#sonetra

A. RELATIVELY SMALL VALUE, SHORT CONSTRUCTION TIME OR INVOLVING SIMPLE OR REPEATITIVE WORK

When to use short form of contract?

► If the price for the contract is relatively small, say under USD 500,000 or the construction time is short, say less than 6 months, or the work involved is relatively simple or repetitive - dredging work might be a good example → then consider using the Short Form of Contract, which is a completely new FIDIC Book specially prepared for such projects. 

Under FIDIC Yellow Book (both 1987 and 2017 Editions), who bears the risk of design error and failure to pass performance tests?

► Under the FIDIC Yellow Book (both 1987 and 2017 Editions), the Contractor bears sole and exclusive responsibility for the design of the Plant. The Contractor's design obligation is a strict fitness for purpose warranty, and the testing regime is structured to verify that the Contractor's design solution meets the Employer's performance requirements. The Employer's Requirements define what must be achieved; the Contractor's Design defines how it will be achieved. The risk of design error — including failure to pass performance tests — rests entirely with the Contractor.

Under the 1995 FIDIC Orange Book (Conditions of Contract for Design-Build and Turnkey) and The Silver Book EPC/Turnkey (2017), what is the precise standard of care governing the Contractor’s design obligations? Specifically, does the contract impose an absolute warranty that the Works will be "fit for purpose" as defined in the Employer’s Requirements, or is the liability limited to the exercise of reasonable skill and care? Furthermore, how does the contractual mechanism for the Employer’s review of design documents affect the overall allocation of design risk?

►Standard of Care for Design Obligations

•1995 Orange Book: The Contractor's design obligation is limited to reasonable skill and care. There is no absolute warranty of fitness for purpose. The Contractor must exercise the professional diligence expected of a qualified designer, but is not strictly liable if the Works fail to achieve the intended purpose despite proper professional efforts. •2017 FIDIC Silver Book (EPC/Turnkey) (Sub-Clause 4.1(c)): The Contractor gives a strict / absolute "fit for purpose" warranty. The Works must actually achieve the purposes defined in the Employer's Requirements. This is a higher standard than reasonable skill and care — the Contractor is strictly liable even if it exercised maximum professional diligence.

B. LARGER OR MORE COMPLEX PROJECTS

1. Is the Employer (or the Engineer) going to do most of the design?

As in traditional projects, e.g., infrastructure, buildings, hydropower, etc., the Employer did nearly all the design (perhaps not construction details, reinforcement, etc.) (The Red Book),

and the Engineer administered the Contract, monitored the construction work and certified payment 

and the Employer was kept fully informed, could make variations, etc. 

and with payment according to bills of quantities or lump sums for approved work done.

If this is what is wanted - choose the Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer (The Construction Contract), which effectively updates and supercedes the existing Red Book from 1987.   In 2005, FIDIC licenced the Multilateral Development Banks (MDB) to use the MDB Harmonised Edition of the Construction Contract for projects funded by the banks. The MDB Construction Contract mainly incorporates Particular Conditions to the Red Book that was used by the World Bank in its Standard Bidding Documents before it and the other MDBs adopted the Harmonised Edition.

2. Is the Contractor going to do most of the design?

As in traditional projects, e.g., electrical and mechanical works, including erection on site (The Yellow Book) the Contractor (or Supplier) did the majority of the design, e.g., the detail design of the plant or equipment, so that the plant met the outline or performance specification prepared by the Employer, and in the relatively more recent design-build and turnkey type projects the Contractor also did the majority of the design, not only of plant projects but also of various infrastructure and other types of projects, and the project was required to fulfil the “Employer’s Requirements”, i.e., an outline or performance specification prepared by the Employer (The Orange Book),

and the Engineer (Employer’s Representative in the Orange Book) administered the Contract, monitored the manufacture and erection on site or construction work and certified payment, 

and with payment according to achieved milestones generally on a lump sum basis. If this is what is wanted - choose the Conditions of Contract for Plant and Design-Build for Electrical and Mechanical Plant and for Building and Engineering Works Designed by the Contractor (Plant and Design-Build Contract) which effectively updates and supercedes both the existing Yellow Book from 1987 and the Orange Book from 1995.

3. Is it a Privately Financed (or Public/Private Financed) Project of BOT or similar type where the Concessionnaire takes total responsibility for the financing, construction and operation of the Project?

Then the Concessionnaire (the “Employer”) probably requires to have a contract with the construction Contractor, i.e., an EPC (Engineer, Procure, Construct) Contract, where the Contractor takes total responsibility for the design and construction of the infrastructure or other facility, and where there is a higher degree of certainty that the agreed contract price and time will not be exceeded,

and the Employer does not wish to be involved in the day-to-day progress of the work, provided the end result meets the performance criteria he has specified 

and the parties concerned (e.g., sponsors, lenders and the Employer) are willing to see the Contractor paid more for the constructionf the Project in return for the Contractor bearing the extra risks associated with enhanced certainty of final price and time.

If this is what is wanted - choose the Conditions of Contract for EPC/Turnkey Projects (EPC/Turnkey Contract) - the FIDIC Book suitable for this purpose.

C. ALSO FOR THE EPC/TURNKEY CONTRACT

1. Is it a Process Plant or a Power Plant (or a factory or similar) where the Employer - who provides the finance - wishes to implement the Project on a Fixed-Price Turnkey Basis?

Then the Employer wishes the Contractor to take total responsibility for the design and construction of the process or power facility and hand it over ready to operate “at the turn of a key”,

and the Employer wishes a higher degree of certainty that the agreed contract price and time will not be exceeded

and the Employer wishes - or is used to - the Project being organised on a strictly two party approach, i.e. without an “Engineer” being involved

and the Employer does not wish to be involved in the day-to-day progress of the construction work, provided the end result meets the performance criteria he has specified

and the Employer is willing to pay more for the construction of his Project (than would be the case if the Conditions of Contract for Plant and Design-Build were used) in return for the Contractor bearing the extra risks associated with enhanced certainty of final price and time.

If this is what is wanted - choose the Conditions of Contract for EPC/Turnkey Projects (EPC/Turnkey Contract).

2. Is it an Infrastructure Project (e.g., road, rail link, bridge, water or sewage treatment plant, transmission line, even dam or hydropower plant) or similar where the Employer - who provides the finance - wishes to implement the Project on a Fixed-Price Turnkey Basis?

Then the Employer wishes the Contractor to take total responsibility for the design and construction of the infrastructure facility,

and the Employer wishes a higher degree of certainty that the agreed contract price and time will not be exceeded, except that if underground works in uncertain or difficult ground conditions are likely then the risk of unforeseen ground conditions should be borne by the Employer (and the provisions of the Plant and Design-Build Conditions in this respect - Sub-Clause 4.12 - would be appropriate), 

and the Employer wishes - or is used to - the Project being organised on a strictly two party approach, i.e. without an “Engineer” being involved

and the Employer does not wish to be involved in the day-to-day progress of the construction work, provided the end result meets the performance criteria he has specified,

and the Employer is willing to pay more for the construction of his Project (than would be the case if the Conditions of Contract for Plant and Design-Build were used) in return for the Contractor bearing the extra risks associated with enhanced certainty of final price and time.

If this is desired, select the Conditions of Contract for EPC/Turnkey Projects.

3. Is it a Building Project where the Employer wishes to have his building(s) constructed on a Fixed-Price Turnkey Basis generally complete with all furniture, fittings and equipment?

As for 2 above   In the case of a building or building development Project, the Employer or his Architect may have done some or most of the design, but - with suitable modification regarding design responsibility - the Conditions of Contract for EPC/Turnkey Projects (EPCTurnkey Contract) may be chosen.

D. RECONSTRUCTION OR REFURBISHMENT OR ANOTHER TYPE OF PROJECT

Check Questions A1, B1 and B2 above or Questions C1 - C3 if applicable, and make your choice accordingly.

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