On the 26th of November, the alumni of the International Construction Contracts Post Graduate from Paris II Panthéon-Assas University organized an event around FIDIC contracts in Paris attracting a full meeting room. You can see the speaker list by clicking here. I would like to share the content of this event with the readers of this blog as it is relevant for anyone interested in FIDIC contracts.
FIDIC status and projects
Vincent Leloup gave an update of the activities of the FIDIC Contracts Committee (who’s participants are all volunteers):
- Promotion of the 5 Golden Principles: FIDIC is using its soft power to stimulate their contract users to respect certain best practices: reasonably time bars, respecting the risk sharing in accordance with the chosen contract type (for example, not to transform a red book by transferring all risks to the Contractor), effectively establishing the DAAB etc;
- Issuing of the Emerald Book for underground works ;
- Preparing to issue, in December during the FIDIC Contract Users’ Conference, the “Yellow Book Subcontract” (still for 99 versions, similar to the one already issued for Red Book).
For the near future (2020-21), FIDIC has following objectives:
- Finalizing the Bronze Book for operate-design-build-operate. It is is currently in the stage of scrutiny by the “friendly reviewers”. This Book will be for operators that can operate a brownfield project and also rehabilitate and/or upgrade it;
- Updating the Green Book (short form of contract; objective to update by December 2020);
- Issuing the Contract Guide for the 2017 Rainbow Suite (Red, Yellow and and Silver Books) and, thereafter, also for the Emerald Book;
- Reflecting on Offshore Wind Projects, either to create a business-specific Book or to establish standard Particular Conditions.
Other works relate to:
- a BIM protocol;
- obtaining better statistics of worldwide use of FIDIC contracts (currently the only data is the yearly sale of approximate 40 000 books);
- advancing on collaborative contracts (inspired by UK experience);
- standardizing a contract for Public Private Partnerships (for example, providing a model Concession Agreement).
First panel debate – changes introduced in FIDIC contracts
Dispute Avoidance and Resolution (DAAB)
FIDIC contracts have 3 tiers to resolve a dispute:
- Dispute Avoidance / Adjudication Boards (DAABs)
- Amicable settlement
The purpose of DAABs is to be fast, efficient and avoid escalation to arbitration. A hydropower project in China was mentioned as example where about 40 disputes went to the DAAB and none moved on to arbitration.
Honestly, the project stakeholders often still remove the dispute board mechanism from contracts. DAABs are sometimes considered as incentivising Contractors to push for more disputes to crystallise. To counter this, FIDIC does good efforts to increase their efficiency and to develop the avoidance component.
Also, lessons have been learned from past litigation and a certain number of adjustments were made :
- Making sure the payment resulting from a DAAB decision is made rapidly;
- Decisions are to be implemented even if a NOD (Notice Of Dissatisfaction) is given;
- The arbitral tribunal can consider the lack of collaboration when apportioning the procedural costs.
The main subject is however around prevention / avoidance. DAABs should now be standing boards (while in 99 versions, this was only the case in RB). Some of the advantages are:
- Better project understanding;
- More confidence from the Parties;
- Possibility of informal / non-binding advice.
The presumed high costs are often presented as an objection to standing dispute boards. However, statistics show that they only represent between 0.05 and 0.25% of the overall project costs. No doubt, disputes going to arbitration cost several orders of magnitude more.
The role of the Engineer
With the 2017 versions, the Engineer is back as a central figure to avoid disputes. This can be seen in the more elaborate clause on Agreement and Determination.
Increased Contract Management
The 2017 versions bring more avoidance but also more contract management. Many Contractors have already reorganised themselves accordingly. But, it is also necessary for Engineers & Architects to train their staff. The panel representatives welcomed the new processes that enable to establish and record the position of the 3 involved parties in a clear way. This helps structuring the thought process early on (understanding strengths but also weaknesses of one’s point of view). The new versions are seen as an incentive to establish contractually what the operational staff on site is already trying to implement (e.g. anticipation and mitigation).
When the 2017 editions were launched, complaints were formulated about the additional costs of contract management. Stakeholder should make it a habit to budget for this activity and identify a specific line in the price schedules. The mission of FIDIC is to propose contracts in line with market needs. It is perfectly possible for project stakeholders to choose between 2017 or 1999 Rainbow versions or the Green Book based on the project complexity (from higher to lower complexity).
Gradually, the 2017 versions are being more implemented. From 9 identified contracts with the new versions, 8 were private projects all substantially respecting, except one, the 2017 philosophy. Now that Multilateral Development Banks have signed MOU’s for the use of the 2017 versions during the next 5 years, implementation in public contracts will certainly pick up.
Second panel debate – about Emerald Book
The Emerald Book was published in May 2019 by FIDIC and the International Tunneling and Underground Space Association (ITA-AITES), jointly.
Tunneling projects are increasing thanks to technical improvements and the lack of space in urban environments. Underground works have a high degree of unforseeability and therefore the need to determine how the corresponding risks are to be shared. Because, if all risks are transferred to Contractors, soon there are none left to do such works.
The parties have constituted joint work groups since 2014. They decided to base the Emerald Book on the Yellow Book to enable also to benefit from Contractor’s engineering/design. The strength of this Book is that it was really validated by the industry with a balanced risk allocation. This because, in the long run, a balanced approach leads to more optimized projects thanks to the incentives to collaborate and innovate.
An essential element of the contract is the Geotechnical Baseline Report (GBR). All subsurface conditions in accordance with the GBR are considered foreseeable, but what is outside GBR is deemed unforeseeable. Productivity issues are the risk of Contractor while unforeseeable conditions remain at the risk of the Employer.
Underground works are not only dependent on the subsurface conditions but also on the reaction while excavating which depends also on the methodology (e.g. TBM, Tunnel Boring Machine). A GBR should therefore establish a feasible project with a certain number of mitigation measures. An “almost automatic” mechanism should adjust the time and costs, up or down, depending on the actually encountered conditions. For this, the contract needs to include a Completion Schedule (milestones), a Schedule of Baselines (progress rates) and a continuous measurement.
The panel members shared some actual project experience from CERN and Grand Paris explaining that:
- special factors like water inflow and pollution also play an important role; e.g. 5% of perturbations have a time impact of 30%.
- a lot of concentration is required from the Engineer during the preparation of the GBR: neither too optimistic or pessimistic, enough but not too many rock classes, the “right” amount of perturbations etc. Also, rock classes and the required supports have to be treated in a differentiated way. Too much vagueness will enable the Contractor to benefit asymmetrically.
Frédéric Gillion expressed a concern that the Emerald Book philosophy would not enable bankable private projects due to the inherent uncertainty on time and project costs.
Stéphane Giraud made the case for using the Emerald Book on hydro projects. These have a combination of civil works and electromechanical works, depend on hydrology and geotechnical conditions, with performance guarantees… Therefor, neither Red, Yellow or Silver Books are completely adequate. The recent trend to use Silver Book has led to awarding projects to Contractors that didn’t take into consideration the full consequences of such type of contracts.
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