Advanced FIDIC 2019 PDF

Advanced FIDIC Training
Dushanbe, 28-30 August 2019
Geoffrey Smith
BSc CDipAF LLDip CEng FICE FCIArb Barrister
Accredited Mediator, FIDIC Accredited International Trainer,
FIDIC President’s List of Approved Disputes Adjudicators
Partner, PS Consulting, Paris
FIDIC – INTERNATIONAL FEDERATION OF CONSULTING ENGINEERS – WWW.FIDIC.ORG – [email protected] – COPYRIGHT 2019 1

Outline
1. Introduction to FIDIC Rainbow
2. Roles of Employer, Contractor & Engineer
3. Contract Milestones
4. Financial Management
5. Management of Variations
6. Subcontracting
7. Management of Claims
8. Dispute Resolution
9. Case Studies & Discussion
Session 1
Introduction to FIDIC Rainbow

Introduction to FIDIC Rainbow
1. Background
2. Red Book
3. Yellow Book
4. Silver Book
5. Green Book
6. And the Pink Book?
7. Risk Allocation
8. Which Book to Use?

1. Background
• FIDIC Contracts are drafted by Consulting
Engineers.
• FIDIC Contracts have developed since 1957 in
response to demands from international
industry.
1957 Red Book 1st Edition Construction
1963 Yellow Book 1st Edition Electrical & Mechanical
1969 Red Book 2nd Edition Construction
1977 Red Book 3rd Edition Construction
1980 Yellow Book 2nd Edition Electrical & Mechanical
1987 Red Book 4th Edition Construction
1987 Yellow Book 3rd Edition Electrical & Mechanical
1995 Orange Book Design-Build & Turnkey

1. Background
• In 1999, FIDIC totally redrafted all three
contracts:
Red Book – Construction of Works designed by
Employer
Yellow Book – Plant & Design-Build
Silver Book – EPC/Turnkey
• Since then FIDIC has added:
Green Book – Short Form of Contract
Gold Book – Design, Build & Operate
Blue-Green Book – Dredgers’ Contract
Pink Book – MDB Harmonised Edition of RB
Emerald Book – Tunnelling Contract
1. Background
• In 2017, FIDIC published revised versions of the
1999 contracts:
Red Book 2nd Edition – Construction of Works
designed by Employer
Yellow Book 2nd Edition – Plant & Design-Build
Silver Book 2nd Edition – EPC/Turnkey.
• These are often referred to as “FIDIC 2017”

1. Background
• Use of the FIDIC Books is protected by copyright.
• Photocopying, scanning or retyping are illegal.
• ADB had a licence for unlimited use of the Pink Book
(and unlimited copies).
• For all other FIDIC Books, ADB/Employer must buy the
books required.
• Hard copies: about €40 each + Postage.
• Soft copies: €195 per year, can print 10 copies
(watermarked), can edit Particular Conditions.
• Licenses to amend GC’s: €920 per project, per year.

2. Red Book
Conditions of Contract for Construction
• Detailed Design given to Contractor;
• Supervision & contract administration by
the “Engineer”;
• Payment on re-measurement basis.

2. Red Book
• Contract Price usually based on measurement of
“actual” quantities.
• Option for lump-sum.
• Advance Payment for mobilisation – amount,
instalments and currencies stated in Appendix;
repayment mechanism defined.
• Interim Payments usually based on estimated value of
Works executed (measured) but can be based on
Schedule of Payments.

2. Red Book
• Advance for Materials on and/or off Site allowed unless
Schedule of Payments applies
• Adjustment for Costs increases – formula proposed
• Retention at rate stated in Appendix; half certified for
release when TOC issued; half after Defects Period &
rectification of defects
• 42 days to pay Advance; 56 days for Interim & Final
payments based on Payment Certificates

2. Red Book
• Payment in currencies stated in Appendix
• Taxes included in Contract Price
• Financing charges due on late payments at rate stated
in Contract

3. Yellow Book
Conditions of Contract for Plant and
Design-Build
• Detailed Design done by Contractor;
• Payment based on lump-sum;
• Design reviewed/approved and Works
supervised by the “Engineer”.

3. Yellow Book
• Contract Price is usually based on a Lump Sum - no
adjustment for increases/decreases in quantities
• Advance Payment for mobilisation and design –
amount, instalments and currencies stated in Appendix;
repayment mechanism defined
• Interim Payments usually based on Schedule of
Payments with Milestones – great care needed in
defining Milestones
• Advance for Materials on and/or off Site – only if
payments not based on Schedule of Payments
rectification of defects
• Taxes included in Contract Price
in Contract

4. Silver Book
Conditions of Contract for EPC/Turnkey
Projects
• Design done by Contractor;
• Payment based on lump-sum;
• Supervision by the Contractor – but
Employer maintains presence through
“Employer’s Representative” (if
appointed).

5. Green Book
Short Form of Contract
• Intended for projects under US$500 000
and/or <6 months;
• Very simple contract;
• Design can be by Employer or by
Contractor;
• Supervision by the Authorised Person

5. Green Book
• Contract allows a wide range of possibilities for fixing
the Contract Price:
o Lump Sum;
o Lump Sum + Schedule of Rates (prepared by bidder);
o Lump Sum based on BoQ (prepared by Employer);
o Re-measurement;
o Cost Reimbursable.
• No Advance Payment
• No guidance on how Interim Payments are to be
valued
• Advances for Materials on Site
• No adjustment for Costs increases
• Retention at rate stated in Appendix; half released <14
days after Taking Over; half <14 days after Defects
Period & rectification of defects
• 28 days to pay
• Payment in currencies stated in Appendix (assumed to
be a single currency)
• Taxes not mentioned
• Interest due on late payments at rate stated in
Appendix
• Claims for additional cost allowed – but not profit

MDB Harmonised Edition of the
FIDIC Construction Contract
• Since 2005, Multilateral
Development Banks have a
licence to use own version of Red
Book. (3rd Edition published 2010)
• Based on Red Book: design given to Contractor;
Re-Measurement; supervision by Engineer.

• The main areas of difference between the Red Book

& the Pink Book include:
• the Pink Book is more balanced with respect to
periods for taking action;
• the Pink Book includes a role for the Bank;
• the Pink Book has a much greater emphasis on
“social issues”;
• the Pink Book has a much greater emphasis on
anti-corruption measures.

• Contract Price based on re-measurement
• Advance Payment for mobilisation & cash-flow
support – amount, instalments and currencies stated
in Appendix; repayment mechanism defined – not
same as Red Book
• Interim Payments usually based on estimated value of
Works executed (measured) but can be based on
Schedule of Payments
• Advance for Materials on and/or off Site unless
Schedule of Payments applies
rectification of defects but can be replaced by
Retention Guarantee (not necessary if PG is greater
than the remaining Retention)
• Taxes included in Contract Price – except for Import
Duties on Contractor’s Equipment & spare parts
in Contract
7. Risk Allocation
• Risks can be divided into two categories: “unavoidable”
and “manageable”.
• Whenever feasible, risk should be transferred to
insurers – particularly so for “unavoidable” risks.
• Responsibility for “manageable” risk should be allocated
to the party best able to manage and control the risk.
• If the Employer bears certain of the risks, he will have to
pay the financial impact only if the risk happens.
• If the Contractor bears the risk, he will allow for it in his
tender – the Employer pays even if the risk does not
happen.
7. Risk Allocation
• Practice shows that the lowest overall total cost for
completed projects is achieved through balanced risk
sharing.
• Contractor carries the risks associated with his business
of contracting: supply of materials, labour & equipment,
quality, safety, etc.
• Designer carries the risks associated with design.
• Employer carries the risks that are difficult or impossible
to price accurately in advance: provision of the Site,
correctness of information supplied to bidders, political
actions, adverse physical conditions, etc.
7. Risk Allocation
Green Red/Pink Yellow Silver

Employer’s Employer Employer Employer Contractor
Requirements
Detailed Design Depends Employer Contractor Contractor
Quantities Depends Employer Contractor Contractor
Ground Conditions Employer Employer Employer Contractor
Delay by Authorities Not Employer Employer Employer
mentioned
Exceptional Contractor Employer Employer Contractor
Climatic
Conditions
Damage by natural Employer Employer Employer Contractor
events
• In addition, the Red, Pink, Yellow & Gold books allow the Contractor to claim
extensions of time and/or additional payment in relation to about 20 other
circumstances.
7. Risk Allocation
Contractor’s Risk
Green Red/Pink Yellow Gold Silver

Book Book Book Book Book
Operation
Employer’s Design Contractor’s Design
Cost Re-Measurement Lump Sum

Reimbursable

7. Risk Allocation
Green Red/Pink Yellow Gold Book Silver
Book Book Book (Construction Book
Phase)
Final Contract Price
Accepted Contract Amount

8. Which Book to Use?
Is the contract of small
value and short
duration? Or are the
Works repetitive &
simple?
Yes
Use Green Book

No
Is the contract of small value
and short duration? Or are the Employer wishes to do most of
Works repetitive & simple?
design. Does Employer also
Yes
want:
• risks to be shared equitably,
and
Use Green Book
• to operate completed Works
himself and
• Contract to be administered
by Engineer?
Yes
Use Red/Pink Book

No
and short duration? Or are Employer wishes to do most
the Works repetitive & of design. Does Employer Employer wishes
also want:
simple?
• risks to be shared Contractor to do detailed
equitably, and
Yes
• to operate completed design & construct
Works himself and
• Contract to be Works. Does he want:
administered by
Use Green Book Engineer? • risks to be shared
equitably, and
Yes
• to operate completed
Use Red/Pink Book
Works himself and
• Contract to be
administered by
Engineer?
Yes
Use Yellow Book

No
simple? also want: Contractor to do detailed Employer wishes
• risks to be shared design & construct Works.
Yes
equitably, and Does he want: Contractor to design &
• to operate completed • risks to be shared
Works himself and equitably, and construct Works &
• Contract to be • to operate completed
Use Green Book
administered by Works himself and operate. Does he want:
Engineer? • Contract to be
administered by • Contractor to bear
Engineer?
Yes much of the risk and
Yes • Contract to be
Use Red/Pink Book administered by
Employer’s
Representative?
Use Yellow Book
Yes
Use Gold Book

No
simple? also want: Contractor to do detailed Employer wishes
• risks to be shared
equitably, and
design & construct Works. Contractor to design & Employer wishes
Does he want: construct Works &
Yes
• to operate completed
Works himself and
• risks to be shared operate. Does he want: Contractor to take total
equitably, and • Contractor to
• Contract to be
administered by
• to operate completed bear much of the responsibility for design
Works himself and risk and
Use Green Book Engineer? • Contract to be • Contract to be & construction. Does he
administered by administered by
Engineer? Employer’s also want:
Yes Representative?
Yes
• Contractor to bear
Use Red/Pink Book Yes most of the risks
• Contractor to execute
Works without
Use Yellow Book
administration by
Engineer and
Use Gold Book
• to pay enhanced
price?
Yes
Use Silver Book

End of Session 1

Session 2
Roles of Employer, Contractor & Engineer

Roles of Employer, Contractor & Engineer
1. Employer
2. Contractor
3. Engineer

1. The Employer
The Employer’s role is generally to deal with matters under
his control in order to facilitate execution of the Works by
the Contractor:
• Obtain building permit, etc. (Clause 1.13)
The Employer must obtain main permits for Permanent Works
and any other permits described in the Specifications as to be
obtained by the Employer.
• Provide reasonable assistance to Contractor (Clause
2.2)
As requested; to obtain permits for execution of the Works,
delivery of Goods including customs clearance and for the
export of his equipment.
1. The Employer
• Give right of access to and possession of the Site:
• Under Clauses 2.1, Employer must give right of access and
possession of the Site.
• Under PB, this obligation includes special or temporary rights of
way necessary for the Works.
• He may withhold until Performance Security has been received.
• Access and possession must be given within the times stated in
the Appendix to Tender/Contract Data.
• If no times are stated, they must be given so as to allow the
Contractor to proceed in accordance with his programme.
• Under PB, Clauses 4.13 & 8.1 oblige Employer to give effective
access

1. The Employer
• Ensure the co‐operation of his Personnel (Clause 2.3)
Employer must ensure that his Personnel and his other
contractors cooperate with the Contractor.

1. The Employer
• Provide evidence of financial arrangements (Clause
2.4) :
• Employer must provide reasonable evidence that financial
arrangements have been made and are being maintained to
enable him to pay the Contractor punctually.
• He must do so before the Commencement Date (Pink Book) but
also within 28 days after receiving any request from the
Contractor.
• Before making any material change to his arrangements, he
must notify the Contractor and give detailed particulars.

1. The Employer
• Employer’s Claims (Clause 2.5)
• The Employer (or the Engineer) must give notice and
particulars to the Contractor of any claim by the Employer for
payment in connection with the Contract and/or for any
extension of the Defects Notification Period (DNP).
• The notice must be given as soon as practicable and no more
than 28 days (Pink Book) after the Employer became aware or
should have become aware of the event or circumstances.
• The particulars must specify the basis for the claim and
substantiate the amount and/or extension claimed.
• Any claim for an extension of the DNP must be made before the
expiry of the DNP.

1. The Employer
• Appoint the “Engineer” (Clause 3.1):
The Employer is required to appoint the “Engineer” and name
him in the Appendix to Tender/Contract Data.
A failure to appoint the Engineer/ maintain him in place is a
serious breach of contract.
If he intends to appoint a replacement Engineer, he must give
notice to the Contractor at least 21 days beforehand and he
must give full and fair consideration to any objection raised by
the Contractor. (Clause 3.4)

1. The Employer
• Appoint the “Engineer” (Sub-Clause 3.1):
He must promptly inform the Contractor of any change to the
authority of the Engineer. (Clause 3.1 – PB)
Note that if the Engineer gives an instruction or makes a
determination for which he was required to obtain the
Employer’s approval, he is deemed to have obtained
approval before it was given.

1. The Employer
• Release Contractor’s Security (Clause 4.2)
• The Employer must return the Performance Security to the
Contractor within 21 days after receiving a copy of the
Performance Certificate.
• He shall not make any claim under the Performance Security
except for amounts to which he is entitled under the
Contract.
• He must indemnify the Contractor against all damages, losses &
expenses (including legal fees) resulting from an unjustified
claim under the Performance Security.

1. The Employer
Provide Site Data (Cause 4.10):
• Employer must make available prior to the Base Date, all
relevant data in the Employer’s possession on sub-surface and
hydrological conditions at the Site, including environmental
aspects.
• Employer must also make available to the Contractor all such
data which come into the Employer’s possession after the Base
Date.

1. The Employer
Provide Employer’s Equipment and/or free-issue materials
(Cause 4.20):
• If foreseen by the Specification, Employer must make available
Employer’s equipment and any free-issue materials at the
appropriate time and place.
• Contractor is responsible for such equipment or materials while
in his possession or use.

2. The Contractor
The Contractor’s obligation is to provide everything necessary to
execute and complete the Works in accordance with the Contract
and to remedy any defects.
– Compliance with applicable Laws (Clause 1.13) :
• In performing the Contract, Contractor must comply with
applicable Laws.
• He must give notices, pay all taxes, duties and fees and obtain
all permits, approvals, etc. required by the Law.

2. The Contractor
– Allow Inspections & Audit by the Bank (PB Clause
1.15)
• Contractor must permit the Bank or its representatives to inspect
the Site and/or his accounts and records and have these
audited by auditors appointed by the Bank
– Provide the Personnel, Goods, Plant, etc. (Clause 4.1):
• All Plant, Materials and services required for the Works must
originate from any eligible source country as defined by the
Bank (PB only).
• Contractor must submit details of the arrangements and
methods he proposes to use for the execution of the Works,
whenever required by the Engineer.

2. The Contractor
– Provide the Performance Security (Clause 4.2):
• Within 28 days after receiving the Letter of Acceptance
Contractor must provide a Performance Security in the required
form and in the amount and currencies stated in the Appendix to
Tender/Contract Data.
• He must ensure that the Performance Security remains valid
and enforceable until he has executed and completed the Works
and remedied any defects.
• PB foresees an increase or decrease in amount of Performance
Security if the Contract Price changes by more than 25% in a
specific currency due to changes in costs and/or legislation or
due to a Variation.

2. The Contractor
– Appoint a Contractor’s Representative (Clause 4.3):
• Prior to Commencement Date, Contractor is to submit for the
Engineer’s consent the name & cv of the person proposed as
Contractor’s Representative.
• Must have full authority to bind Contractor.
• Must dedicate all his time to the project – and be on Site.
• If he is to be temporarily absent from Site, Contractor must
propose suitable deputy for Engineer’s consent.
• Must be fluent in the language for communications.
• May delegate powers and functions by prior notice to Engineer.

2. The Contractor
– Cooperate with others (Clause 4.6):
• Contractor must allow appropriate opportunities for work by
others on or near the Site, as specified in the Contract or as
instructed by the Engineer.
• Any such instruction will be a Variation if and to the extent that it
causes the Contractor to suffer delays and/or to incur
Unforeseeable Costs.

2. The Contractor
– Satisfy himself regarding access routes to the Site:
• The Contractor is deemed to have satisfied himself as to the
suitability and availability of access routes to the Site at the
Base Date (remember the Employer must provide right of
access under Clause 2.1 but “effective access” under PB Clause
4.13).
• The Contractor must bear the costs due to non-availability or
non-suitability of the access routes. (Clause 4.15)
• He must obtain at his own risk and cost any additional rights of
way or facilities outside the Site, which the Employer is not
obliged to provide. (RB & YB Clause 4.13)

2. The Contractor
– Protect the Environment (Clause 4.18):
• The Contractor must take all reasonable steps to protect the
environment (both on and off Site) and to limit damage and
nuisance to people and property from pollution, noise, etc.
• He must ensure that emissions, discharges and effluent stay
within limits fixed in the Specification or by applicable Laws.

2. The Contractor
– Must provide the manpower & supervision necessary to
execute the Works. (Clause 6)
– Under the YB, he must provide the name and
particulars of the designers and ensure that they are
available to meet the Engineer at all reasonable times
up to the end of the DNP (Clause 5.1)
– Must provide the Plant and Materials for the Works,
allow inspections, carry out tests, etc. to ensure proper
quality (Clause 7)

3. The Engineer
• Engineer’s role is partly defined under Clause 3 – but
in reality almost every clause of the Contract
mentions the Engineer.
• His role is a mixture of Employer’s agent – checking
quality, chasing progress, processing payments and
generally ensuring compliance with the Contract, on
behalf of the Employer.
• But it also involves him acting as a semi-
independent professional, making
determinations (decisions) which are fair and in
accordance with the Contract.
3. The Engineer
• Engineer may delegate authority to assistants.
• Delegation to be in writing and takes effect when
Employer and Contractor have been informed.
• Unless Employer and Contractor agree, Engineer
cannot delegate responsibility for determinations
under Clause 3.5.
• This means that the Engineer must be a physical
person, not a company.

3. The Engineer
• Under all FIDIC contracts (except Green Book),
Engineer has extensive duties of checking and testing
the ongoing work of Contractor.
• Aim is to ensure Works are completed in accordance
with the Specifications:
o Plant materials are of specified standard and quality;
o Workmanship of required standard;
o Project constructed in accordance with Drawings &
Specifications;
o Completed on time.

3. The Engineer
• Although Engineer gives his consent / approval for
Materials, Plant & workmanship, he does not assume
any responsibility – in theory!
• In the event of a defect in the completed project, who
will be liable, the designer, the Contractor due to poor
Materials or workmanship, or failure to follow design, or
Engineer for failure to properly check?
• Problem can be minimised by having same consultant
for design & supervision.

3. The Engineer
• Under RB and PB, it is anticipated that Engineer will
continue to issue drawings throughout the execution of
the Works.
• This is because the Tender drawings, which become
the Contract drawings, are sufficient for preparing the
tender but not sufficient to construct the Work.
• Any delay in issuing these additional drawings entitles
the Contractor to claim.
• But often the preparation of the additional drawings is
not in the scope of the Supervision Consultant’s
contract.
3. The Engineer
• Under YB, Contractor usually develops detailed design
based on preliminary design included in the Employer’s
Requirements.
• Contractor is not liable for mistakes in the Employer’s
Requirements unless these could have been identified
by an experienced contractor.

3. The Engineer
• Engineer must review the Contractor’s detailed design
to ensure that it complies with the Employer’s
Requirements – Contract might also require him to
approve.
• Unless the reviewers are on Site, there is a high risk of
review periods being exceeded.

3. The Engineer
• Employer may fix limits on supervisor’s authority.
• Under RB & YB, Engineer may exercise authority
attributable to him as specified or necessarily implied
from the Contract.
• Any limits on authority must be stated in Particular
Conditions – but not Contractor’s problem if he
exceeds limit.
• Engineer has no authority to amend Contract.
• In general, he has no authority to relieve either Party of
any duties or responsibilities under the Contract.
• FIDIC – INTERNATIONAL FEDERATION OF CONSULTING ENGINEERS – WWW.FIDIC.ORG – [email protected] – COPYRIGHT 2019 62

3. The Engineer
• Under PB, Engineer’s authority is generally similar to
RB & YB.
• But Engineer must obtain specific approval of Employer
before taking action in relation to:
o extensions of time or addition Costs arising from
unforeseeable adverse physical conditions;
o instructing a Variation which exceeds a specified
percentage of the Accepted Contract Price (unless in
an emergency);
o approving a Variation proposed by the Contractor or for
which he has submitted a quotation.

3. The Engineer
“SOME FOOD FOR THOUGHT”
• Is it practical to impose limits given that even if
Engineer/Employer’s Representative exceeds the limit,
this is not the Contractor’s problem?
• Is it practical to impose limits, knowing that a Variation
can consist of a reviewer’s note on a Contractor’s
drawing?
• What about Engineer’s obligation to fix provisional
prices for Variations so that the Contractor gets paid (in
part) under the next IPC?

End of Session 2

Session 3
Contract Milestones

Contract Milestones
1. Commencement
2. Mobilisation
3. Taking Over/Completion/Operational Acceptance
4. Defects Notification Period
5. Performance Certificate

1. Commencement & Time for Completion
• The Works must be completed within the “Time for Completion”
which begins at the Commencement Date.
• Under PB Clause 8.1, a number of precedent conditions must
be satisfied before the Commencement Date. These include:
• Signature of the Contract Agreement by both Parties (together with
any necessary approval from relevant authorities);
• Provision by the Employer of reasonable evidence of his financial
arrangements;
• Possession of the Site and such permissions as are required for
commencement, are given to the Contractor; and
• Receipt by the Contractor of the Advance Payment (provided that the
corresponding guarantee has been delivered by the Contractor).
• Remember also that possession of the Site is only given after
receipt of the Performance Security.

• Once all “four” conditions have been satisfied, the Engineer
must issue an instruction recording that both Parties agree on
fulfilment of the conditions and instructing the Contractor to
commence.
• If this instruction is not issued within 180 days from receipt by
the Contractor of the Letter of Acceptance, the Contractor may
terminate the Contract.

Letter of
Acceptance Signature of Contract Agreement &
<28 days
approval by authorities
<28 days Provision of Performance Guarantee
Possession of Site &

receipt of permits
Evidence of financial arrangements

Provision of
Advance Guarantee
Contractor’s Statement IPC Payment of Advance
<28 days <21 days
Notice of
Commencement
Date
<180 days
<28 days
Contractor’s programme

• Under RB & YB, there are no conditions to be fulfilled before
Commencement Date.
• The Engineer simply writes to the Contractor fixing the
Commencement Date which must be at least 7 days after the
letter.
• Which is better: PB or RB/YB?

2. Mobilisation
• As soon as reasonably practicable after Commencement Date,
Contractor is to commence execution and proceed with “due
expedition and without delay”.
• Should Contractor mobilise before Commencement Date?
• If he does, and commencement is delayed, can he claim his
Costs?
• Under RB or YB, if the Engineer fixes the Commencement Date
before the Site is available, can Contractor delay mobilisation?
• Can he claim his Costs for mobilised resources?
• Can he claim his Costs for un-mobilised resources?

2. Mobilisation
• Should payment of the Advance be linked to progress of
mobilisation?
• PB states Advance Payment is for “mobilisation and cash-flow
support” – what does this mean?
• Should the Contract impose a milestone date for completion of
mobilisation?

• “Taking Over” is the FIDIC process for transferring the
“completed” Works from the Contractor to the Employer.
• At this point, the Works can be used for their intended purpose
even though there may be some minor items to finish or minor
defects to rectify.
• The Engineer decides whether the Works are complete.
• The Engineer signs and issues the Taking Over Certificate
(TOC).
• However, before issuing the Engineer must check whether the
local legal requirements for Taking Over have been met: e.g.
inspection by Fire Department or Security commission;
certification by independent certifying authority.

• Contractor may apply for a TOC up to 14 days before he
anticipates completing the Works.
• Contract foresees that Engineer must respond to a request for a
TOC within 28 days after receiving request.
• If he does not reply within 28 days, the Works are deemed
Taken Over on day 28, provided that they were substantially
complete.
• Therefore, Engineer might have only 14 days after alleged
completion to organise visit by Fire Department, Security
Commission, etc. and obtain the relevant reports.

• The issue of TOC triggers several important actions and
changes in responsibility.
• Among these, liability for care of the Works and repair of
damage or theft passes to the Employer.
• Therefore Engineer should ensure Employer organises security
personnel, operations personnel, insurance, etc.
• What other events are triggered?

• “Completion” and “Operational Acceptance” are not expressions
used by FIDIC.
• They come from the ENAA Contract form used by the MDB for
power plant projects & process plant projects.
• The “Completion Certificate” is issued when the plant is ready
for commissioning.
• The “Operational Acceptance” Certificate is issued after
commissioning, trial operation and, if specified, execution of the
Guarantee Tests.
• In order to avoid delay damages, Completion must be achieved
on time. A bonus might also be payable if Completion is
achieved ahead of schedule.

• Under FIDIC Contracts, when the Works have been Taken
Over, the Defects Notification Period (DNP) begins.
• The duration of the DNP is 12 months unless the Appendix to
Tender/Contract Data states otherwise.
• Under the ENAA Contract, the Defects Liability Period (DLP) is
either 540 days from Completion or one year from Operational
Acceptance.

• The Contractor is obliged, at his cost, to rectify any defect
attributable to:
– any design for which the Contractor is responsible;
– Plant, Materials or workmanship not in accordance with
the Contract;
– failure by the Contractor to comply with any other
obligation.
• but not :
– “fair wear and tear”;
– defects which are attributable to faults of design not
performed by the Contractor;
– damage not caused by/attributed to Contractor in the
DNP. (Clause 11.2)

• Employer may choose to rectify defects or damage that are not
attributable to the Contractor by:
- a request by the Employer (or on his behalf by the
Engineer) that the Contractor perform the remedial works,
for which the Contractor’s agreement and jointly agreed
payment terms would be necessary (by a proposal under
Clause 13.3);
- the Employer executing the remedial works outside the
Contract, by himself or by others.

• Clause 11.3 permits the Employer to claim an extension of the
DNP for up to 2 years.
• However, this is only if the entire Works, a Section or major item
of Plant cannot be used for a certain time period, in which case
the relevant DNP should be extended by that time period.

• Within 28 days after the end of the DNP, Engineer (not
Employer) must issue the Performance Certificate.
• However, if defects were notified during the DNP but have not
yet been remedied, the Engineer does not issue the
Performance Certificate until the repairs have been completed
and, if instructed, satisfactorily tested.
• Engineer has only 28 days after completion of repairs to order
testing.

• The issue of the Performance Certificate is largely independent
of release of 2nd half of retention.
• The 2nd half of retention must be released at the end of the DNP
except for the estimated cost of any unfinished repair work.
• The estimated cost of the unfinished repair work must be
released after completion of repairs (and satisfactory testing if
instructed).

• After the issue of the Performance Certificate, the Employer has
21 days to release the Performance Security.
• The Contractor has 56 days after receipt of the Performance
Certificate in which to submit his draft Final Statement.
• The Engineer and Contractor then have 28 days to try to agree
the draft Final Statement.
• If the Engineer does not start the final measurement of
quantities before the issue of the Performance Certificate and
receipt of the draft Final Statement, there is a risk that any over-
measurement will not be covered by the Performance Security.

End of Session 3

Session 4
Financial Management

Financial Management
1. Statements & Interim Payment Certificates
2. Measurement v Schedule of Payments
3. Corrections, Deductions & Set-off
4. Payment Periods
5. Tax Invoices
6. Cost Escalation Adjustments

• Payment process begins with a Statement and supporting
particulars from Contractor – usually submitted monthly.
• Among the supporting particulars must be the Contractor’s
Monthly Report (Clause 14.3).
• The first Statement should be for the Advance Payment (Clause
14.2).
• The last Statement will be after the issue of the Performance
Certificate (the “Final Statement”).

• The Statements must be set out cumulatively and in the
following order:
– the estimated value of the Works executed up to the end
of the month including Variations;
– any additions & deductions for changes in Laws and
adjustments for changes in cost;
– the amount to be deducted for Retention;
– the amount to be added for the Advance Payment and
deducted as repayment;
– amounts to be added and deducted for Plant & Materials
delivered to Site;
– other additions or deductions which may be due, including
Claims;
– deduction of amounts previously certified.
• After receipt of Statement, the Engineer has 28 days to check
and attempt to agree the amounts and issue an Interim Payment
Certificate (IPC)
• The Appendix to Tender/Contract Data fixes a minimum amount
if IPC.
• Unless the amount to be certified is less than the minimum, (or
the Performance Security has not been provided or has
expired), the Engineer must not delay or withhold the IPC.
• If a supporting document is missing, the Engineer must adjust to
take account of this in the IPC and explain the adjustment.

Moreover:
(a) if any thing supplied or work done by the Contractor is not in
accordance with the Contract, the cost of rectification or replacement
may be withheld until rectification or replacement has been
completed; and/or
(b) if the Contractor was or is failing to perform any work or obligation
in accordance with the Contract, and had been so notified by the
Engineer, the value of this work or obligation may be withheld until
the work or obligation has been performed.

• Certification of payment by Engineer in an IPC does not signify
acceptance or approval.
• If the Engineer makes a mistake or subsequently finds an over-
certification, he can correct the mistake or over-certification in a
later IPC.
• The process is designed to maintain the Contractor’s cash-flow
so that progress of work does not suffer.
• The Employer is not at risk because he holds the Performance
Security and, by the time payment is made under the IPC,
Contractor will normally have made further progress.

• If the Engineer fails to issue the IPC within 28 days, Contractor
may send a notice of suspension under Clause 16.1.
• If he does so, he can suspend work 21 days later (or slow down)
and claim an EOT and additional Costs plus profit.
• If the IPC has not been issued by day 56, Contractor can send
notice of termination under Clause 16.2.
• If he does so and the IPC has not been issued within the next
14 days, he can terminate and claim the costs arising from
termination, including loss of profit. (loss of profit is not claimable
under PB)

• The first line of the Statement is “the estimated contract value of
the Works executed up to the end of the month”.
• This estimate can be on the basis of the quantities of work
executed multiplied by the applicable unit rates from the BOQ
(normal basis for RB & PB).
• Alternatively, it can be on the basis of a schedule of payments
(frequently used for lump sum contracts such as YB).
• If the RB or PB contain a lump sum against any BOQ item,
Contractor must submit a breakdown of the lump sum within 28
days after Commencement Date (Clause 14.1). Engineer can
use this breakdown for the IPC but is not obliged to do so.

• A schedule of payments usually identifies a number of
milestones with a payment becoming due when the milestone is
achieved.
• If the Contractor is late in achieving a milestone, payment will
not become due until a later date. If he is ahead of schedule, the
payment will be advanced also.
• Care is required when defining the milestones and deciding
upon the evidence required to substantiate achievement.
• If the schedule of payments is not tied to milestones but to
calendar dates, the schedule must be adjusted to take account
of actual progress (Clause 14.4)

• As an alternative to a schedule of payments, some lump-sum
contracts foresee interim payments on the basis of a break-
down of the lump sum.
• Contractor is required to provide in his bid or subsequently, an
approximate Bill of Quantities that corresponds to the lump sum
Accepted Contract Amount.
• In this case, the Bill of Quantities is only to be used as an
approximate way of monitoring financial progress. The Accepted
Contract Amount is not to be adjusted to take account of actual
quantities of work done.
• The Bill of Quantities does not change the lump sum contract to
a re-measurement contract.

• The Engineer is the sole person with the power to issue an IPC.
• The IPC is not signed by the Employer, nor signed by the
Contractor.
• The Contractor signs his Statement which sets out his view of
the situation.
• The IPC is the Engineer’s view of the situation and must be
accompanied by detailed explanations for any differences
between the amounts included in the Statement and IPC.
• If the Engineer disagrees with Statement, he must not send the
Statement back to Contractor for “correction” (except for the
draft Final Statement).

• Similarly, if the Employer, the Ministry of Finance or ADB find
mistakes in the IPC or insufficient documentation, they do not
return the IPC to the Engineer for “correction” (although they
should inform him so that he makes a correction in the next
IPC).
• Employer has no right to correct the IPC himself or to deduct or
set-off amounts which he believes the Contractor owes to him.
• Clause 2.5 states:
“The Employer shall only be entitled to set off against or make
any deduction from an amount certified in a Payment
Certificate, or to otherwise claim against the Contractor, in
accordance with this Sub-Clause.”

• Thus if the Employer believes that the Contractor owes him
money, he must follow the procedure set out under Clause 2.5
and submit a claim against the Contractor.
• Under PB, the claim must be notified to the Contractor within 28
days of when the Employer became aware or should have
become aware of the event giving rise to the claim.
• After processing of the claim by the Engineer, any amount due
from the Contractor will be included as a deduction in the next
IPC.

4. Payment Periods
• After the issue of the IPC, Employer must pay full amount
certified within periods stated in Contract (Clause 14.6).
• Amount must be in Contractor’s bank account within the stated
payment periods, which are as follow:
• Advance Payment: 21 days after Employer’s receipt of
IPC and Advance Payment Security or 42 days after
issue of Letter of Acceptance, whichever is later;
• Other Interim Payments: 56 days from Engineer’s receipt
of Statement and supporting documents
• Final Payment: 56 days from Employer’s receipt of Final
Payment Certificate.
4. Payment Periods
• If full payment is not received within stated periods, Contractor
may send a notice of suspension under Clause 16.1.
• If he does so, he can suspend work 21 days later (or slow down)
and claim an EOT and additional Costs plus profit.
• If the payment has not been received by day 56, Contractor can
send notice of termination under Clause 16.2.
• If he does so and full payment is not received within the next 14
days, he can terminate and claim the costs arising from
termination, including loss of profit. (loss of profit is not claimable
under PB)
4. Payment Periods
• In addition, Contractor is entitled to be paid financing charges at
the rate stated in the Contract calculated at the rate stated in the
Contract from the date payment was due until the date it is
received.
• The financing charges are compounded monthly – if they are not
paid, financing charges are calculated on the unpaid financing
charges.
• Financing charges are due without any requirement for a notice
under Clause 20.1 and without certification by the Engineer.
• If they are not paid, Contractor can suspend work/terminate the
Contract as for any other unpaid amount.
5. Tax Invoices
• FIDIC contracts do not mention an invoice from the Contractor.
It is assumed that interim payments can be made solely on the
basis of the IPC.
• However, in many countries payment can only be made against
an official invoice.
• Often this is necessary because Valued Added Tax or similar
must be collected by the Contractor and paid to the tax
authorities.
• This means that after Contractor receives the IPC, he must
prepare and submit an invoice for the amount certified.
• The time needed to do this might make it difficult for Employer to
process payment within 56 days of receipt of the Statement.
5. Tax Invoices
• Moreover, whereas the amount of an IPC can be adjusted or
corrected in a subsequent IPC, it can sometimes be difficult to
adjust or correct a subsequent invoice to take account of an
“over-payment” in an earlier invoice.
• Some countries have issued official guidance on how this
problem is to be managed.
• ADB requires price adjustment provisions in contracts with long
delivery or completion periods (>18 months) including major civil
works contracts.
• This is in line with aim of having a balanced allocation of risks
and liabilities.
• Without such a provision, Contractor would have to build
allowance in to his tender – and Employer would have to pay
even if actual cost increases were less than expected.
• If Contractor did not allow enough, he might run out of funds and
stop work.
• FIDIC contracts provide for adjustment of the amounts payable
to the Contractor to take account of rises or falls in the cost of
labour, Goods and other inputs to the Works – provided that the
Contract contains a completed “table of adjustment data”.
• The contracts (except for Green Book and SB) propose a
formula to be used to determine a “multiplier” which, when
applied to the estimated contract value of the work carried out
during the month, will yield the adjusted amount:
Pn = a + b Ln/Lo + c En/Eo + d Mn/Mo + …..
• The use of the suggested formula does not guarantee that
Contractor will be fully compensated or that he will not be over-
compensated.
• Much depends upon:
o the choice of cost elements to be taken into account
under “M” – diesel, cement, steel, etc.;
o the weighting of the non-adjustable portion “a” the
weighting applied to the other cost elements – “b”, “c” &
“d”;
o the source and reliability of indices;
o the timing of cost increases.
• The price adjustment provisions can be modified by the
Particular Conditions.
• Common modifications include:
o the weighting of the non-adjustable portion “a” is
increased;
o no adjustment for first year (but what happens if
Contractor makes insufficient progress?);
o no adjustment for first 50% of Works;
o no adjustment until “Pn” exceeds 1.10 (first 10%
increase is Contractor’s risk).
• The consequence of all of these modifications will be an
increase in bid prices.
• If the Contractor does not complete the whole of the Works
within the Time for Completion, the adjustment multiplier for
works executed after the Time for Completion must be capped
at its value which was applicable to the last month of the Time
for Completion.
• However, if costs come down after the Time for Completion has
expired, the Engineer is entitled to calculate and apply the
multiplier.
• What can go wrong?:
o The indices do not reflect reality or are no longer available;
o Bidders manipulate the proportions “b”, “c”, “d” etc. in hope
of making windfall
o In the absence of published indices, bidder proposes to use
“market rates” – but “base prices” are under-stated and/or
“market rates” are based on questionable evidence;
o As the formula is independent of time, Contractor might buy
high-risk items long before they are needed in order to
maximise recovery – (linked to Advance Payment
provisions and Advances for Material on Site).
• The provisions for price adjustment need to be considered
alongside the provisions for advance payments in relation to
Materials and Plant delivered to Site or on way to Site (Clause
14.5).
• Such advances are only payable for Materials and/or Plant that
are listed in the Appendix to Tender/Contract Data.
• The advance to be certified shall be equivalent to 80% of the
cost of the Plant and Materials (including delivery to Site) taking
account of the documents mentioned in the Sub-Clause and of
the contract value of the Plant and Materials.
• Should there be a restriction on premature delivery?
Case Study – Price Adjustment Formula
Extracts from Particular Conditions Sub-Clause 13.8:
The Effective Value shall be adjusted, for the currency of payment, in
accordance with the following formula
V/Vo = 0.15 + 0.15L/Lo + 0.15F/Fo + 0.12C/Co +
0.18S/So + 0.05 T/To + 0.15 M/Mo + 0.05 P/Po
The terms in the formula have the following meanings:
V = Adjusted Effective Value
V0 = Effective Value which is the value of work executed during the
statement period less:
• Work by Nominated Subcontractors;
• Materials and plant on site;
• Dayworks, variations or other items based on current prices;
• Adjustments under Clause 13.8
Index Index Description Source of Index Base Weighting
Code Value
(USD) &
Date
Non adjustable 0.15
L Local Labour Market rate/chamber commerce 2 0.15
F Local Diesel Fuel Market rate/chamber commerce 0.65 0.15
C Local Cement Market rate/chamber commerce 70 0.12
S Structural Steel Market rate/chamber commerce 480 0.18
T International Transport Market rate/chamber commerce 800 per 0.05

20ft
M Construction Market rate/chamber commerce 80 0.15
Machinery
P Specialist Personnel Market rate/chamber commerce 5000 0.05
End of Session 4
Session 5
Management of Variations
Management of Variations
1. What is a Variation?
2. Power to instruct Variations
3. Contractor’s Response
4. Evaluation of Variations
5. Value Engineering
1. What is a Variation?
• In any construction project, there will be need to change the
initial requirements as construction proceeds:
- Employer changes his mind about some requirement;
- Engineer may need to issue further information which
involves changes to the initial requirements;
- to correct a mistake in the information which has been
issued to the Contractor.
• Engineer may instruct any Variation that he considers necessary
(Sub-Clause 13.1).
• He has authority under RB & PB (subject to restrictions
specified in the Contract) to instruct the Contractor to:
- increase or decrease the quantity of any work;
- omit any work unless it is to be carried out by others;
- change the character or quality of any such work;
- change the levels, positions and/or dimensions of any
part of the Works;
- execute additional work needed to complete the Works;
- change any specified sequence or timing of construction /
execution of any part of the Works.
• Under YB, a Variation is any change to the Employer’s
Requirements or the Works, which is instructed or approved as
a variation under Sub-Clause 13. No examples are given.
• Under PB, Engineer has certain restrictions on his authority to
make determinations or issue instructions compared to the RB.
• Under PB Clause 3.1, Engineer must obtain specific approval
before:
• Agreeing or determining an Extension of Time and/or
additional cost when Unforeseen Physical Conditions are
involved (Sub-Clause 4.12).
• Instructing a Variation or approving a proposal for a
Variation except in cases of emergencies.
• Specifying the amount payable in each of the applicable
currencies (Sub-Clause 13.4).
• Additional constraints on the Engineer’s authority must be stated
in the Particular Conditions.
• If the Engineer has not obtained the Employer’s approval where
required, he is nevertheless deemed to have done so.
• Note in the RB, no further constraints can be imposed unless
the Contractor agrees. In the PB, the Employer can change the
authority by simply informing the Contractor.
3. Contractor’s Response
• The Contractor is obliged to comply with the instruction unless
he gives notice to the Engineer (with supporting particulars) that:
- he cannot readily obtain the required Goods, or
- the Variation will trigger a substantial change in the
sequence or progress of the Works.
• Under YB, Contractor can also refuse the instruction on the
basis that it will have a negative impact on the Schedule of
Guarantees.
• Nevertheless, Engineer can still confirm his instruction and
Contractor must comply.
• The principles of evaluation of the Variation under RB & PB in
descending order are:
- Variations are to be valued at the Contract’s rates and
prices;
- if the Contract has no rates & prices for the varied work,
Contract rates & prices are to be used as the basis for
developing new rates (enhanced or star rates);
- failing which, after due consultation by the Engineer,
suitable rates or prices shall be agreed on the basis of
reasonable Costs plus Profit.
(Sub-Clause 12.3)
• In the event of disagreement the Engineer shall agree or fix
such rates and prices and shall notify the Contractor and the
Employer.
• Until rates or prices are agreed or fixed, the Engineer shall
determine provisional rates to enable the Engineer’s
certification of on-account payments to the Contractor.
• How does he do this, if ADB must approve the Variation?
• If an instruction to vary the Works is necessitated by some
default or breach of Contract by the Contractor or for which he is
responsible, any additional cost so attributable shall be borne by
the Contractor.
• Under YB, no principles of evaluation are stated and the
Engineer must agree or determine the adjustment to the
Contract Price (including reasonable profit) and Schedule of
Payments.
Engineer requests Engineer values Engineer
a proposal (Cl on basis of Cl determines
13.3) 12.3 (RB & PB) adjustment to
Optional
Pending Contract Price

agreement, including
Contractor payment made reasonable profit
submits a provisionally (YB)
proposal
Contractor entitled
Engineer issues to payment even if
instruction in Engineer
writing (can be exceeded
orally in RB & PB) authority (Cl 3.1)
(Cl 13.1 & 3.3)
Contractor claims
Contractor Contractor under Cl. 20.1
acknowledges complies with unless Engineer
receipt instruction (Cl states instruction
13.1 & 3.3) is Variation.
• Under Sub-Clause 13.2, the Contractor has the right but not an
obligation to make his own proposals if he believes he knows how
to:
– accelerate completion,
– reduce the construction or operating costs of the Works,
– improve efficiency or value of the completed Works, or
– otherwise benefit the Employer.
• If the proposal is accepted by the Employer, the Engineer
approves the Variation.
• Until the Variation is approved, the Contractor must continue with
the original design.
• The Contractor may not claim his Costs for preparing his proposal
under Sub-Clause 13.2, but is remunerated by a split savings
formula if his proposal is approved.
• The split savings are based on the difference between the
“reduction in contract value”, and the “reduction (if any) in the
value to the Employer of the varied works.”
• The Contractor receives 50% of the difference (RB & PB)
• Under YB, no indication is given of how the benefits are to be
shared.
- A Variation instruction following approval of a Contractor’s value
engineering proposal, may involve changes of design.
- If so, the design work is to be done by the Contactor.
- However under RB & PB, the design is the Employer’s
responsibility.
- Therefore, the Employer and the Engineer need to carefully
consider how this shared liability for design is to function.
- is this sharing of liability the best solution?
- does the Employer take the Contractor’s design, have it
approved by the Engineer and re-issued as an instruction
i.e. does the original designer assume responsibility?
- or does the Contractor take responsibility for his part of the
design?
- If so, what unintended consequences are there with respect to the
original designer's overall responsibility?
- The Insurance provisions of the Contract will most likely require
revision in the latter case.
End of Session 5
Session 6
Subcontracting
Subcontracting
1. Limits on subcontracting
2. Liability for subcontractors
3. Domestic v Nominated subcontractors
4. Assignment
5. Nominated subcontractors
• One of ADB’s guiding principles is to encourage development of
a domestic contracting industry in the country of the borrower.
• Such encouragement can be through the application of a
“domestic preference” weighting during bid evaluation – but
actual award of the subcontracts to local companies must be
“policed” and covered by a guarantee.
• It can also be through the imposition of a “threshold” which fixes
the minimum amount which must be subcontracted locally (total
of all subcontracts).
• But the Employer does not want a “phantom” Contractor who has
subcontracted the entire project, either as a whole or as a
number of packages.
• To avoid this, he might impose a “ceiling” fixing the maximum
amount which can be subcontracted (sum of all subcontracts).
• In fixing such lower and upper limits, the drafter must consider
how to apply them:
o Do they include suppliers and service providers as well
as works subcontractors?
o For example: is a contract for legal services from a
local lawyer to be included within the calculation or
not?
o What about a contract for the supply of diesel?
o What about the customs clearance agent?
• The Employer will also have competing concerns about the
capabilities of the subcontractors (even though, in theory, the
Contractor remains liable):
o The Contractor could achieve a 30% threshold for local
subcontracts by awarding 100 subcontracts for 0.3%
each – but can such small subcontractors perform
properly? Should a minimum size of subcontract be
imposed?
o Although a major subcontractor might be approved, he
might award all the work to 2nd tier subcontractors who
are not approved.
2. Liability for subcontractors
• In theory, the Contractor remains liable for the acts or failures of
all subcontractors and suppliers.
• However, in the case of Nominated Subcontractors, the topic of
liability might be less clear.
3. Domestic v Nominated subcontractors
• A subcontractor chosen by the Contractor is often referred to as
a “domestic” subcontractor.
• It is clear under Clause 4.4 that Contractor is fully liable for their
performance even if the Engineer consents to their employment.
• Contractor must obtain the Engineer’s consent before appointing
a Subcontractor, unless the Subcontractor is to supply materials
only or is named in the Contract.
• He must give the Engineer at least 28 days notice of the
intended date of the commencement of Subcontractor’s work.
• Should this requirement for consent be extended to 2nd tier or
even 3rd tier subcontractors?
4. Assignment
• Under Clause 4.5, if a Subcontractor’s obligations extend beyond
the expiry date of the relevant Defects Notification Period and the
Engineer, prior to this date, instructs the Contractor to assign the
benefit of such obligations to the Employer, then the Contractor
must do so.
• Unless otherwise stated in the assignment, the Contractor will
not be liable to the Employer for the work carried out by the
Subcontractor after the assignment.
5. Nominated Subcontracts
• A “nominated Subcontractor” in RB & PB is one
o who is stated in the Contract as being a nominated
Subcontractor, or
o whom the Engineer, under Clause 13 [Variations and
Adjustments], instructs the Contractor to employ as
a Subcontractor subject to Sub-Clause 5.2
• Under YB, it is one:
o who the Contractor is instructed by the Engineer to
employ.
• A “nominated Subcontractor” can be a supplier of Goods and/or
Materials.
• In ADB’s SBD the definition of a Nominated Subcontractor is
different:
o “A nominated subcontractor is one which either has been: (i)
included by the bidder in its pre-qualification application or
bid because it brings specific and critical experience and
know-how that are accounted for in the evaluation of the
bidder’s pre-qualification application or the bid; or (ii)
appointed by the Employer.”
• Under FIDIC, a subcontractor named in the bid is not a
“nominated Subcontractor” but a “named Subcontractor”.
• The difference is significant because nominated Subcontractors
have more protection under the Contract than named or other
domestic Subcontractors.
• There are three potential advantages to the Employer or
Engineer of using a nominated Subcontractor:
• involvement in the choice of a specialist subcontractor;
• involvement in the choice of Plant;
• the avoidance of participation in the co-ordination of the
interface between the nominated Subcontractor’s and the
Contractor’s Works.
• Disadvantages in using nominated Subcontractors include:
• lack of commitment from the Contractor to manage a
Subcontractor that he feels was imposed upon him;
• nominated Subcontractors are sometimes chosen
because of close links to the Employer’s organisation
rather than because of their ability;
• delays often occur in the appointment of the nominated
Subcontractor, thereby delaying completion of the Works.
• If there are to be nominated Subcontractors, the Employer
should make this clear in the tender documents so that the
Contractor can take account of this in his bid.
• The Employer and/or Engineer cannot unilaterally impose a
Subcontractor on the Contractor as RB/PB Clause 5.2 provides
that a Contractor can raise a reasonable objection to any
proposed appointment .
• An objection is deemed reasonable if it arises from (among
other things):
• there are reasons to believe the nominated Subcontractor
lacks competence or sufficient finances or resources;
• the nominated Subcontractor does not accept to enter into
a subcontract under which the nominated Subcontractor
shall
– have similar obligations and liabilities as the Contractor;
– indemnify the Contractor against all obligations and
liabilities arising from any failure by the Subcontractor to
perform;
– be paid only if and when the Contractor has received
payment from the Employer for sums due under the
Subcontract.
• In respect of this latter point, the Contractor shall pay the
nominated Subcontractor amounts shown on the
Subcontractor’s invoices approved by the Contractor and which
are certified by the Engineer as being due.
End of Session 6
Session 7
Management of Claims
Management of Claims
1. Contractor’s claims
2. Employer’s claims
3. Processing of Claims
• FIDIC contracts attempt to deal with all the kinds of risk that are
commonly encountered on a construction project.
• Whenever possible, these risks are covered by provisions
concerning insurance.
• When the risks are not suitable for insurance coverage, liability
for these risks is allocated to one of the Parties (e.g. the types of
risk event listed under “Employer’s Risks”, liability for late issue
of design drawings, etc.).
• In many cases, should one of these risk events occur, the
Contractor is entitled to an extension of the Time for Completion
(EoT) and/or reimbursement of his additional Costs and in some
cases to payment of a profit.
Sub-Clause Time Costs Profit
1.9 Delayed Drawings or instructions Yes Yes Yes

2.1 Right of Access to the Site Yes Yes Yes
4.7 Setting Out Yes Yes Yes
4.12 Unforeseeable Physical Yes Yes No

Conditions
4.24 Fossils Yes Yes No
7.4 Testing (Additional tests/Delay) Possibly Possibly Possibly
8.4 Extension of Time for Completion Yes No No

8.5 Delay caused by authorities Yes Silent Silent
Sub-Clause Time Costs Profit
8.9 Consequences of Suspension Yes Yes No
10.2 Taking Over Parts of the Works No Yes Yes
10.3 Tests on Completion (Delay) Yes Yes Yes

11.8 Contractor to search No Possibly Possibly
12.4 Omissions No Yes No
13.7 Adjustments for Changes in Yes Yes No
Legislation
16.1 Contractor’s Entitlement to Yes Yes Yes
Suspend Work
17.4 Consequences of Employer’s Risks Yes Yes Some
19.4 Consequences of Forces Majeure Yes Some- No
times
- The procedure for a claim by the Contractor is set out principally
under Clause 20.
- The Contractor is required to give a notice of his claim to the
Engineer (copied to Employer) describing the event or
circumstances giving rise to the claim.
- The Contractor has only 28 days to do this after he became
aware or should have become aware of the event or
circumstances:
“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.”
- The Contractor must submit his fully detailed claim with
supporting particulars within 42 days after he became aware or
should have become aware of the event or circumstance – not 42
days from when he submitted the notice.
- If the event or circumstance is continuing, this first claim is
considered as “Interim” and the Contractor must submit updates
every month until the effects of the event or circumstance end.
Thereafter, he must submit his final claim within 28 days after the
effects have ended.
- These periods of 42 days (for the initial claim) and 28 days (for
the final claim) can be relaxed upon request by the Contractor
if he has reasonable grounds for so requesting.
Contemporary records
- “The Contractor shall keep such contemporary records as may be
necessary to substantiate any claim, either on the Site or at
another location acceptable to the Engineer. Without admitting the
Employer’s liability, the Engineer may, after receiving any notice
under this Sub-Clause, monitor the record-keeping and/or instruct
the Contractor to keep further contemporary records, and shall (if
instructed) submit copies to the Engineer”
Contemporary records
- The Contractor is ultimately responsible for keeping contemporary
records if he wants to be able to prove any claims for costs or
delays.
- The Engineer should however not hesitate to be proactive and
instruct and inspect records as he sees fit.
- If the Contractor is keeping records, and these are made available
to the Engineer, the Engineer may have difficulty complaining
about the accuracy of these records later if he has remained
silent.
2. Employer’s Claims
Sub-Clause 2.5
- “If the Employer considers himself to be entitled to any payment
under any Clause of these Conditions or otherwise in connection
with the Contract, and/or any extension of the Defects Notification
Period, the Employer or the Engineer shall give notice and
particulars to the Contractor.”
- Sub-Clause 2.5 lists two exceptions to the notice requirement:

- Sub-Clause 4.19 [Utilities],
- Sub-Clause 4.20 [Employer’s Equipment and Free-Issue
Materials]
Notice Periods
• RB & YB:
- “The Notice shall be given as soon as practicable after the
Employer became aware of the event or circumstances giving rise
to the claim.”
• PB:
- “The Notice shall be given as soon as practicable and no longer
than 28 days after the Employer became aware, or should have
become aware, of the event or circumstances giving rise to the
claim.”
Content of the Notice
“The particulars shall specify the Clause or other basis of the
claim, and shall include substantiation of the amount and/or
extension to which the Employer considers himself to be
entitled in connection with the Contract.”
- Do the particulars and the notice have to be given together?
- The language could be interpreted that they are to be given at the
same time, and some commentators have written this.
- Where the PB is used, the 28 day notification period could make it
onerous for the Employer to produce particulars at the same time
as the notice.
- However, there is no obligation to give particulars at the same
time as the notice.
- According to the FIDIC Contracts Guide 2000:
“Particulars may be given at any time, but excessive delay
in their submission may be construed as an indication that
the Employer will not be proceeding with the notified claim.”
- The following should be considered with regard to the
Contractor’s response:
• The Contractor is to list all notices issued under Sub-Clause
2.5 in his progress reports (Sub-Clause 4.21(f)).
• The Contractor should respond to any factual errors he finds
in the notice.
• The absence of any rebuttal should not be taken as any
indication of agreement.
Sub-Clause Time Costs Cl.2.5
Notice
4.19 Electricity, Water & Gas No Sometimes No
4.20 Use of Employer’s Equipment No Sometimes No
7.5 Rejection & retesting No Yes Yes
7.6 Remedial Work by others No Yes Yes
8.6 Rate of Progress (Supervision of No Yes Yes

catch-up)
8.7 Delay damages No Yes Yes
9.4 Failure to pass tests on completion No Yes Yes

11.3 Extension of DNP Yes No Yes
Sub-Clause Time Costs Cl.2.5
Notice
11.4 Failure to remedy defects No Yes Yes
12.3 (Yellow Book) Repeated tests No Yes Yes
after completion
12.4 (Yellow Book) Failure to pass No Yes Yes
tests after completion
13.7 Changes in Legislation No Yes Yes
15.4 Payment after termination No Yes Yes
17.1 Indemnities No Yes Yes
18.1 Failure to insure No Yes Yes

18.2 Cancelled insurance No Yes Yes
– Generally, claims by the Employer fall within 4 categories:
• Delay damages
• Costs arising from termination of the Contract
• Costs arising from defective work
• Prolongation of the Defects Notification Period
Delay damages
– The Employer’s delay damages are covered by Sub-Clause 8.7,
and compensate the Employer if the Contractor fails to comply
with the Time for Completion.
Delay damages
– The amount should be clearly calculable, without ambiguity. The
Contractor may be able to escape delay damages provisions if an
ambiguous formula has been used, or if the date at which the
delay damages apply is not clear.
Delay damages
– The percentage to be applied daily for delay, and the maximum
delay damages, expressed as a percentage of the final Contract
Price, are to be stated in the Contract Data/Appendix to Tender.
Delay damages
– Note, FIDIC does not specifically address delay damages for
intermediate milestones – except with respect to Sectional
Completion (Sub-Clause 10.2).
– If delay damages are to be applied for an intermediate date, the
Engineer/Employer will need to define these in the Particular
Conditions, and set the amount of the delay damages.
Delay damages
“… the Contractor shall subject to [notice under] Sub-
Clause 2.5 [Employer’s Claims] pay delay damages to the
Employer for this default …”
“These damages are the only damages due from the
Contractor for such default, other than in the event of
termination under Sub-Clause 15.2.”
– As discussed previously the Employer must therefore have an
Engineer’s determination under Sub-Clause 3.5 in his favour
before being allowed to deduct delay damages.
Delay damages
– Note the following cautionary words in the FIDIC Contracts Guide
2000:
“Before the Employer deducts delay damages from moneys
due to the Contractor, he could consider whether the delay
is a reflection of cash flow shortfall from interim payments.
If so, further diminution of cash flow (by withholding delay
damages) could exacerbate the situation.”
– If the Employer does not immediately exercise his right to claim
delay damages, he should write to the Contractor reserving his
right to do so at a later date.
Defects in Works and/or design
There are three periods when the question of defects can arise:
– During construction, in which case the relevant provisions with
regard to financial claims are found under Sub-Clause 7.6
[Remedial Works].
– During the Tests on Completion, in which case the relevant
provisions with regard to financial claims are found under Sub-
Clause 9.4 [Failure to pass Tests on Completion].
– During the Defects Notification Period, in which case the relevant
provisions with regard to financial claims are found under Sub-
Clause 11.4 [Failure to Remedy Defects].
In all three case, the situation is similar:
a) The Engineer instructs the Contractor to remedy the situation
and fixes a reasonable time to do so;
b) If the Contractor does not remedy the situation within the
stated time, Employer is allowed to employ another contractor
to execute the remedial work at the defaulting Contractor’s
expense;
c) If the defect cannot be remedied, the work can be accepted
against a reduction in the Contract Price to be agreed or
determined by the Engineer;
d) If the defect deprives the Employer of substantially the whole
benefit of the Works, or any major part, then the Employer
may terminate the Contract and recover damages directly
including:
– all sums paid for the Works
– plus financing costs
– plus the Costs of dismantling, clearing the Site and
returning Plant and Materials to the Contractor.
– The foregoing is without prejudice to any other rights under the
Contract or otherwise.
3. Processing of claims
- Under Sub-Clause 20.1, once the Engineer has received a claim
from the Contractor, he is allowed up to 42 days, or other such
period as agreed between the Engineer and Contractor, to
respond with approval or disapproval and detailed comments.
- The Engineer may also request any necessary further particulars,
but must nevertheless give his response on the principles of the
claim, within the said period.
- If the Engineer rejects the claim, Sub-Clause 20.1 requires him to
provide detailed comments in support of the disapproval.
- This reflects the philosophy behind Sub-Clause 1.3 which
requires that “Approvals, certificates, consents and
determinations shall not be unreasonably withheld or delayed.”
- These comments should include a reasoned argument why the
Contractor is considered to have no contractual entitlement to
pursue the claim, and/or why any of the supporting particulars are
insufficient.
- The 7th paragraph of PB Clause 20.1 states:
“Within the above defined period of 42 days, the Engineer shall
proceed in accordance with Sub-Clause 3.5 [Determinations] to
agree or determine (i) the extension (if any) of the Time for
Completion (before or after its expiry) …. and/or (ii) the additional
payment (if any) …. “
- If the Engineer fails to respond to the claim within the 42 days
period, either Party may consider that it is rejected and may refer
the matter to the Dispute Board.
- There is no such time limit for issuing a determination with respect
to Employer’s claims.
Sequence for Contractor’s Claims
Contractor Contractor Contractor Engineer
became sends sends fully- responds giving
aware or Notice detailed at least his
should have claim opinion on
become principle and
aware Issues his
<28d
determination
<42d <42d under Clause
3.5
Short
event
Sequence for Contractor’s Claims
Contractor Contractor Contractor Engineer
became sends sends fully- responds giving
aware or Notice detailed at least his
should have claim opinion on
become (Interim) principle and
aware Issues his
<28d
determination
<42d <42d
under Clause
3.5
<30d <42d Engineer

Continuing responds
Contractor
event submits <28d after
updated claim effects <42d
Contractor Engineer
submits responds
final claim
Engineer’s Determination, Sub-Clause 3.5
- The Engineer’s first job when acting under Sub-Clause 3.5 is to
attempt to achieve the agreement of both Parties through
consultations.
- Failing an agreement within a reasonable time, the Engineer shall
make “a fair determination in accordance with the Contract, taking
due regard of all relevant circumstances.”
- The Engineer’s determination is to be accompanied with
supporting particulars.
Engineer’s Determination, Sub-Clause 3.5
- Note that the Engineer’s ability to make a fair determination is
seriously restricted by the express requirement under Sub-Clause
3.1 to obtain the specific approval of the Employer before
agreeing an EoT and/or additional cost.
- Following the determination:
“Each Party shall give effect to each agreement or determination
unless and until revised by the next higher step in the dispute
resolution procedure.”
- This almost always means a referral to the DAB/DB.
End of Session 7
Session 8
Dispute Resolution
Dispute Resolution
1. Dispute Boards
2. ADB’s role
1. Dispute Boards
Clause 20 of RB/PB:
- Allows Parties to refer disputes to the decision of either one or
three impartial individual(s) – the “Dispute Adjudication
Board”(DAB) or “Dispute Board” (DB).
- No formal notice of dispute is required to make a formal
referral.
- The DB is then required to give notice of its decision, including
reasons within 84 days.
1. Dispute Boards
- The DB is to be appointed by the date stated in the Appendix
to Tender/Contract Data: normally 28 days after
Commencement – but provision is not rendered invalid by a
failure to do so within the stated period.
- The DB conducts regular Site Visits and must be available on
28 days’ notice.
- The appointment of the DB (including each member) expires
with the transmission of the Contractor’s Discharge
immediately prior to the return of the Performance Security
(following rectification of all defects notified during the DNP).
- The DB must render its decision within 84 days of receipt of a
referral.
1. Dispute Boards
Setting Up the DB:
• 1 person or 3 persons ?
− 3 persons unless stated otherwise in the Contract or agreed.
• If a 3 person DB:
− each Party proposes to the other Party the name of a
person to act as a DB Member and if the other Party accepts,
the two members so appointed recommend to the Parties the
name of a third person to act as Chairman.
• If a 1 person DB:
− one Party proposes to the other Party the name of a
candidate
1. Dispute Boards
Setting Up the DB:
• If the Parties fail to agree:
− either Party may apply to the appointing authority named in
the Appendix to Tender/Contract Data;
− appointment is final & conclusive;
− appointing authority must be paid before making appointment.
1. Dispute Boards
Retainer Fee (now often 1 day per month) to cover:
− being available on 28 days’ notice;
− becoming and remaining conversant with all project
developments (reading Monthly Reports, correspondence,
etc.);
− all office and overhead expenses including secretarial
services, photocopying and office supplies.
• Applicable at full rate up to the issue of the Taking Over
Certificate, at 50% of the full rate from Taking Over until the issue
of the Contractor’s Discharge after the DNP.
• Retainer and expected travel costs are invoiced quarterly in
advance.
1. Dispute Boards
• Daily Fee covering:
− travel up to two days in each direction,
− each day spent reading submissions, attending hearings,
preparing decisions, or making Site visits.
• Reasonable Expenses
• Fixed for 24 months
• If Parties are unable to agree fees with DB members, fees will be
fixed by the Appointing Authority named in the Contract Data.
1. Dispute Boards
The Dispute Board Agreement
• The Parties enter into a contract with each of the DB members
(TPA) It is possible to have one contract for all members.
• The TPA comprises the General Conditions of Dispute Board
Agreement.
• The TPA includes details of any amendments to the General
Conditions of Dispute Board Agreement.
• It details the terms of payment and the undertaking of the
Employer and the Contractor to be jointly and severally liable to
ensure that the DB is paid.
1. Dispute Boards
Site Visits:
- DB must visit the site at intervals of not more than 140 days,
unless otherwise agreed by the Parties;
- Interval between visits is not normally less than 70 days unless
agreed otherwise by the Parties or necessary for a hearing;
- Timing and agenda for each site visit to be agreed jointly by the
DB and the Parties or in the absence of agreement, to be decided
by the DB.
- Site visits to be attended by the Employer, the Contractor and the
Engineer.
- Visits are to be coordinated by Employer – provides offices &
secretarial assistance.
1. Dispute Boards
- Purpose of visit is to allow DB to become acquainted with
progress and with actual or potential problems or claims and to
try to prevent such problems and claims becoming disputes.
- The DB to make special effort during regular visits to the site to
promote open discussion between the Employer, the Contractor
and the Engineer concerning problems causing delays to
progress of the Works and disputes that may arise.
− The DB should produce its site visit report before leaving the Site.
1. Dispute Boards
Opinions:
- The DB must hold itself available during visits and otherwise to
give advisory opinions if asked by both Parties to do so.
- Contractor and Employer should avail themselves of this role, and
if not DB should offer.
1. Dispute Boards
− Decision process begins with a “referral” from one Party.
− A referral should be a reasoned statement of case submitted by
the claimant (Contractor or Employer) stating that it is given under
Sub-Clause 20.4.
− It must be submitted to each DB member, the other Party and the
Engineer.
− It is deemed received by the DB at the date of receipt by the
Chairman.
− The “clock starts to tick” from this latter date.
− There is no express time limit for making a referral – except that it
must be made before the expiry of the DB jurisdiction. This can
lead to an “ambush” situation.
1. Dispute Boards
Under Article 8 of the Procedural Rules, DB has power to:
– Establish the procedure to be applied in deciding a dispute.
– Decide upon the DB's jurisdiction, and the scope of the dispute.
– Conduct a hearing as it thinks fit.
– Take initiative to ascertain the facts and matters required for the
decision.
– Make use of its own specialist knowledge.
– Decide upon provisional relief such as interim or conservatory
measures.
– Open up, review and revise certificates, decisions, or
determinations.
1. Dispute Boards
The Hearing:
− The DB may decide to limit the persons attending the hearing or
require that oral presentations be made by persons familiar with
or resident at the site:
− Presence of lawyers?
− Presence of third party experts?
− The DB must act fairly and impartially as between the Parties.
− The DB must allow each Party a reasonable opportunity to
present his case and to respond to the case against him, subject
to the time allowed.
− DB can proceed “ex parte” if it is satisfied that the absent Party
received notice of the hearing.
− FIDIC – INTERNATIONAL FEDERATION OF CONSULTING ENGINEERS – WWW.FIDIC.ORG – [email protected] – COPYRIGHT 2019 198
1. Dispute Boards
- The decision of the DB must be reasoned.
- The decision of the DB to the extent possible should be
unanimous – but majority decisions are permitted.
1. Dispute Boards
– A decision is immediately binding on the Employer and the
Contractor.
– Unless and until the decision is overturned in arbitration the
Employer and the Contractor must comply.
– A Party who disagrees with a decision must issue a Notice of
Dissatisfaction within 28 days after receipt of the decision –
but must still comply.
– A Notice of Dissatisfaction can also be served within 28 days
after the expiry of the period during which the DB was to issue
its decision if no decision was issued during the said period.
1. Dispute Boards
- The Notice of Dissatisfaction must state that it is given under Sub-
Clause 20.4, must set out the matter in dispute and the reason(s)
for dissatisfaction and state the writer’s intention to commence
arbitration.
- If no Notice of Dissatisfaction is served within the period of 28
days following receipt of the DAB decision, the decision becomes
final and binding on the Parties.
1. Dispute Boards
- If a Notice of Dissatisfaction is served on time, then it is followed
by a 56 days “cooling-off period”.
- During this period, the Parties must attempt to reach an amicable
settlement.
- The importance of this period and the opportunity for amicable
settlement should not be under-estimated.
- If, following the 56 days period, there has been no amicable
settlement, either Party may commence arbitration.
1. Dispute Boards
- Regardless of whether or not a Notice of Dissatisfaction has
been served, the Parties are to comply with the decision.
- If a Party fails to comply, the other Party can refer the failure to
arbitration.
1. Dispute Boards
Source: Grutters & Smith, DRBF International Conference Tokyo 2018;
2. ADB’s Role
• What is ADB’s role in dispute resolution?
• It is easier to state what is not ADB’s role.
• It is not ADB’s role to try to resolve the dispute either as
mediator, negotiator or Dispute Board Member.
• It is not ADB’s role to choose a mediator or Dispute
Board Member.
• It is not ADB’s role to advise a Party to accept a DB
decision.
• It is not ADB’s role to advise whether to send a notice of
dissatisfaction or to start arbitration.
2. ADB’s Role
• ADB can merely monitor that the agreed processes and
procedures are correctly followed and encourage the
Parties to do so.
• For example:
o A frequently encountered problem is that the Executing
Agency refuses to propose someone to be a DB
Member or refuses to participate in DB proceedings. It
might be helpful for ADB to explain the advantages of
using the system and the risks of not participating (a
“default” decision which can be enforced by quick
arbitration).
2. ADB’s Role
o The Parties often fail to attempt amicable settlement
following receipt of the decision – ADB might
encourage them to do so, but without commenting on
the decision.
o At a much earlier stage, even before the dispute
crystallises, consultations are supposed to take place
between the Parties in order to try to agree before the
Engineer issues his determination. Often this does not
happen. ADB can encourage the Parties to take this
opportunity.
2. ADB’s Role
o If the Employer indicates that arbitration is being
considered, ADB might ask whether the associated
costs and management time have been estimated.
• Remember:
It is not ADB’s project – it is not ADB’s dispute!
End of Session 8
Session 9
Case Studies & Discussion

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Advanced FIDIC Training

Dushanbe, 28-30 August 2019

Partner, PS Consulting, Paris

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Introduction to FIDIC Rainbow

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• The main areas of difference between the Red Book

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Green Red/Pink Yellow Silver

Green Red/Pink Yellow Gold Silver

Cost Re-Measurement Lump Sum

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Final Contract Price

Accepted Contract Amount

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Use Green Book

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Use Red/Pink Book

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Use Yellow Book

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Use Gold Book

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Use Silver Book

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Roles of Employer, Contractor & Engineer

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