WE often hear of players in the construction industry making reference to FIDIC contracts regulating their relationships with different parties in a project — how and when they get paid and how do their scope of work is defined.
This week I’m going to break down what FIDIC contracts are, how they work, and what impact the latest 2017 addition to the fitted suites of forms has on the construction industry.
FIDIC is a French language acronym for Federation Internationale Des Ingenieurs-Consiels. FIDIC contracts represent agreements in the construction and installation field, used as the standard in the international arena. They cover a multiplicity of disciplines within the construction industry and each specific discipline or scope of work is covered under separate form-of-contract books ascribed with a particular colour. For example, the Red Book covers conditions of contract for construction, the Yellow Book covers conditions of contract for plant-design-build agreements and the Silver Book covers conditions for Engineering, Procurement and Construction (EPC) contracts.
The different standard forms for contracts are generally known as the FIDIC rainbow suite. The rainbow suite was most recently updated in 2017 and the last edition in 1999. I intend, in this article, to highlight the major changes that were introduced through the 2017 editions of the red, yellow, and silver books while providing a general understanding of how FIDIC contracts work.
The Red Book
The Red Book was first introduced in 1957, With subsequent changes resulting in the widely used 1987 version. The main distinguishing feature of the Red Book is that the employer, or the principal, is responsible for all or most of the design of the works. That is not to say that the contractor (the agent hired to do the construction work) is never responsible for any design, but the form is intended to make the employer, or those working on their behalf, responsible for most or all of the design. The contractor’s basic responsibility under the Red Book forms is to execute the works in accordance with designs prepared by or on behalf of the employer.
Both the 1999 and 2017 versions of the Red Book oblige the employer to appoint an engineer to administer the contract. The engineer is not a party to the contract, but he/she exercises a range of important functions which control the project and affect the rights of the two parties (the employer and the contractor).
The engineer’s functions include administering the contract by, for instance, certifying interim payments due to the contractor and determining certain matters affecting the parties’ entitlements under the contract such as the contractor’s entitlement to an extension of time or additional payment. This adjudicative function particularly highlights the dual role that engineers play of being the agents of the employer for various purposes and being the determiners of the parties’ entitlements at the same time.
Engineers’ decisions about extensions of time, for example, are generally not binding under the FIDIC forms, but if time limits are breached then an engineer’s determination may become final.
Risk allocation
In terms of the 2017 edition of the Red Book, the contractor may claim both additional time and money if they encounter physical conditions, which were unforeseeable prior to entering the contract. The contract allocates risk by striking a balance between the need to protect the employer from time to time and the cost consequences of physical conditions, which inexperienced contractors ought to have foreseen, and the need to protect responsible contractors from time to time and cost consequences on conditions they cannot reasonably have been expected to foresee at tender stage.
This standard contract form deals with electrical and mechanical works. In contracts of this nature the bulk of the work is done by the contractor. It makes more sense for the contractor and not the employer to be primarily responsible for the design because much of the work is done off site and installation is carried out by specialist contractors on-site. The Yellow Book therefore, differs from the Red Book in that it is contractor driven and note employer driven.
Fixed price lump sum
The second most important feature of the 2017 edition of the Yellow Book is that it is a fixed price lump sum rather than a re-measurement contract. In other words, the contractor is entitled to be paid a fixed price, stated in the contract at the outset and expressed as a lump sum, subject only to adjustments or additions made pursuant to the terms of the contract for such matters as variations or unforeseeable physical conditions. The engineer and risk allocation aspects of the Yellow Book are identical to those of the Red Book.
The Silver Book
Unlike the Red and Yellow books, the Silver Book is a completely new form of contract. It was introduced to meet a perceived market need for a form of contract which would give project financers maximum certainty as to time and budget. This need was particularly evident in build-operate-transfer and other concession type projects, in which the project financing places huge constraints on project financers to ensure that the project was completed on time and within budget.
The allocation of risk characteristic of the Yellow and Red books was wholly unsuited to such projects. What project financers required was a contract form under which the contractor carried virtually all the risk and had very limited opportunities to claim. FIDIC noted the trend for project financers to cause the general conditions of typically a Yellow Book form to be amended to try and place as much as possible on the contractor, quite often with disastrous results. To avoid this tendency, the Silver Book was introduced in 1999. It can be used not merely in concession type projects, but in any case where the project financers require maximum certainty about time and budget.
FIDIC itself does, however, counsel caution when contractors are invited to tender on the basis of a Silver Book form. The guidance is to the effect that contractors ought not to contemplate contracting on such a basis unless they have had an opportunity to assess all relevant risks, something which is difficult in practice to achieve when the tender and available resources are limited.
What often happens in practice, although this will depend on the individual contractor’s bargaining power, is that the parties will negotiate exceptions to the contractor’s otherwise comprehensive responsibility and, for example, identify particular items of design or information for which the contractor will not be responsible or carry the risk.
Further, there is no engineer in the Silver Book forms. The employer is obliged to administer the contact themselves. Typically, they will appoint an employer’s representative to do so on their behalf. Regardless of whether the administration is done by himself or through a representative, any determinations made must be fair. In the 2017 edition of the Silver Book, the employer is obliged to appoint an employer’s representative and so cannot administer the contract themselves.
Muza is a duly admitted lawyer with expertise in business law, labour law and commercial litigation. He writes in his personal capacity. For feedback, email him at hilarykmuza@gmail.com or call on +263719042628.