FIDIC vs NEC and Others

Presentation to the Danish Society for Construction and Consulting Law

Mark Roe

29 September 2011

Topics covered

• The latest developments on the FIDIC form of contract

• Partnering and Framework contracts using the NEC form

• PPP opportunities globally

FIDIC Latest Developments

• Latest Contracts

– Gold Book

– Sub Contract Form

– MDB Form

The Gold Book

• FIDIC published a Guide to the Gold Book this summer• Contrary to expectation, the Gold Book was not extended

to brownfield sites• The Gold Book therefore still applies only to greenfield

sites• FIDIC has stated its intention to publish a separate

document for the brownfield scenario

The Gold Book - Notices

• Amendment to Clause 20.1– A dilution of the notice provisions– Allows the contractor to refer a notice to the DAB if it has given

notice out of time

• “if the Contractor considers there are circumstances which justify the late submission, he may submit the details to the DAB for a ruling. If the DAB considers that, in all the circumstances, it is fair and reasonable that the late submission be accepted, the DAB shall have the authority to overrule the relevant 28-day limit and, if it so decides, it shall advise the Parties accordingly.” (extract from Clause 20.1(a))

New Yellow Book

• FIDIC are due to publish a new version of the Yellow Book sometime in 2012

• So far there are no hints about what form the amendments might take; however– It is likely that the Yellow Book 2012 will include the

recent change made to the Gold Book; namely the dilution of the notice provisions in Clause 20.1

– It might seek to address criticisms that certain provisions do not work in a civil law environment

The Sub Contract Form - 2009

• A new form with amendments is to be published in the near future (FIDIC say 2 October 2011 at FIDIC Davos conference)

• Overall Philosophy is a pass through of risk from Contractor to Sub Contractor

– Cl 1.1. Definitions in main Contract adopted in Sub Contract

– Cl 1.3. Where Main Contract Provisions apply to Sub Contract , Sub Contract Clauses are to be interpreted as if amended appropriately

– Cl 1.8 Sub Contract adopts Law and Language of Main Contract


• Cl 2.1 Sub Contractor deemed to have knowledge of Main Contract

• Cl 2.2 Sub Contractor assumes all liabilities of Main Contractor, subject to exceptions for matters such as

– Security

– Access

– Services


• Pass Through Continued

No provision that Sub Contractor will not place Main Contractor in breach in performing its Sub Contract Works


• Clause 2.4 Contractor will take all reasonable steps to secure for Sub Contractor like

– Benefits – Rights– Entitlements

That Contractor has under Main Contract

• But, Pay when Paid Provisions of Cl 14.6 limit its effect


Co ordination and Co operation

Cl. 3.5 Contractor to co ordinate other Sub Contractor

Cl. 6.1Sub contractor has duty to co operate and allow access to others

Cl. 8.4 If Sub Contractor is late Contractor can order acceleration at Sub Contractor’s Cost.


• Termination– Cl 15.1 Optional Termination if Main Contract

terminated– Sub Contractor entitled to:

• Contract Value • Termination Costs• Lost Profit

– Subcontractor entitled to immediate payment if Contractor terminated for cause

• unless Sub Contractor caused termination.


• If Main Contract terminated

– for Force Majeure, or– Continued Suspension

• Pay when Paid

• Cl 15.6 Contractor may also terminate on any of Main Contract Grounds


• Clause 20 - Claims Regime

– Cl. 20.2 - 21 day notice of claim is a precondition

– Clause 20.1 Sub Contractor must give notice to Contractor and keep records where Contractor required to do so under Main Contract.

– Cl. 20.3 Failure to comply with cl.20.1 entitles Contractor to set off from sums otherwise due to the Sub Contractor.


• Claims Regime Contd

– Cl. 20.4 If Sub Contractor gives notice of dispute Main Contractor may suspend reference to DAB for 112 days

– Main Contractor may refer related disputes to Main Contract DAB.

– Sub Contract Arbitration not linked to Main Contract

New MDB Form

• Very Similar to First Edition so a very brief reminder of the differences to the Red Book

– Cl. 2.4Funding Information– Cl 6.4 &4.4 Local Labour and Sub Contractors – Cl 6.7 Aids– Owner risk for riot and insurrection limited to

Jurisdiction of the Works– Cl 17.6 Employer entitled to indemnity for damage to

property unless Contractor can prove Employer fault

What FIDIC Has not done

• No Partnering Form

• No Target Cost Contract

• New Engineering Contract is becoming a serious Competitor.

Partnering and framework contracts using the NEC form

• Partnering as part of the ethos of the NEC generally

• Partnering as an optional sub-clause

• NEC framework contracts

NEC Overview

UNDERLYING PRINCIPLES • A clear division of functions and responsibility helps

accountability and motivates people to play their part• Foresight applied collaboratively mitigates problems

and risks

FLEXIBILITYSTIMULUS TO GOOD MANAGEMENT

CLARITY

Stimulus to good management – a “Partnering” approach

• Modern approach

• Mutual trust and co-operation

• The role of the Project Manager

• Notices and communications

• Compensation events

NEC’s modern approach

• Traditional forms of contract:

– discourage communication and can lead to claims

– create uncertainty re the final cost until the Final Account process begins

– no early resolution of claims – payments are often on an interim basis

– cynicism and suspicion surrounding notices and records

• NEC approach is very different:

– encourages early communication

– entitlements based on forecasts

– no final account process in NEC

• But this requires a very different approach and mindset

Core clause 1

“10.1 The Employer, the Contractor, the Project Manager and the Supervisor shall act as stated in this contract in a spirit of mutual trust and co-operation”

• What does this mean?

• How does it work in practice?

The Project Manager

• The role of the PM– Pro-active– Involved in early warnings, risk reduction,

compensation events, ambiguities, subcontractors, accepting programme, programme revisions

• Costain v Bechtel (2005)“When the project manager comes to exercise his discretion... It would be a most unusual basis for any building contract to postulate that every doubt shall be resolved in favour of the employer and every discretion shall be exercised against the contractor.

…Upon examining these provisions, I am unable to find anything which militates against the existence of a duty upon the project manager to act impartially in matters of assessment and certification.”

Structure - flexibility

• Modular– Nine Core Clauses– Six main options (pricing)– Two dispute resolution secondary options– Sixteen secondary options

• Total design flexibility

• Separate contracts for consultancy services (PSC), term maintenance (TSC), framework agreement, sub-contracting

Main Option(A)

SecondaryOption

(X1)

SecondaryOption

(X2)

SecondaryOption

(X3)

SecondaryOption(X15)

SecondaryOption(X18)

SecondaryOption

(Y(UK)2)

Contract Data Parts 1 & 2

Main Option(B)

Main Option(C)

Main Option(D)

Main Option(E)

SecondaryOption

(Z)

Core Clauses

Must select one

main option

All secondary options are

optional

Essential information

Main Option(F)

Dispute Resolution(W1)

Dispute Resolution(W2)

Must chose 1 Dispute Option

Structure – modular form

Structure – the Core Clauses

1 General

2 The Contractor’s Main Responsibilities

3 Time

4 Testing and Defects

5 Payment

6 Compensation Events

7 Title

8 Risks and Insurance

9 Termination

Secondary Option Clauses

Bonds and Guarantees

Retentions Inflation and Currencies

Construction ActIncentives –KPI, DLAD,

Bonus, PLAD

Design Responsibility

Sectional Completion

Changes in Law

Partnering

Third Party Rights Act

Limitations of Liability

Disputes Additional conditions

Secondary Option Clauses

• X1 – price adjustment for inflation

• X2 – changes in law• X4 – PCG • X5 – sectional completion• X6 – bonus for early

completion• X7- delay damages

(LADs)• X12 - partnering

• X13 – performance bond• X14 – advance payment• X15 – design liability• X16 – retention• X17 – low performance

damages• X18 – limitation of liability• X20 – KPIs • Y(UK)2&3 – legislation• Z – additional conditions

Option Clause X12 - Partnering

• Option X12 puts the NEC partnering option into a contract

• It is used for partnering between more than two parties working on the same project or programme of projects

• Enables the composition of the partnering team to be changed from time to time as projects evolve

• Brief set of clauses (4 clauses)• Includes agreements for joint pursuit of objectives, &

working towards key performance indicators

Framework contract

• Introduced in 2005 when the NEC3 contract was launched

• Can be used in conjunction with any of the contracts from the NEC suite

• Designed to allow the Employer to invite tenders from suppliers to carry out work on an ‘as instructed’ basis over a set term.

• Normally, the Employer will appoint a number of framework suppliers to carry out work within the defined scope.

Framework Contract

• The Employer provides data:– the framework information – Scope – Selection procedure – Quotation procedure

• The Employer selects a supplier for a ‘work package’ under the framework contract

• The supplier submits a quotation• If the quotation is accepted the Employer issues a

package order

NEC in general - points to bear in mind

• NEC3 is in many ways more ‘contractor friendly’ than other forms– As the main and subcontract clauses are the same, you need to

amend the standard subcontract form if you are subcontracting on NEC3

• Emphasis on project management, and successful project outcome, e.g. early warning, programming, communications– You must watch Cl. 13 when giving notices

• Time bar provisions in the Comp. Event process– Is it practicable to comply with the CE process in reality?– Assessment is based on forecasts which are not revisited if

wrong.

NEC in general - points to bear in mind

• Complete the contract properly!– Watch the Works Information. NB: the Contract Data.– Take care with the secondary option clauses

• main and subcontract choices do not need to be the same

• The ‘generosity’ (to the Contractor) of the CE regime– Gear your internal processes so that you take advantage of the

‘deeming’ provisions in 61.4, 62.6 and 64.4 – and watch subcontractors who will try to do the same

• Programming obligations - onerous!• Read the contract carefully. Its different! Do not make

assumptions about what it says! It wording is not always clear and is not tested in the Courts.

Accessing global PPP opportunities to build business

Why does a country need infrastructure?A sign of economic growthA sign of ability to compete A sign of ‘development’Demands of population increaseDemands of increasing urbanisation

Opportunities

• Global expenditure on infrastructure:Currently US$1 trillion = 2% global GDP per annumAnticipated increase by 2030 to US$41 trillion


Opportunities (cont’d)

• What types of projects are/will be available?Major developments

• E.g. Bahrain Pilot Social Housing PPP – scheme to build 5,000 housing units

Maintenance and improvement• E.g. Belmarsh Prison PPP – new correctional facility at

existing prison in LondonReplacement

• E.g. Hounslow Highways PPP – repair and replacement of roads and pavements in west London


An Example of the Current Situation - Western Europe • In first half of 2010,138 projects reached financial close

Spain had 46 projects, total value of US$9.87 billion– leading sectors for value: Transport (US$3.5 billion), Oil &

Gas (US$3.1 billion) France had 18 projects, total value of US$7.5 billion

– Includes Exeltium Power Purchase Financing agreement Portugal had 5 projects, total value of US$5.06 billion

– Includes High Speed Rail (value: US$2.3 billion) UK had 25 projects, total value of US$3.35 billion

– Leading sector for number of projects: Social Infrastructure (22)


The Future:

• Ongoing pipeline of European projects

PLUS

• Impact of emerging markets? Population increase

Demands for higher living standards

Need to replace/maintain existing infrastructure

Lack of budgetary constraints that will affect developed countries

= opportunities for construction sector!

PPP: the basics – important considerations when starting out in PPP

Public Procurement• Short term contract• Funded by public sector

• Risk shared between public and private sectors

• Delivery of infrastructure asset = end of contract

• Payment – by public sector for duration of construction period

PPP• Long term contract (20+years)• Funded wholly or largely by

private sector• Risk allocated to party ‘best

suited to manage the risk’• Delivery of infrastructure asset is

usually integrated with ongoing maintenance/operating services

• Payment – by public sector when asset is delivered and operational (‘unitary charge’)

Conventional Public Procurement vs PPP


Conventional Procurement vs PPP

PROJECTCO “SPV”

PROCURING

AUTHORITY

PROCURING

AUTHORITY

CONSTRUCTION CONTRACTOR



Procedure:

• Procuring Authority runs pre-contract Competition - Competitive dialogue / Negotiated Procedure

↓

• Preferred Bidder selected – Project Company contracts with Procuring Authority

↓

• Project Company contracts with Construction Contractor

↓

• Financial Close – funding secured by Project Company - Construction Period begins

PROCURING AUTHORITY

HOLDCO BANK

OPERATING MAINTENANCE

PROJECTCO “SPV”


PPP Project Structure


Construction Agreement

Operations Agreement

Maintenance Agreement

Subscription Agreement

Project/Concession Agreement

Facility and Security

Agreements


• Differences between non-PPP and PPP Construction Agreement

– PPP Construction Agreement• Will seek to “step down” (or pass-through) Project Company’s

construction related obligations to Contractor

• Therefore will often not be in the form of a FIDIC or NEC contract but will have bespoke clauses

• Will contain new provisions which are Project Agreement (PA) driven:

– Termination (with compensation) if PA terminates

– Procuring Authority’s independent certifier/engineer likely to have influence

– Project equivalent relief (time/cost)

Lessons learned from recent PPP projects – international best practice

Country Analysis: Country Risk Perception

• Consider: domestic legal system, financial stability of the country, level of government support offered, query if awards are made at national or state level

Government flexibility and willingness• Consider: government’s willingness to see that the project is

completed – will it recognise that events may not run according to plan and that some compromise may be needed between the parties?

Lessons learned from recent PPP projects – international best practice

Project Selection:

• ‘Pipeline of projects’ – to encourage investment by private sector

• Clear and transparent procurement process – candidates have confidence that the competition is run fairly

• Projects need to be well-structured – to be attractive to private sector and to satisfy private sector investors that PPP is the right approach for this project

Impact of role of international funding institutions (IFIs)

Remit of IFIs is consistent with implementation of PPP International Finance Corporation (part of 'World Bank Group'):

"[to] further economic development by encouraging the growth

of productive private enterprise in member countries,

particularly in the less developed areas"

European Bank for Reconstruction and Development (EBRD):

"[to] foster the transition toward open market oriented

economies and to promote private and entrepreneurial initiative

in the Central and Eastern European countries...“

European Investment Bank (EIB):

"[to] contribute...to the balanced and steady development of the

common market in the interest of the Community"

Impact of role of international funding institutions

IFIs: investing in PPP projects (cont’d):

Investment is largely in the form of direct loans to Project Companies (but some grant funding is available too)

Examples of current PPP investment:• Metro de Barcelona Estaciones (Spain) – rail – loan value

EUR400 million• Douro Litoral (Portugal) – motorway toll concession – loan value

EUR600 million

• A2A Servizi Idrici Brescia – water/waste – loan value EUR70

million

Opportunities in Global PPP

• Conclusions:– Countries will continue to need infrastructure– Rise of emerging markets will be crucial

• Population growth• Replace / build new infrastructure• Lack of budgetary constraints

– Support of IFIs• Already active (e.g. Structural Fund )

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FIDIC vs NEC and Others

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