FIDIC and Recent Infrastructure Developments

01 March 2007

In infrastructure construction one of the most significant quality issues is the ability of the consulting engineer to offer quality services, at the crossroads between acting as a trusted adviser to the employer and as a supplier of a commodity, in this case the design. The FIDIC suite of contracts has responded to the changes in the international procurement market and the changing role of the engineer. 

FIDIC Red booK 

In particular these contracts now recognise the fact that the engineer, when appointed by the employer, might not be impartial. The 1999 FIDIC Red Book, for example, makes it clear that he or she should be deemed to act for the employer. The 1999 Red Book is illustrative of the way in which risk allocation has developed in the international context as the employer can now terminate for convenience, but in return the contractor’s liability under the contract is limited. The contractor has however to accept a fitness for purpose obligation in certain circumstances. 

The defining characteristics of this contract are the concepts of contract price and measurement, with provision for remeasurement. The role of the engineer is pivotal given his responsibility for measuring the works; albeit that the measurement is to be carried out in accordance with the contract schedules. 

The contractor is also given enhanced rights by the new Red Book including the right of suspension, additional rights of termination and extended force majeure provisions. The contract therefore remains balanced. It should be noted for example, that the fitness for purpose obligations, although stricter under the new Red Book, only apply to the extent that the contractor is required to undertake the design. The contract now contains a dispute adjudication board – again, a feature intended to improve harmony between contractor and employer by resolving disputes promptly. 

FIDIC Silver Book 

The impact of private finance in the international infrastructure marketplace is reflected in the FIDIC Silver Book. This form was subject to much controversy and protest when it first appeared. However, it is used quite frequently both on BOT type contracts and on design and construct process work where the FIDIC Yellow Book might be thought to be more appropriate by many. The reason for the controversy is the significant risk transferred to the contractor. While this is standard in private finance projects, it has still caused much consternation in European contracting circles. However, overall the bankability of the project is enhanced by sufficiency and certainty of price and time. All these are the contractor’s risk save for variations, other very limited relief events specified in the contract or as a result of a delay or impediment by the employer. The contractor is also liable for design failures. The only exception to the sufficiency of price under the Silver Book are: certain specific defaults by the employer (eg, failure to give access, or delay to testing or similar); employer instructions (eg, archaeological or historic finds or variations); or events outside the control of the parties, which include changes in law, force majeure and rectification of damage caused by employer’s risk. The contractor accepts the onerous responsibility described as “total responsibility for having foreseen all difficulties and costs of successfully completing the works”. The contractor is also obliged to accept fitness for purpose obligations although these are confined to the purposes defined in the contracts. 

The contractor also accepts responsibility for the correctness of the employer information including the employer’s requirements and any employer design. This obligation is only removed where the contract states these to be the employer’s responsibility, or there are requirements defining the intended purposes of the works, or where the criteria for testing the performance of the completed works cannot be verified by the contractor. Comparing the Red and Silver books reveals the impact that private finance has had on risk allocation between the parties.

Future Developments 

The increased sophistication of the procurement methods demanded and used in the modern international infrastructure market has led to the creation of new FIDIC forms to supplement the main standards of Red, Yellow and Silver. These have included working closely with multilateral development banks resulting in the creation of the MDB/FIDIC contract, where FIDIC conditions are incorporated in standard bidding documents of multilateral development banks. 

Similarly, there has been a development of standard bidding documents with the World Bank, and there are a number of other forms under development. These include a DBO form, particularly in response to calls for a standard concession contract for the transport, water and waste water sectors. 

The push to develop a DBO form is partly a response to the use of the existing FIDIC Yellow Book with operation and maintenance obligations tacked on. This is an unsatisfactory state of affairs and FIDIC has very sensibly appreciated the need to tailor a form to meet market place demand. Another development is the sophistication of the industry sectors in which FIDIC contracts are used (and the difficulties of using a generic style of contract in these particular industries). This raises the question of how frequently it is appropriate to use the generic FIDIC form without amendment for an international project. Take a power project, for example. There were three main areas in FIDIC where consideration to amending standard terms would seem appropriate: 

• Design development. FIDIC may apply too light a touch in this area. It envisages employer’s requirements, contractor’s document and review periods for design development. In practice more sophisticated procedures are required to ensure collaborative working and adherence to the programme. It is critical to ensure that the review process is properly managed and that the input from that review is used. 

• Testing and completion. It may be necessary to rewrite the FIDIC provisions for this aspect of a power project. When redrafting it is important to consider the relationship between performance testing, risk transfer and insurance and delays. The way in which different sections of work interact with each other would also need to be managed. The market will dictate whether contractors are prepared to risk an outright right of rejection. 

• Risk and maintenance obligations. For defect notification periods, blanket extended warranties are often no longer appropriate because different suppliers will insist on giving different warranties. Separate agreements divorced from the construction contracts are required. Commercial pressures could mean there are long lead times for key equipment and needs to be careful risk evaluation and the reflection of the fact that power projects are developing sections and that tests need to be done to avoid the risk of defect at an early stage affecting the project at a later stage. 

The universal respect with which the FIDIC documents are treated in the infrastructure field is key in helping parties reach agreement. The impact of these forms should not be underestimated – and although in many circumstances they may need adapting to particular local conditions and to the needs of particular industry sectors – they are nonetheless a good starting point for those discussions, saving time and costs, particularly in circumstances where there may be significant cultural differences between the parties.

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