Frank Kehlenbach Director of European International Contractors - - PowerPoint PPT Presentation

Frank Kehlenbach Director of European International Contractors (EIC)

FIDIC standard forms as risk mitigation tool

• FIDIC standard forms of contract have historically allocated the construction risk

fairly, i.e. on the basis of which party is best placed to assume individual risks

• Provide the lowest outturn cost, as bidders do not have to price for potential risks
• Avoid any possibility of arbitrary interpretations and actions by one of the parties

IMPACT OF FAIR CONDITIONS IMPACT OF UNFAIR CONDITIONS Co-operation / Teamwork Claims, Disputes, Penalties Quality works Poor quality works Profitability Insolvencies / Bankruptcies Professionalism & Integrity Corruption / Cartels

FIDIC standard forms have become more risky for contractors over time

• In the “good old times”, the first three

FIDIC “Red Book” editions were agreed and published jointly by FIDIC and the world’s regional contractors’ federations

• Contractor was obliged to design (to the extent

provided for by the Contract), execute and complete the Works with due care and diligence (not fitness for purpose)

• Existence of a trusted and independent

Engineer able to operate as experienced contract administrator was welcomed as a value added by both contractor and employer

FIDIC standard forms have become more risky for contractors over time

• In 1987, consensus between FIDIC and

international contractors – which had existed for three decades – ended and FIDIC became the sole publisher of the 4th edition of its “Red Book”

• Reason was irreconcilable standpoints

with respect to the role of the impartial and independent Engineer

• In 1996 supplement, DABs were introduced
• Collaboration between FIDIC and contractors

was remodeled (“friendly reviewer”)

FIDIC standard forms have become more risky for contractors over time

In 1999, FIDIC published an unbalanced standard form with enormous risk for contractors. EIC comment:

• “Whilst it is not difficult to draft conditions that appeal to

employers, FIDIC has always endeavoured to explain to prospective Employers the reason behind the allocation of certain risks.

• By leaving the traditional FIDIC philosophy behind and

instead in the Silver Book taking on-board the “all risks

• n the contractor - philosophy”, FIDIC will contribute to

poor contract practices.

• In the end, it does not serve employers generally that

unreasonable conditions are imposed on contractors. Employers will have to pay the costs for construction and it must be most fair that the cost to execute a particular project is borne by the owner of the project.”

FIDIC standard forms have become more risky for contractors over time

F A I R C O N T R A C T C O N D I T I O N S

Contractor’s contractual rights are unreasonably limited

• r duties expanded

Employer’s contractual rights are unreasonably expanded or duties reduced Engineer’s or DAB’s powers are restricted

• r deleted

Event Time Cost Cost plus Profit

Delayed Drawings or Instructions

X X X

Right of Access to the Site

X X X

Fossils

X X

Setting Out, Ground conditions

X X X

Exceptionally adverse climatic conditions

X X

Consequences of Suspension by Employer

X X

Adjustment for Changes in Legislation

X X

Consequences of Employer’s Risks

X X

X

Typical re-allocation of risk in Particular Conditions of fair “FIDIC” forms

FIDIC standard forms have become more risky for contractors over time

FIDIC standard forms have become more risky for contractors over time

• In 2010, MDBs adopted the FIDIC “Pink Book”

as the standard form of contract used by MDBs for construction projects for which they provide finance

• Participating banks and FIDIC have amended

the General Conditions of the FIDIC 1999 Red Book and have also diminished the role of the Engineer

• WB Procurement Reform: FIDIC forms of

contract will probably no longer be imposed by MDBs as exclusive set of general conditions but will be one of several options available to borrowers

Consequences of too risky contract conditions

If the risks to the Contractor become excessively high, the following problems may occur:

Higher bid price Bid failure & disruption of project implementation Contract award to bidder who fails or not capable of estimating risks properly Poor construction quality and delay of the work Undermining the relationship of mutual trust and respect between parties Groundless claims from the contractor Frequent disputes between the employer and the contractor In extreme cases eventual termination of the contract

JICA Checklist for One-Sided Contracts (March 2011)

EIC Contractor’s Guides flag FIDIC risk profile

International Construction Law Review, October 2011 (Introduction)

They [the EIC Contractor’s Guides] are valuable as they are the product of a responsible and reputable international organisation. They also throw a light on the approaches to be adopted in drafting international construction contracts... As in the past, EIC’s comments are balanced. They indicate what it regards as improvements and what it believes to be retrogressions.

Conclusions & Outlook

FIDIC standard forms of contract 1999 contain a greater deal of risk for contractors when compared with earlier forms of the last century FIDIC’s market core, the ”trusted and independent Engineer” who can afford to make fair decisions, is often eliminated by ill-advised clients Necessity for FIDIC (and its Member Federations) to raise awareness of the negative effects connected with the uninhibited misuse of FIDIC forms vis-à-vis clients and their financiers remains a daily concern Given that the “Silver Book” goes to the extreme by allocating construction risk to the contractor, FIDIC might consider to serve the international contracting market by publishing a more collaborative and “innovative” standard form of contract at the opposite end of the spectrum

EIC Contact

Address: EIC Secretariat Kurfuerstenstrasse 129, D - 10785 Berlin, Germany Phone: ++49 (0)30 /21286-244 Fax: ++49 (0)30 /21286-285 E-mail: info@eic-federation.eu Internet: www.eic-federation.eu