Posts Tagged ‘gas’

FIDIC – engineering a smooth project

May 7, 2010

Another week, another blog post…

I initially wrote this briefing note as an aide memoire for the RICS in November 2009 as part of their series of talks to a visiting Chinese delegation tasked with understand more about FIDIC as a possible procurement tool for the upgrade of their domestic electricity supply infrastructure.

I hope this short-hand note is of wider interest to some of you.

Overview

Since 1999, the FIDIC forms have been popular for all types of engineering projects, in particular those that are project financed. Lenders appreciate the greater certainty afforded in terms of project costs.

The performance of the asset to be built is typically critical to the lender’s security insofar as the loan is normally linked to its ability to operate and generate revenue e.g. selling electricity. Therefore, there is much emphasis in FIDIC on testing, commissioning and handover procedures and the use of key performance indicators to measure time, cost, designed production and output levels. Full completion is not deemed to have been achieved until final performance tests have been carried out and results positive.

The hallmark of FIDIC is balanced risk. In the context of the turnkey version (the Silver Book), the contractor is tasked with achieving the performance of whatever is necessary for a certain purpose. For example, the particular yield of power generation.   But it is not the case that all risk is necessarily transferred to the turnkey contractor in FIDIC, despite assumptions. Many large project involve several specialist turnkey contractors.

This can cause interface problems, as a contractor will not be willing to assume another’s work given the performance tests that it knows it must satisfy. Also, if plant and machinery are brought in on licence from a 3rd party, a contractor will not assure its performance.

Further, contractors are increasingly risk adverse in the current market. This means that they may wish to design first and then enter into a full FIDIC turnkey contract at a later stage. The risk is that the contractor will then seek to re-negotiate the terms of the FIDIC contract unless there is a mechanism at the time of contracting for design and placing of materials, for them to then enter into the FIDIC contract with its obligations.

Traits of FIDIC:

–         fixed price;

–         contractor can organise itself as it sees fit provided it achieves the deliverables;

–         Employer exercises limited control provided informed of programme and progress; and

–         Contractor must prove the reliability and performance of plant and material.

 The guidance published alongside the contract explains that FIDIC is not suitable in the following circumstances; namely where:

–        there is insufficient time for checking relevant information and scrutinising the Employer’s requirements. This is not a contract to ‘bounce’ on contractors to gain a commercial advantage in tendering;

–        the works involve a lot of underground work or areas where the contractor cannot verify the physical conditions;

–         if Employer needs to supervise closely or inspect the drawings closely throught the build and installation; or

–         if interim payments require an official or other intermediary to certify them.

There are cost implications, so the suite may not always be commercially viable for all projects. NEC3 may be better for more straightforward projects.

Specific points in the standard form

Priority of documents – be aware that the standard form may be amended. The terms of any other Contract Agreement always take precedence (clause 1.6).

Non assignable without consent (clause 1.7)

Responsibility for noticing errors or defects on both parties, not just the contractor as in some other standard forms (clause 1.8)

Duty on the Employer with helping the Contractor to obtain consents where the contractor asks the employer to do so (clause 2.2).

Concept of “Determinations” – a process by which the employer and contractor shall consult and endeavour to reach an agreement on any matter arising (clause 3.5). Leave for either party to refer a dispute to a Dispute Adjudication Board’s Decision (DAB).

Fit for purpose obligation (clause 4.1). Rare in other forms but success in FIDIC is measured by performance.

Contractor automatically needs to provide security to assure its performance. Not a matter for negotiation as in other forms. Clause 4.2 lays out the triggers for the employer using that security (normally upon 42 days contractor default).

Can’t subcontract all of the works (clause 4.4), so cannot be used as a management contract.

Implicit in the terms that labour will be of a sufficient standard and paid a sufficient wage according the local rates.

Employer can ask Contractor to search for the cause of defects (clause 11.8).Cost agreed and added to the Contract Price.

Acceptance by the employer of the works not achieved until Performance Certificate issued (clause 11.9), which is normally 28 days after the last Defect Notification Period has expired.

Scope for value engineering but no obligation to achieve savings (clause 13.2).

The main areas of negotiation

Ground conditions

The Employer provides all the relevant data on sub-surface conditions not later than 28 days prior to submission of tender.

Contractor deemed to base contract amount on data.

In the red and yellow book, the Contractor is however only responsible for interpreting the data – the accuracy of that data is warranted by the Employer who carries the risk of any physical conditions that are not reasonably foreseen at the date of the tender.

In the Silver book however, due to its turnkey nature, the Contractor takes all risk including any unforeseen conditions apart from items listed in clause 5.1 which include the purpose of the works and any specific information which the Employer can only verify contained in the Employer’s Requirements.  The contract price will not be amended otherwise.

One way contractors seek to get around the onerous conditions, if not negotiated out, is to obtain all relevant reports before tendering and then to make all assumptions based on that material. The risk stays with the employer in such circumstances if there is any variance between those assumptions and the physical conditions as any incidence is deemed to be unforeseen in such circumstances.

Handover, testing and commissioning

There is problem where the employer wants to start selling electricity as soon as it is being generated following commissioning. This is however prior to performance testing.

The employer can prejudice itself if it takes over before tests are completed. It is wise to wait.

Force majeure

Time and cost impact stays with the Employer unless amended.

FIDIC is a very effective contract provided to know and adapt to its limitations. Hopefully, this short article goes some way to explaining how to avoid its pitfalls.

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