th edition, published in 1999, by a continual process of updating and revision to accord with changes in legislation and the nature of the industry itself. The ICE form inspired and became the basis of similar standard forms adopted in many parts of the world, generally incorporating only minor changes to reflect particular domestic, legal, or language requirements. It was, though, and remains very much a domestic form of contract and not one best suited for international construction projects. In 1956 the Association of Consulting Engineers in the UK published an amended form suitable for such projects, the ACE Form, though still very similar to the ICE. The following year FIDIC published "Conditions of Contract (International) for Works of Civil Engineering Construction", generally known as the Red Book. FIDIC (Federation Internationale des Ingenieurs Conseils - The International Federation of Consulting Engineers) is a federation of associations of Consulting Engineers representing their respective countries and is based in Geneva. The Red Book was modelled closely on the ACE Form, in turn modelled on the then current fourth edition of the ICE Form, so was very similar to the ICE document. The second edition of the Red Book was published in 1969, responding to increased take up internationally, and then the third edition in 1977. This edition was prompted by issue of the fifth edition of the ICE Conditions in 1973 which had incorporated significant changes from its predecessor, though all those changes were not themselves carried forward into the Red Book. The Third edition served very well until well into the 1980's, when increasing economic growth in developing countries, particularly the Middle and Far East, greatly increased its use and, inevitably, the legal scrutiny to which it was subjected in consequence. The Fourth Edition was published in 1978, the product of comprehensive revision, and was reprinted with further minor amendments in 1988 and 1992. In 1996 FIDIC published a Supplement which dealt with Dispute Resolution, Lump Sum Payments and Delayed Certification by the Engineer. To some extent these provisions reflected contemporaneous concerns being addressed by the World Bank, in the UK and elsewhere, in an effort to reduce the confrontational nature of the industry. Concurrent with the evolving Red Book, FIDIC also published the Yellow Book, which reached its 3rd edition in 1987, and the Orange Book which was first published in 1995. The Yellow Book, for electrical and mechanical works, was based on the Red Book, but it reflected the different requirements for M and E works, providing for design and erection of plant by the Contractor. The Orange Book was published under the title "Conditions of Contract for Design - Build and Turnkey", and was based on the UK ICE Design and Construct form published in 1992. In 1994 FIDIC commenced a thorough review of the current Red and Yellow Books, together with a re-assessment of the then proposed Orange Book, and this culminated in the publication in 1999 of a completely new set of Standard Forms, Red, Yellow, Silver and Green, which continue in use today. FIDIC expected that the new forms would quickly replace the previous editions in common use, but this has not actually happened. Familiarity with the Fourth Edition of the Red Book and its practical application, have kept it in use, such that the earlier and later editions are now in Pagina 8 van 34 www.drivertrett.com general use together. The 1999 forms reflect a radical change in contracting, and, in common with similar changes being introduced in, for example, the UK, they will take some time to become popular. FIDIC Forms of Contract In 1999, Federation Internationale des Ingenieurs-Conseils (FIDIC) published the following four forms of contract: Red Book - Conditions of Contract for Construction, which are recommended for building or engineering works designed by the Employer or by his representative, the Engineer. Under the usual arrangements for this type of contract, 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. Yellow Book - Conditions of Contract for Plant and Design-Build, which are recommended for the provision of electrical and/or mechanical plant, and for the design and execution of building or engineering works. Under the usual arrangements for this type of contract, the Contractor designs and provides, 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. Silver Book - Conditions of Contract for EPC/Turnkey Projects, which are recommended for the provision on a turnkey basis of a process or power plant, and which may also be used where one entity takes total responsibility for the design and execution of a privately financed infrastructure project which involves little or no work underground. Under the usual arrangements for this type of contract, the entity carries out all the Engineering, Procurement and Construction ("EPC"): providing a fully-equipped facility, ready for operation (at the "turn of the key"). Green Book - Short Form of Contract, which is recommended for relatively simple or repetitive work, or for work of short duration or of small capital value. In 2006, FIDIC published: Blue Book - Dredging and Reclamation Works, which is specifically, drafted for dredging and reclamation works. Pagina 9 van 34 www.drivertrett.com Comparison between the FIDIC 1999 Forms Red Book - Conditions of Contract for Construction Yellow Book - Conditions of Contract for Plant and Design-Build Silver Book - Conditions of Contract for EPC/Turnkey Projects Recommended for building and engineering works if most (or all) of the works are to be designed by (or on behalf of) the Employer Recommended for the provision of electrical and/or mechanical plant and for building and engineering works if most (or all) of the works are to be designed by (or on behalf of) the Contractor. The Contract is administered by the Engineer who is appointed by the Employer. If disputes arise, they are referred to a DAB for its decisions. The Contract is administered by the Engineer who is appointed by the Employer. If disputes arise, they are referred to a DAB for its decisions. Suitable for a process or power plant, a factory or similar facility, or an infrastructure project or other type of development, if (i) a higher degree of certainty of final price and time is required, and (ii) the Contractor takes total responsibility for the design and execution of the project. The Contract is administered by the Employer (unless he appoints an Employer's Representative) who endeavours to reach agreement with the Contractor on each claim. Alternatively, Particular Conditions may specify Engineer's decisions on disputes, in lieu of a DAB. Alternatively, Particular Conditions may specify Engineer's decisions on disputes, in lieu of a DAB. If disputes arise, they are referred to a DAB for its decisions. The Contractor designs (but only to the extent specified) and executes the works in accordance with the Contract (which includes the Specification and Drawings) and the Engineer's instructions. The Contractor provides plant, and designs (except as specified) and executes the other works, all in accordance with the Contract, which includes his Proposal and the Employer's Requirements. The Contractor provides plant, and designs and executes the other works, ready for operation in accordance with the Contract, which includes his Tender and the Employer's Requirements. Interim and final payments are certified by the Engineer, typically determined by measurement of the actual quantities of the works and applying the rates and prices in the Bill of Quantities or other Schedules. Interim and final payments are certified by the Engineer, typically determined by reference to a Schedule of Payments. Interim and final payments are made without any certification: typically determined by reference to a Schedule of Payments. Other valuation principles can be specified in Particular Conditions. The alternative of measurement of the actual quantities of the works and applying the rates and prices in a Schedule of Prices can be specified in Particular Conditions. The alternative of measurement of the actual quantities of the works and applying the rates and prices in a Schedule of Prices can be specified in Particular Conditions. The General Conditions allocate the risks between the parties on a fair and equitable basis: taking account of such matters as insurability, sound principles of project management, and each party's ability to foresee, and mitigate the effect of, the circumstances relevant to each risk. The General Conditions allocate the risks between the parties on a fair and equitable basis: taking account of such matters as insurability, sound principles of project management, and each party's ability to foresee, and mitigate the effect of, the circumstances relevant to each risk. Disproportionately more risks are allocated to the Contractor under the General Conditions. Tenderers will require more data on hydrological, sub-surface and other conditions on the Site, to the extent that this data is relevant to the particular type of works, and more time to review the data and evaluate such risks. Pagina 10 van 34 www.drivertrett.com The principle ways in which these documents differ from the pre-1999 forms (the old Red. Yellow and Orange books) may be summarised as follows: 1. The separate Standard Forms reflect the allocation of responsibility for design. The Red Book applies to design by the Engineer, on behalf of the Employer, the Yellow Book to design by the Contractor with an Engineer in place, the Silver Book to design by the Contractor with no Engineer in place. 2. Under the 1999 Red and Yellow Books (which provide for the appointment of the Engineer) the Engineer is deemed to act in the interests of the Employer unless specifically stated otherwise. Traditionally of course, the Engineer was deemed to act impartially under the terms of the Contract. 3. Under the 1999 Red and Yellow Books the Contractor is entitled to evidence of the Employer's ability to pay. If such evidence is not forthcoming the Contractor can ultimately suspend or terminate the Contract. 4. Under the 1999 Editions the Contractor is obliged to provide work 'fit for purpose'. There is no such requirement under the earlier editions. 5. The 1999 Red and Yellow Books provide that, in ascertaining the consequences of adverse unforeseen physical conditions, the Engineer shall take account of any more favourable conditions encountered on the project. 6. Time limits re interim payments have been tightened up. 7. Very strict time limits are applied to Contractors notice of claim, and time limits re notices in general are more definite. 8. The 1999 forms introduce the concept of 'Value Engineering'. 9. The 1999 forms introduce significant changes in the provisions with regard to insurance. 10. The 1999 forms are written in a more user-friendly way, the total number of clauses reduced to 20, and with similar clause numbering and layout applying to all the documents. The sentences are shorter and the content is easier for the 'non- lawyer'; user to understand. Format and Logic Forms of Contract must fulfil four primary requirements: i. Specify the Scope of Work. What, precisely, has the Contractor contracted to build? ii. Allocate risk between the Employer and the Contractor. What risks are borne by each or shared between them? iii. Specify the procedures to be followed over the execution of the Works. How is the Contract administered? iv. Specify the terms of payment. Who values, how, and when is payment due? The way in which these requirements are included in a Form of Contract will vary. The 1999 FIDIC Red Book, as an example, is arranged as follows: Clause 1 Clause 2-4 Contractor. Clause 5-7 Clause 8-10 Clause 11 Clause 12-14 Clause 15-16 Clause 17-19 Clause 20 Pagina 11 van 34 Definitions, General Provisions (communications, documents etc). The duties of the "three" parties - The Employer, the Engineer and the Resources (staff, labour, materials etc) Time Defects Liability Payments Termination Risk and Insurance Claims and Disputes www.drivertrett.com The 1999 Yellow Book (Contractors Design) differs slightly as follows: Clause 5 Clause 12 Provides for Design Provides for Tests on Completion instead of measurement The Silver Book differs further as follows: Clause 3 With no Engineer, Clause 3 deals with the duties of the Employers Representative Taking the 1999 Red Book as an example, the clauses may be summarised as follows: Clause 1 The General Provisions include a very complete set of definitions, first of the Contract itself and the associated documents, specifications, and the like; then of the people involved, including the Engineer, who still has a role, and the Dispute Adjudication Board. The Definitions go on to deal with dates and times for Commencement and Completion and for any tests, together with Taking-Over and Performance Certificates. Money terms, such as the "Accepted Amount" and the "Contract Price" are clarified. There's a difference. Finally, there arc two more groups of definition, one covering Works and Goods, defining, among other things, the "Contractors Equipment" and differentiating it from the Permanent Work. Worthy of note is that "Plant", means machinery and the like, including vehicles, intended to form part of the Works. In addition to the Definitions, the General Provisions have clauses to deal with interpretation, communications and the giving of notices, with choice of law (although the actual choice should be written in an appendix to the Tender), and with languages. They go on to deal with Documents and the relationship between Employer's and Contractor's Documents, with confidentiality, legality of conduct and the liability of a Contractor who is a consortium or other grouping. The Provisions are well thought out and set out in such a way that they give a firm base on which the rest of the document is grounded. They are practical, clear and precise. Clauses 2 - 4 Clause 2 sets out the duties of the Employer and his personnel, and his obligation to demonstrate proper financial arrangements for payment to the Contractor. It ends with provisions for Employer's claims against the Contractor. The Engineer's role is set out in detail in Clause 3. The Red Book makes it clear that the Engineer, when carrying out his duties, is deemed to act for the Employer. However, the clause provides also that where there is no agreement between the Employer/Engineer and the Contractor and the Engineer is required to make a determination, he is to make a fair determination in accordance with the Contract, taking due regard of all relevant circumstances. Note: a fair determination taking due regard of all relevant circumstances. If and when an Pagina 12 van 34 www.drivertrett.com Engineer does not act fairly in that context, then he is in breach of his duty, and the Employer is in breach of contract. Clause 4 deals with the Contractor and his responsibilities. Sub-contracting the whole of the Works is prohibited, but the document does not discuss whether that means that the whole shall not be the subject of a single subcontract, or if an arrangement would be excluded if it meant that the whole was sub-contracted, albeit in parts. That could be of interest where a joint venture company effectively sub-contracts the whole of its work to its members or others. The Guidance Notes comment on variations to the sub-contracting provisions, including a clause to encourage local suppliers and sub-contractors. Note that 4.10, is not primarily an obligation of the Contractor but of the Employer. It requires the Employer to have given the Contractor all relevant sub-surface, hydrological and environmental data about the Site, or at least that which the Employer has. The Contractor, in turn, is deemed to have obtained all necessary information as to risks and the like, but only to the extent that was practicable at the time of tendering. Clauses 5 - 7 Nominated sub-contractors are the subject of Clause 5. There is little to say about it, save that the Contractor has a right to object and to be indemnified if the objection is overridden. Clause 6 deals with Staff and Labour. This is an interesting class distinction which isn't defined in the Definitions of Clause 1, which refer only to personnel. The clause deals with working hours and facilities, and with rates and conditions, which must be in line with the trade norms or no lower than the general local level. There is no provision to protect local employers by prohibiting higher rates and better conditions, but relevant labour laws must be followed. A requirement for a monthly report of Contractor's Equipment, as well as his deployment of labour, is included in this section. Plant, Materials and Workmanship are included in Clause 7. You will remember that "Plant" in this Form of Contract means apparatus, machinery and vehicles, intended to form part of the Permanent Works. Here it does not mean the Contractor's equipment or hired equipment. There is provision for samples specified in the Contract and additional samples to be provided as a Variation, for inspection and testing (though not Tests on Completion) and for remedial work. Plant becomes the property of the Employer when the Contractor is entitled to payment for it, or when it is delivered to site, whichever is the earlier. Clauses 8 - 10 Clause 8 deals with Commencement Date, Time for Completion and Extensions of Time, and provides for a detailed programme to be prepared by the Contractor within 28 days of commencement, and for it to be updated thereafter. It also provides for damages for delay, the amount of which will be in the appendix to the tender. Arrangements for Suspension of the Work are set out, with corresponding arrangements for payment and for a remedy in the event of prolonged suspension, which may be treated as an omission or as a cause to terminate the works, depending on the extent of the Works affected. Pagina 13 van 34 www.drivertrett.com Clause ') discusses Tests on Completion and provides for delayed tests, retesting and the effect of failure. The Employer's taking over is the subject of Clause 10. It speaks of taking over Sections of the Works and of Certificates for any part of the Permanent Works. Logically it provides (at 10.3) that, if the Employer has prevented the Contractor from carrying out the tests, the Engineer shall issue a Taking Over Certificate for the relevant part of the works - this is not a discretionary power, it is a mandatory duty. Clause 11 The Contractor's liability for defects after taking over is governed by Clause 11, which allows for an extended Defects Notification Period to the extent that the Works or a Section cannot be used. The clause also provides for a Performance Certificate to be issued when defects have been remedied. This is an important document, because it is the only certificate deemed to constitute acceptance of the Works. At the end of this clause is recorded the Contractor's obligation to clear the site of waste and redundant material. Clauses 12 - 14 Clause 12 deals with Measurement and Evaluation, including the valuation of omissions from the works. Worthy of note is the Clause on Methods of Measurement, which requires measurement of the net actual quantity of each item of the Permanent Works, according to the Bill of Quantities or other applicable schedules, irrespective of what may be the local practice. Variations and Adjustments are governed by Clause 13. There is a right for the Engineer to vary works - acting for the Employer, but his authority so to do is limited in Sub Clause 13.1. There is an express provision, under the side note "Value Engineering", for the Contractor to make proposals to accelerate completion, to save cost (in building, maintaining or operating), improve the efficiency or value of the works, or benefit the Employer in any way. If the proposal includes a change in design, it is to be the Contractor's design which must be fit for purpose. The cost benefits are shared. Other matters covered in the Clause are procedures for introducing a Variation, use of Provisional Sums, Day Work, adjustment for changes in legislation, and changes in cost (if applicable). The price and payment procedures are set out in Clause 14, which provides for advance payment where these have been agreed. This section also deals with Interim and Final Certificates and with Retention Money. Clauses 15-16 Theses clauses provide for termination by the Employer and Contractor respectively, together with arrangements for payment where appropriate. Any party seeking to invoke a right of termination should only do so after examining the detailed provisions with care. Essentially, the rights depend upon default by the other party, save that a right for the Contractor to suspend works may follow upon prolonged suspension. Clauses 17-19 Pagina 14 van 34 www.drivertrett.com Clause 17 deals with particular risks and responsibilities and seeks to allocate them appropriately. The Contractor is required to indemnify the Employer against the consequences of the Contractors actions. A list of Employer's risks and of their consequences is included. This section provides for Intellectual and Industrial Property Rights, and finally provides for limitation of the liability of the parties one to another (and a limit lower than the Contract Amount may be agreed in the Contract). Clause 18 provides for insurance, and Clause 19 defines Force Majeure and its consequences. Clause 20 Finally, Clause 20 sets out the regime for Claims, Disputes and Arbitration. The process includes the use of a Dispute Adjudication Board and the consequences of its decisions. Clause 5 of the Yellow and Silver Books deals with the Contractors Design, the Employer's Requirements and responsibility for error therein. Clause 12 deals with Tests on Completion, crucial to approval and acceptance of the Contractors obligation to design and build a project fit for the purpose defined by the Employer in the Employer's Requirements. The 1999 Red Book is written in plain language and means what it says. Provided Contractor, Engineer and Employer follow precisely the provisions and record their actions and notices in writing, it is a very effective document for our times. The 1999 Standard forms actually provide two separate Conditions of Contract. The General Conditions, clauses 1 to 20 outlined above, and the Particular Conditions, relevant to the actual project in hand. The Guidance Notes included in the document deal with these latter conditions in detail. The Scope of Work, obviously a fundamental clement of the contract, will be defined in the Particular Conditions. Again using the Red Book as an example, the four primary Contractual requirements (scope, risk, procedures and payment) are distributed over the General Conditions as follows: Pagina 15 van 34 www.drivertrett.com FIDIC (1999) RED BOOK SPECIFY THE WORKS Defined in the Contract Agreement, para, 2. defined in Appendix to Tender ALLOCATE RISK Pagina 16 van 34 1.9 Delayed Information 1.5 Ambiguity 1.13 Compliance with law 2.1, 4.13 4.15 Site Access 4.1 Site Safety 4.1 Design 4.4, 5.2 Sub-Contractors 4.6 Site Co-operation 4.7 Setting Out 4.10 Site Data 4.12 Physical Conditions 4.19 Provisions of Services 6. Site Labour 7.4, 9.2 Testing 8.4, 8.7, 8.8 Delay 10.2, 10.3 Take Over 1 1.2 Defects 13.3 Scope Changes (Variations) 14.8 Delayed Payment 17.18 Damage, Death, Injury, Insurance 19 Force Majeure www.drivertrett.com SPECIFY PROCEDURES 1.3 Communications 1.9 Information Delay 2.1 Delayed Access 2.4 Employer Financial Arrangements 2.5 Employer Claims 3.3 Instructions 3.5 Determinations 4.1 Contractors Design 4.3 Contractors Representative 4.4, 5.2 Sub-Contractors 4.7 Setting out errors 4.9 QA 4.13 Physical Conditions 4.16 Delivery to Site 4.21 Progress Reports 6.7 Accident Notification 6.10 Site Records 7.2 Submission of samples 7.3, 7.4, Pagina 17 van 34 9.1, 9.2 Inspection/Testing 8.1 Commencement 8.3 Programme 8.4 Delay 8.9, 8.11 Suspension 10.1, 10.5 Take Over 1 1.4 - 1 1.7 Defects 12 Evaluation 13 Variations 17.4 Employers Risks 18.1 Insurance 19.2, 19.4 19.6 Force Majeure 20.1 Claims www.drivertrett.com SPECIFY PAYMENT TERMS 14.1 Contract Price 14.3 Interim Applications - procedures by Contractor 14.6 Interim Certificates - when, evaluation 14.7 Payment - when, by Employer 14.9 Retention - procedure by Engineer/Employer 14.10 Completion - Contractor's procedure Final Application - Contractor's procedure Final Certificate - Engineers procedure 14.11, 14.1 3 14.12 FIDIC WHICH FORM TO USE The Form of Contract is chosen by the Employer and imposed by him on the Contractor, who tenders on that basis. The Employer can either choose a Standard Form, or compose his own bespoke conditions to suite his particular requirements. The job of a contract draughtsman is highly skilled and specialised. Composing contract documents is very difficult and 'home made' conditions are generally less satisfactory than those set out in standard forms for a number of reasons.





Standard Forms are drafted "at leisure" and with care, since they are not subject to the urgent provisions of an imminent project. Standard Forms are drafted by contract draughtsmen who know what they are doing and whose business it is. Standard Forms are subject to input from all elements of the contracting community - the Employer, the Contractor, the Engineer and Surveyor, the specialist supplier and so forth. They thus represent a reasonable compromise between the different aspirations of all those factions, and in consequence apportion risk fairly between them, Standard Forms are reviewed and updated to reflect the current requirements of the industry, and the experiences gained from use of the forms themselves. Standard Forms have been around for some time. We are familiar with them. Uncertainties of meaning are likely to have been ironed out, either by court decisions or revisions to the text. Standard Forms contain no surprises. Parties contracting on the basis of a standard form know where they stand and what is required of them. Recognising the advantages of using standard forms, it is important to guard against the temptation to tinker with particular terms and conditions to secure some perceived contractual or commercial advantage. Amending clauses, supposedly in the interest of the Employer, immediately nullifies al] the advantages of the Standard form listed above, and almost invariably introduces conflicting or ambiguous requirements on the parties, and often mistrust between them. The Employer can either respond to the commercial provisions upon him by drafting a contract which deals with each issue as he prefers (bespoke conditions), or he can choose the most attractive Standard Form and tailor his aspirations to suit. Pagina 18 van 34 www.drivertrett.com The choice before the Employer is first, whether to adopt a Standard Form or bespoke conditions, and if he decides on the former, which Standard Form should he use. Our advice and recommendation, particularly in the context of this seminar, must be that he adopts the former course. Assuming he does so, how do the Red, Yellow and Silver books compare in terms of his exposure to risk? What are the principle factors which should determine his choice between them? The Red Book retains the Engineer as acting generally in the interests of the Employer, provides for design by the Engineer, payment against measurement, responsibility for unforeseen conditions on the Employer. The Yellow Book also retains the Engineer as acting generally in the interests of the Employer, provides for design (fit for purpose) by the Contractor, payment on a lump sum basis, responsibility for unforeseen conditions on the Employer. The Silver Book effectively puts all risk on the Contractor, there is no Engineer, but rather the Employers Representative. Design (fit for purpose) is by the Contractor, payment on a lump sum basis. The Silver Book The Silver Book is intended to meet the requirements inherent in the private (as opposed to public or Government) funding of construction/engineering projects. These are increasingly in Build, Own and Transfer (BOT), Build, Own, Operate and Transfer (BOOT), arrangements, both for private and public infrastructure projects. The overriding requirement in these cases is for certainty (or as much certainty as possibly) of price. This is achieved by imposing nearly all the risk of cost and time overrun onto the Contractor, such that claims for addition to the Contract Price or for extensions of time arc unlikely to arise. It is accepted that the additional risk carried by the Contractor will be reflected in his higher Contract Price, but that may be considered acceptable to the Employer in return for the benefits of increased confidence in the outturn. Risks which are traditionally borne by the Employer (as, for example, under the Red and yellow Books) but which are transferred to the Contractor under the Silver Book include:




In the absence of the 'Engineer', who is replaced by the Employers Representative, "determination" of any dispute between the Employer and the Contractor is made by the Employer, though subject to the more formal dispute procedure if the decision is unacceptable to the Contractor. The Contractor is wholly responsible for any and all unforeseen conditions, difficulties or costs. Ground conditions, for example, are at the Contractors risk. The Contractor is wholly responsible for any error in the Employer's Requirements or any data provided by the Employer. Any error found in the Contractor's documents (which will be based upon the conceptual design data provided by the Employer) shall be the Contractors risk. This includes any omissions from the Employer's Requirements - no variation would apply to including the omitted requirement. Reduced scope for granting Extension of Time - excluded are delays from setting out data, physical conditions, information errors. Pagina 19 van 34 www.drivertrett.com 
Reduction in Employers Risks - excluded are occupation of the Permanent Works by the Employer, design by the Employer, and unforeseen conditions re "forces of nature". Despite the intentions inherent in the Silver Book, the Employer is still at risk in a number of areas - Force Majeure, delays by 'Authorities', Employer Variations, and in the provision of the Employer's Requirements. Under Clause 5.1 the Employer cannot escape responsibility for certain crucial data he provides to the Contractor, in particular for data "which cannot be verified by the Contractor". This issue is considered in more detail elsewhere, but obviously raises doubt with respect to, say, the Employer's ability to transfer risk for unforeseen ground conditions to the Contractor. In essence, the particular provisions of the Silver Book are: i. that the Contractor is responsible for errors in the Employer's design and ii. that the Contractor is responsible for unforeseen conditions. Otherwise the Silver Book is not greatly different to the Yellow Book. The Employer must weigh up the price he is prepared to pay for those provisions. The Red and Yellow Books Both adopt the "Engineer" in his traditional role, both provide that payment may be by measurement or by a lump sum, though the Red Book is drafted on the basis of the former, the Yellow Book on the latter. Both, though, include provisions for the alternative. The essential difference between the books is in allocation of responsibility for design, which under the Red Book lies with the Engineer acting on behalf of the Employer, under the Yellow Book with the Contractor. Preference for contractors design stems from the design of electrical and mechanical plant or other manufactured materials (e.g. wall cladding, flooring etc.), when the Employer is effectively dependent upon the contractors design insofar as it is inevitably inherent in his particular product. Under the Yellow Book FIDIC has extended the scope of the Contract to include for any and/or all design by the Contractor, to include that for Building and Civil Works. Responsibility for design of the Permanent Works under the Yellow Book is similar to that under the Silver Book, though under the Yellow Book the design is subject to approval or review by the Engineer, whereas under the Silver Book it is not. The contractual significance or risk inherent in "Engineer approval" is questionable. The Yellow and Silver Books require the Contractor to employ suitably qualified designers, and to provide an end product, which they will have designed, that is fit for purpose. The ramifications of this requirement are discussed elsewhere, but it should be emphasised that it imposes a substantial burden of risk on the Contractor. It is extremely unlikely that the designer will be retained other than on the basis of a duty of care, or that either they or the Contractor himself will be able to insure other than on that basis - i.e. that they will not be negligent in their duties. The Contractor cannot insure against failure to design fit for purpose, so will carry that risk himself. It follows that the purpose of the Works must be very clearly defined by the Pagina 20 van 34 www.drivertrett.com Employer, and there may be doubts as to how far along the design process the definition of purpose should apply. In this context, FIDIC identifies three stages in the design process: i. Conceptual design by the Employer sufficient to define the Employers Requirements. ii. Preliminary design by the tenderer to substantiate his bid. iii. Final design for the working drawings by the Contractor. The Employers Requirements are crucial to the transfer of design responsibility to the Contractor, especially under the Yellow Book where the Employer remains liable for any errors, omissions or ambiguities therein. It is likely that the Employer will retain Consulting Engineers to provide the conceptual design and to formulate the Employer's Requirements (which will include, for example, quality standards, tests etc), and he will be appointing "the Engineer" to act under either the Red or Yellow Books. Then extending the Engineer's brief to include 'non-manufacture' design (i.e. for building and civil works) would seem the logical step. If such design is imposed on the Contractor he is likely to employ specialist designers from outside his Company, just as the Employer would. The benefit to the Employer of a 'fit for purpose' design, which he could not enjoy if the design was carried out by his Engineer, must be balanced against increased Contract Price, reflecting the Contractor's increased, uninsurable risk, his own increased design costs and his reduced control of the design. Insofar as electrical and mechanical plant and manufactured goods are concerned it is hard to sec how such design responsibility could be borne other than by the manufacturer. 'Fitness for purpose' is an acceptable risk in those cases, provided the purpose is suitably defined - the manufacturer will know the capabilities of his product. However, the Red Book also provides for design by the Contractor when it is specifically defined in the Particulars (see Clause 4.1), again requiring that any such design is 'fit for purpose'. Whilst the 1999 Yellow Book has obvious advantages for M&E Works, the 1999 Red Book would seem a more logical choice for a multi discipline contract - as has traditionally been the case. The ultimate choices facing the Employer in his selection of a suitable Form of Contract are:

Increased (but not absolute) certainty of outturn price for a significant premium payment. Works 'lit for purpose' for increased design costs and reduced control of the design. NEW CONCEPTS IN THE FIDIC 1999 RED, YELLOW AND SILVER BOOKS The 1999 suite of FIDIC Standard Forms share a new manner of presentation in the division of the Conditions into only 20 clauses, the adoption of simplified language, and the use of the same clause format (with only one or two exceptions) for all the books. The way the Conditions are grouped together has been discussed elsewhere. There is no doubt the 1999 books are much easier to read and refer to than were their predecessors. Apart form the presentation, though, the books include a number of significant changes to the terms and conditions, some of which are discussed below: 1. Evidence of ability to Pay Clause 2.4, in all three books, provides: Pagina 21 van 34 www.drivertrett.com "the Employer shall submit, within 28 days after receiving any request from the Contractor, reasonable evidence that financial arrangements have been made and are being maintained which will enable the Employer to pay the Contract Price (as estimated at that time) in accordance with Clause 14. If the Employer intends to make any material change to his financial arrangements, the Employer shall give notice to the Contractor with detailed particulars". Good news for Contractors, particularly when the Employer is not himself providing the funding. But what comprises "reasonable evidence"? A letter from the Employer which simply confirms that suitable arrangements have been made is not evidence, though it may well be the Employer's response to the Contractor's request. The Contractor should be looking for written confirmation from the source of the funding - the bank, insurance company or similar, which deals with the specific contract in question. The funder should be of good repute. In fact the Contractor is in a strong position, under the provisions of Clause 16, whereby, if the Employer has not complied with his obligation to provide "reasonable evidence", he can slow or suspend work or, ultimately, Terminate the Contract. The 'Contract Price' is a defined term (Sub clause 1.1.4.2). It is not the sum named in the letter of Tender, but the amount adjusted to account for changes made under the Contract - by Variations, for example. So the assurances required by the Contractor will be relevant to the estimated amounts due in accordance with the payment timescale per Clau