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

on 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 or duties expanded

Employer’s contractual rights are unreasonably expanded or duties reduced

Engineer’s or DAB’s powers are restricted or 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 Changesin 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 SecretariatKurfuerstenstrasse 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