EBRD conference on FIDIC 2017 – Red and Yellow Books

On 27th of September 2018, AfiTaC participated to an event organized by EBRD (the European Bank for Reconstruction and Development) at its headquarters in London. The event was about the changes introduced with the new forms of contract, Red and Yellow Books, of the 2017 rainbow suite.

A couple of months ago, we also published on this subject, which became a very popular article: Thank you FIDIC for explaining changes introduced with FIDIC Rainbow Suite (ed. 2017).

Participants

After an introduction by Betsy Nelson (EBRD VP, Risk and Compliance), Jan Jackholt (EBRD Procurement) explained that  the event was a first of a kind for EBRD as an initiative the engage around selected topics with their stakeholders. The morning part included speakers from FIDIC (Aisha Nadar, Zoltan Zahonyi and Christopher Seppala), from Contractors (Philippe Dessoy, Mathias Fabich and Nabeel Khokhar) and from EBRD’s Clients (Kakha Sekhniashvili and Olena Kryvoruchko). The afternoon was devoted to a panel discussion, moderated by Sarah Thomas with the participation of Zoltan Zahonyi, Christopher Seppala, François Doré and Stefan Ciufu-Hayward.

Issues covered

Enough “name dropping”; let us now go to the take away’s from this event. To make this post compact and quick to read, I’ll present them in the form of bullet points:

    • Thank you to EBRD, FIDIC and the other participants for this event because it was really well organized, informative and open minded. Good general subject, excellent speakers, nice interaction from the public during the panel discussions, great networking opportunities during the coffee breaks with all the major actors concerned by FIDIC present.
    • FIDIC stressed that the 2017 versions remained loyal to their principle “made by engineers for engineers” with, of course, a legal review. They have enhanced Project Management features, a balanced risk allocation and more emphasis on reciprocity of the rights and obligations of Employers and Contractors. The changes were driven by users’ feedback, the international state of the practice and adopting some of the developments introduced with other versions since 99 (Gold and Pink Books).
    • Zoltan Zahonyi introduced the ideas around the changes:
      • More prescriptive:  requirements to give proper notices explaining their purpose.
      • Greater certainty, for example, on unforeseeable physical conditions and key personnel.
      • Enhanced contract administration: the programme (Sub-Clause 8.3) is now evolving along the project and better described. The contract shall be proactively administered by the Engineer.
    • Christopher Seppala explained the more detailed and prescriptive claims and disputes mechanism:
      • Still based on 4 tiers: Engineer’s role, DAAB, amicable settlement and finally international arbitration. Every dispute must go through these 4 levels (if not resolved during the process, which is of course the objectif).
      • An important psychological changes is that routine claims in day-to-day contract management (Sub-Clause 20) are now separated from the exceptional disputes (Sub-Clause 21).
      • Time limits have been further enhanced to impose discipline on the parties. There is a procedure for the Engineer to loosen the time bars.
      • The former DAB is now a DAAB. The additional “A” is there to put emphasis on “Avoidance” of disputes. There is a strong preference for a “standing”, rather than “ad hoc”, dispute board because the standing boards are more knowledgeable about the contract and can work pro-actively to avoid disputes to escalate.
    • The representatives of EIC (European International Contractors) provided their postions, established after months of internal analysis between their members, in a straightforward way:
      • They regret the length of the new contract (50% longer), which looks like a manual of good engineering practices. They fear the additional contract administration costs in order to properly serve notices and follow all the prescribed steps. These costs may not be incorporated in the price by less experienced contractors and consequently no resources will be made available which may result in contractual chaos.
      • Some concerns relate to the risk of “form over substance” when it comes to notices. For example, all information has been properly provided but the document is not correctly labelled as a notice for a specific purpose.
      • Also automatic answers to respect the time limits and avoid the “deemed” provisions are feared. They are worried that qualified contract managers, more than ever needed by both Employer’s and Contractors, will be scarce and hard to find.
      • The management meetings as per Sub-Clause 3.8 should have a defined output to avoid non-value added meetings.
      • They are a bit skeptical about the advance warning principle in Sub-Clause 8.4 where they are of the opinion that no party will give an advance warning if it relates to a risk it bears under the contract and rather handle this internally.
      • On dispute adjudication, EIC welcomes the emphasis on avoidance and favor standing boards but mention a JICA study on 124 large scale contracts, where 43% had a standing DAB contractually foreseen, but only 7% actually constituted it at the beginning of the contract. Maybe the additional “avoidance role” will motivate the parties to select the board members at a stage when disputes are still an unwelcome and remote subject?
      • They are relieved by the fact that “fitness for purpose” provisions now have to be explicitly stated in the Employer’s Requirements rather than understood from the “1000 pages contract” (or otherwise be limited to “ordinary purpose”).
      • FIDIC 99 Sub-Clause 3.5 [Determinations] only had two paragraphs and now has become Sub-Clause 3.7 [Agreement or Determination] with 36 paragraphs and many steps to be performed to conclude something.
      • The regulations regarding concurrent delays are still unclear.
      • A special concern is about the Contractors Documents that have to be reviewed by the Engineer (Sub-Clause 5.2.2). The definition of Contract Documents is hard to understand even by the top contractors. This definition starts with an exclusion and uses the word “Contractor’s Documents” in its own definition (see quote here below). My recommendation is to mutually agree a clear & explicit list of “to be approved” documents & drawings during the first month(s) of the project execution because this is a subject that can only be resolved on a case-by-case basis.

“Contractor’s Document” excludes any of the Contractor’s Documents which are not specified in the Employer’s Requirements or these Conditions as being required to be submitted for Review, but includes all documents on which a specified Contractor’s Document relies for completeness.

    • The representatives of EBRD’s Clients talked about some problems encountered on recent contracts using FIDIC. They also expressed some fear that the “deemed” acceptance provisions will expose them. An example is the case of deemed acceptance of O&M manuals which may be incomplete but still essential with during the entire operation period. Maybe Employers can propose an alternative remedy (time & money) for very specific cases where they cannot live with deemed acceptance?
    • The new “FIDIC Golden Principles”, which are a part of the guidance notes in the new standard contracts, are very positively received by all stakeholders. All agreed that a sixth golden principle would also be welcome: international arbitration in a neutral country.
    • At the end of the event, Sarah Thomas organized a vote to see if it is more likely that (i) people will continue using FIDIC 1999 and add, in the particular conditions, those provisions from FIDIC 2017 they find improvements or (ii) take FIDIC 2017 and adjust the changes they are less happy with. There were a bit more votes for the first option than the second. However, a natural tendency to oppose change and stick, as close as possible, to one’s knowledge base (FIDIC 1999) is no surprise. Time will tell.

My conclusions

  • Change is always opposed initially but FIDIC 2017 has the substance to make things work. The administrative rigor, for example related to notices, will soon become a habit just like EHS measures did over the past decade. This rigor will avoid misunderstandings about the stage the project is in (e.g. regular claim vs real dispute) and push the parties to table their problems early when they can be mitigated.
  • The “deemed” approvals & replies will avoid that projects stall and will push the parties to reply in a timely matter.
  • The Engineer is now back to a more neutral role with some mediator actions as foreseen in Sub-Clause 3.7 [Agreement or Determination]. It will take some time for Engineers to adapt but, I believe, it is this kind of attitude that avoids conflicts (together with the standing DAAB as second line of defense). The construction / contracting / project business can partially avoid the huge, non-value added, costs of disputes (cost of arbitration, delay in decisions etc).
  • The more prescriptive processes will help the less experienced users to implement the contract properly. The new versions can hopefully remain on top of the stakeholders’ desks. We must move away from the “negotiate, file & forget the contract” attitude that often existed in the past.

Let us try to make these new versions, and the philosophy behind it, a success. Of course, this will require mobilization of adequate resources to live up to this challenge. Please provide your comments here below.

Click here to read other publications concerning FIDIC on this site.

Contract Management & Music, Time Bar struggle for Muse

When a Contract Manager receives a new contract to follow, probably the first thing she/he should look at is this: Is there a time bar for claims? 

The answer to this question will dramatically change her/his behavior during the contract execution. Together with Muse and their song “Time is Running Out” (of which we have quoted the relevant lyrics here below), we will analyze the consequences of time bars. You can listen while you read by clicking on the below link to YouTube:

What is a Time Bar?

Unfortunately, it is a not a bar where your can spend as much time as you want. Many definitions are available all saying more or less the same. I randomly present you the one given by “The Law Dictionary” (https://thelawdictionary.org) : “Stoppage put on exercising a claim or judgment after a period that was established by a law or custom.”

Original justification of Time Bars

Time Bars were introduced decades ago because Contractors / Employers used to pile up potential claims “just in case” to only launch them at a later timing most convenient to their interests. Usually this coincided with the time they had the maximum bargaining power, for example because the project was already built (for avoidance of counter-claims, no more risk of suspension etc).

In accordance with good contracting practice, both parties should be more transparent and should be pushed to table any issues as soon as they are aware of them, as soon as practical. Time Bars became a usual practice … even though one could regret it between mature and reasonable contracting parties.

The consequences of not claiming within the Time Bar

You will be
The death of me
Yeah, you will be
The death of me

Bury it
I won’t let you bury it
I won’t let you smother it
I won’t let you murder it

When you are beyond that maximum period to formulate your claim, it will simply be barred, not accepted anymore, “buried” with the words of Muse. Anyone can understand that feeling of injustice when the facts objectively show that your claim is valid but the clock says that the time is over. The three last sentences of the above citation show this feeling of resistance, this frustration.

Contractor’s feelings and reactions

Most of the claims barred by this mechanism are Contractor’s claims, so let us see with Muse what reactions this will bring to the Contract Manager.

I think I’m drowning
Asphyxiated
I want to break the spell
That you’ve created

…I want to play the game
I want the friction

The Contractor will feel asphyxiated, under huge pressure to present its claims in time. The Contract Manager, in order to protect himself, will rather formulate too many claims than too little. She/he wants to play the game.

Our time is running out
And our time is running out
You can’t push it underground
We can’t stop it screaming out

And we end up with a “claim machine”: claims for anything. You never know it will be useful. Umbrella claims, we will always be able to attach something to this.

I wanted freedom
But I’m restricted
I tried to give you up
But I’m addicted

Now that you know I’m trapped
Sense of elation
You’ll never dream of breaking this fixation
You will squeeze the life out of me

These “just in case” claims generate a lot of work for both parties, the one formulating and the one reacting. The involved resources don’t add any value if the claims are not legitimate, not substantiated. Key project players are drawn away from the real pro-active project execution. And, the positive atmosphere of the project is spoiled: “what, another claim! That’s outrageous”, …

Time Bars in FIDIC contracts

FIDIC 99 has the Time Bar in sub-clause 20.1 of Red, Yellow and Silver Books with the following wording: “If the Contractor fails to give notice of a claim within such period of 28 days, the Time for Completion shall not be extended, the Contractor shall not be entitled to additional payment, and the Employer shall be discharged from all liability in connection with the claim.”

This clause clearly spells out the hard consequences. If you are late, you loose it all. Never mind how justified your claim is and how impacting the consequences are. This also applies for late claims related to Employer’s acts and Risks. On top of that, the Employer doesn’t have an equivalent Time Bar in its claims clause, sub-clause 2.5.

Fortunately, the new clause 20 in FIDIC 17 deals with both Contractor’s and Employer’s claims in the same way. The time bar is now in sub-clause 20.2: “If the claiming Party fails to give a Notice of Claim within this period of 28 days, the claiming Party shall not be entitled to any additional payment, the Contract Price shall not be reduced (in the case of the Employer as the claiming Party), the Time for Completion (in the case of the Contractor as the claiming Party) or the DNP (in the case of the Employer as the claiming Party) shall not be extended, and the other Party shall be discharged from any liability in connection with the event or circumstance giving rise to the Claim.”

General recommendations about time bars

  • Do not set Time Bars too short; the minimum is 28 days. Setting it too short will inevitably lead to a “claim machine” environment where the parties start formulating a continuous stream of claims so that they can always find a way to argue that they started the claim in time. I would recommend time bars not to be below 90 days.
  • Make the clause symmetrical / bilateral, meaning that the same time bar and duration should apply to both parties. During negotiations, parties tend to become much more reasonable when they know the same provision will also apply to them.
  • Ideally, the entitlement to claim should only be reduced to the extend that the other party was unable to mitigate its losses due the claim being late. This will avoid barring of obvious entitlements that could not be mitigated anyway.

Let us stop with the stereotypes that Contractors are just claim machines and look for the reasons. The vicious circle of ever lower time bars is not going to help. The above post and the music of Muse allow us to rethink our ways of working in a positive atmosphere outside of the rush of day-to-day projects.

This post is part of our series illustrating important contract management subjects by music to make it more fun. You can click here to see other posts of that series.

Thank you FIDIC for explaining changes introduced with FIDIC Rainbow Suite (ed. 2017)

Maybe you have already received it from another source but this is a must-read. I therefore prefer to also share with you the FIDIC document available at the link below. It explains the changes from the first (1999) to the second (2017) edition of the Rainbow Suite (Red, Yellow and Silver Books):

http://fidic.org/sites/default/files/press%20release_rainbow%20suite_2018_03.pdf

After 20 to 30 minutes of reading, you will have a good understanding of the changes. Most of us have over a decade of experience with FIDIC 1999. We know the clause numbers and where to look for the appropriate mechanisms. Here you have a short summary of what I got out of reading the attached document and where to find the changes:

There are few but important changes to the contract structure and some relocated clauses:
  • Limitation of liability is no longer in Clause 17 but has been moved to become the last sub-clause of Clause 1.
  • Former “Force Majeure” has been renamed “Exceptional Event” and is delt with in clause 18.
  • Insurance has been moved to clause 19.
  • We now have 21 clauses. Former clause 20 is split in two parts to deal first with claims (new clause 20, also covering Employer’s Claims) and then only with disputes (new clause 21).
FIDIC cares about conflict/dispute avoidance:
  • There are encouragements to reach agreements between the Parties.
  • The role of the Engineer or Employer’s Representative is clarified in order to “act neutrally between the Parties” on certain issues and “to fairly consider the amount of interim payment due” (sub-clause 14.6).
  • FIDIC favours standing Dispute Avoidance/Adjudication Boards (now DAAB instead of DAB) under clause 21.
Step-by-step approaches also reflect this. The parties will know where they are in the process on the following subjects:
  • Claims and determinations (sub-clause 3.7).
  • Unforeseeable conditions (sub-clause 4.12).
  • Review of Contractor’s design (sub-clause 5.2).
  • Advance payment (sub-clause 14.2), interim payments (sub-clause 14.6) and Final Statement (sub-clause 14.11/14.13).
  • Termination by Employer (clause 15) and Contractor (clause 16).
  • Employer’s and Contractor’s claims for time and/or money (sub-clause 20.2).
  • Disputes (sub-clause 21.4)
Variations are an important source of conflict and are therefore further detailed:
  • Employer to show financial arrangements are in place for Variations (sub-clause 2.4).
  • Mechanism to recover in case an instruction does not state that it is a variation (sub-clause 3.4/3.5).
  • Determination does not just apply to claims but also to issues like: variations, payments, EOTs, day-works etc.
  • Contractor’s right to object to an instructed variation (sub-clause 13.1).
  • Additional entitlement for changes to permits/permissions/licences/approvals obtained for the Works (sub-clause 13.6).
And finally, further Project Management best practices are incorporated: 
  • Regular management meetings (sub-clause 3.6/3.8).
  • Detailed requirements for initial programme and updates (sub-clause 8.3). For example, the requirement for a supporting report to overcome effects of any delay.
  • Detailed test programme (sub-clause 9.1) and repeat testing (sub-clause 11.6).
  • Equal time bar for claims from both parties (sub-clause 20.2).
Conclusion:

We will all need some more time before we are as familiar with the FIDIC 2017 editions as we were with FIDIC 1999. Personally, I am happy to change. FIDIC has put good efforts in making their standard contracts more balanced (dispute avoidance, dealing with delicate issues like variations and programme and further introducing project management best practices). The ultimate goal remains, of course, to have a maximum of successfully completed projects, which meet the expectations of all parties and the end users.

Other publications concerning FIDIC can be found by clicking here.

How to establish reliance data in EPC Contracts (like FIDIC Silver Book)?

Introduction and definition

This article will analyse the concept of reliance data in EPC Contracts and provide a methodology to identify it. We can define reliance data as follows:

“Reliance data” (also named “rely upon data”) is the data identified in an EPC Contract that the EPC Contractor can take for granted. If this data changes during the course of the design or execution of the EPC Contract, a Variation Order should be agreed between the Employer and the EPC Contractor in order to implement the impact on the performance guarantees, the time for completion and the price.

Context in EPC Contract negotiations

The starting point of many EPC tenders and contract negotiations is as follows: the Owner / Employer provides the Contractor with the data he has in his possession regarding the project together with a specific statement that

«the Employer does not give any warranty as to the completeness, accuracy or fitness for purpose»

of that information. He does this to avoid any claim by the Contractor during the project execution on the basis that the provided information is inaccurate or incorrect. Sometimes the situation is even worse and the Owner / Employer simply tries to avoid giving any information.

In practice, withholding information is counterproductive as it does not enable the EPC Contractor to quote properly, with reasonable efforts. Contractors may walk away from the tender, overprice or underestimate the project’s cost. In the latter case, Contractor often create trouble during the execution phase in an attempt to limit their losses.

Reliance data in FIDIC

FIDIC 1999 Silver Book (Clause 5.1) requires the Contractor to scrutinize the Employer’s Requirements prior to the bid submittal. The Employer shall not be responsible for any error, inaccuracy or omission of any kind in the Employer’s Requirements except for data and information which are stated as immutable or the responsibility of the Employer and also except for data and information which cannot be verified by the Contractor. Having some data on which the Contractor may rely (reliance data) is therefore good industry practice and in line with the contract standards.

The difficulty starts when we want to precisely identify the “reliance data”, “baseline data” or whatever word is defined in the contract to introduce the same concept. The data is usually parked in an appendix containing a limited list of data for which the Employer takes responsibility.

Structured approach to identify rely upon data – “black box” concept

During those long contract negotiations, I had some thoughts about a structured approach to identifying reliance data. I came up with a “black box” concept:

  • Look at the project (to be executed) as a “black box”.
  • Whatever is in the box are the works to be executed. These are defined by a functional, not detailed/prescriptive, specification. Certain performance requirements are to be achieved usually by the time of taking-over. The reliance data should not include any information from within the “black box”.
  • On the other hand, this “black box” is somehow connected to and interacting with the environment. It is obviously physically attached to / founded on the outside world. It also receives some inflow. The “black box” can be impacted/shaken-up by the outside environment. The quality, magnitude and characteristics of these foundations, inflows and impacts are data that can, and often should, become reliance data.

Concrete example of identification of reliance data

Let’s run this on a concrete example in order to make the “black box” concept more understandable. In the case of building a hydro power plant, the following can be reliance data:

  • Geo-technical baseline data: reference characteristics of subsurface conditions like rock classes (“foundations”)
  • Water quality: chemical composition of water quality for which the penstocks and turbine equipment should be designed; maximum water temperature to be taken into consideration for the design of the cooling system; hydrological data (“inflow”)
  • Grid connection information: data related to the transmission line and grid characteristics (voltage, frequency). The grid often still has to be expanded under a separate contract (“connections”)
  • Maximum wind speed or seismic acceleration coefficient: design requirements that the “black box” will have to withstand (“impacts”).

Conclusions

In conclusion, having some concept of reliance data is healthy for a balanced EPC contract. Both Employer and Contractor shall reasonably reflect on this concept and the “black box” approach can be helpful. Jointly, they shall try to minimize the information to those design inputs that are essential and cannot reasonably be verified by the Contractor during the tender stage. This includes information that is the result of long-term data series or unaccessible or needing unreasonable efforts and resources to obtain it while the Contractor is not sure to be awarded the contract. This way, Employers will attract first class Contractors with optimized price levels and avoid conflicts during project execution.

 

You can find other articles on FIDIC on this blog by clicking here.

AfiTAC.com is the blog on commercial and contractual subjects for the Project Businesses (Construction, Infrastructure, Oil & Gas, Power & Renewable, Water Supply & Sanitation, etc). Its objective is to stimulate reflection, learning, convergence to balanced contracts and positive dispute resolution. You can subscribe to our newsletter by writing to “newsletter@afitac.com”. You can also connect to our LinkedIn page. Engagement with the readers is what keeps us going. So, don’t hesitate to exchange with us by commenting here below, liking our publications on LinkedIn and writing to us “advice@afitac.com”.

Can you still use FIDIC 1987 in 2019?

Introduction

More than 30 years have past since the launch of FIDIC 1987, “yellow book” (Conditions of Contract for Electrical and Mechanical Works). In the meanwhile, the “Fédération Internationale des Ingénieurs-Conseils”, better know as FIDIC, has published newer versions: the well-known 1999 version and a fresh update at the end of 2017. These newer versions are not just updates but have a different structure and, to some extent, a different approach.

Current practice with FIDIC 1987

Certain public utilities have made specific particular conditions on the basis of FIDIC 1987 and continue using them. This is, for example, the case for contracts in Pakistan where PEC (Pakistan Engineering Council), a statutory body to regulate the engineering profession in Pakistan, has prepared a set-of mandatory conditions based on it. I’ve also seen Employers and Contractor mutually agree to use FIDIC 1987 conditions in direct negotiated contracts.

Reasons for considering FIDIC 1987

The FIDIC 1987 conditions are appreciated by Contractors for striking a good balance between Employer’s and Contractor’s rights and obligations. The advantage for Employers is that Contractors make less deviations. By doing so, they avoid painful and lengthy contract negotiations, potential delay in project implementation and unforeseen expenses (especially external legal counsel). Furthermore, the good balance creates a favorable environment to a contract execution with the necessary serenity. The independent Engineer has a good mandate to determine and avoid disputes.

Conclusion

So, yes, even though the naturally tendency is to work with the latest updates of the FIDIC conditions, it can still make good sense to use the 1987 versions. In terms of balance between Empoyer’s and Contractor’s rights and obligations, I would consider them at the same level as the current World Bank conditions for Plant.

Click here for other publications on FIDIC on this blog.

AfiTAC.com is the blog on commercial and contractual subjects for the Project Businesses (Construction, Infrastructure, Oil & Gas, Power & Renewable, Water Supply & Sanitation, etc). Its objective is to stimulate reflection, learning, convergence to balanced contracts and positive dispute resolution. You can subscribe to our newsletter by writing to “newsletter@afitac.com”. You can also connect to our LinkedIn page. Engagement with the readers is what keeps us going. So, don’t hesitate to exchange with us by commenting here below, liking our publication on LinkedIn and writing to us “advice@afitac.com”.