FIDIC conditions of contract for EPC projects [Silver Book]

FIDIC conditions of contract for EPC projects [Silver Book]
THE NIGERIAN INSTITUTE OF QUANTITY SURVEYORS FIDIC conditions of contract for EPC projects [Silver Book] Dr Segun Faniran FIEAust FCIArb MNSE MASCE Good Afternoon everyone, Thank you (xyz) for the kind introduction. I would like to start by thanking the Nigerian Institute of Quantity Surveyors for inviting me to speak at this seminar, and I would particularly like to express my appreciation to the NIQS President, Mr. Onashile, for personally reaching out to me and extending the invitation to speak at the seminar. I also want to thank him for the tremendous hospitality that he has shown since my arrival. I also want to congratulate them for organising this seminar which is focusing on the theme of ‘Construction Contracts Best Practices’. From my personal experience in the delivery of construction projects globally, the 3 pillars that underpin effective project delivery are smart procurement; appropriate contractual mechanisms that protects the interests of the project stakeholders; and good project governance to ensure the project’s objectives are achieved. The theme of this seminar is therefore particularly apt, as it addresses key issues of contracts and procurement. The speaker yesterday spoke on JCT contracts. I will be touching on FIDIC contacts, and this afternoon’s speaker will be speaking on the public procurement Act. I hope that the seminars will generate a momentum for the much-needed revitalization of the Nigerian construction industry, with the attendant benefits that this will bring to the economy and the wider society through improved delivery of infrastructure. I also want to commend the leadership of the NIQS for their commitment to, and investment in, professional development activities for their members. I have had the privilege of speaking at some previous professional development events organised by the NIQS. Undoubtedly, these programmes will greatly enhance the professional skills of its members, and contribute significantly to improving the effectiveness and efficiency of project delivery in the Nigerian construction industry. 1

Introduction to Turner & Townsend
Segun Faniran, Director - Contract Services, Middle East July 2017 As mentioned in the introduction, I work for Turner & Townsend, where I am a Director in the Contract Services unit.. Turner & Townsend is a construction consulting firm specialising in programme management, project management, cost and commercial management and advisory across the real estate, infrastructure and natural resources sectors. Majority of our staff at Turner & Townsend are quantity surveyors or come from quantity surveying backgrounds like most of you. However, I should mention that I have a civil engineering background and started my professional life as a Civil Engineer before veering into Construction contracting, so I am a bit of an odd man out amongst my colleagues, and probably here as well. My area of specialization is in advisory and construction disputes related to time matters.

104 Our global offices offices
Europe Amsterdam Atyrau Basel Berlin Frankfurt Hamburg Istanbul Krakow Madrid Milan Moscow Munich Paris Rome St Petersburg Stavanger Stockholm Vienna Warsaw Zurich 104 UK and Ireland Aberdeen Bath Belfast Birmingham Bristol Cambridge Cardiff Dublin Edinburgh Glasgow Leeds London Manchester Newcastle Nottingham Reading Sheffield Teesside offices Asia Bangalore Beijing Ho Chi Minh City Hong Kong Jakarta Kuala Lumpur Macau Manila Mumbai New Delhi Seoul Shanghai Shenzhen Singapore Tianjin Tokyo North America Calgary Chicago Denver Edmonton Fort Worth Houston Los Angeles Miami Mountain View Nashville New York Ottawa Phoenix San Francisco Seattle Tampa Toronto Vancouver Middle East Abu Dhabi Doha Dubai Muscat Africa Cape Town Dar es Salaam Durban Gaborone Harare Johannesburg Kampala Nairobi Australia and New Zealand Adelaide Auckland Brisbane Cairns Canberra Christchurch Darwin Gold Coast Melbourne Nadi Perth Sydney Townsville Turner & Townsend is head-quartered in the U.K. and has 104 offices in 44 countries around the world. This slide shows all the countries in which we have offices. We use this global reach to draw on extensive global and industry experience in providing services to our clients. In Africa, as you can see from the slide, we have offices in Southern Africa and East Africa but we don’t have offices yet in Nigeria or West Africa. Latin America Buenos Aires Bogotá Lima Mexico City Rio de Janeiro Santiago São Paulo CS Middle East B2B 2018

Service model Turner & Townsend started out as a purely qs firm offering quantity surveying services back in in It has since evolved from a pure cost consultant to providing related value adding services. I mention this because at the dinner on Sunday the ACQS president and the NIQS president spoke of the need for qs firms to evolve their services beyond the traditional qs services currently provided. These are the areas into which we have developed our service offerings. Ranging from procurement (upfront) … Project advisory (during project execution) … right through to disputes resolution (during project execution and at the back-end) … CS Middle East B2B 2018

THE NIGERIAN INSTITUTE OF
QUANTITY SURVEYORS TODAY’S AGENDA Overview of the FIDIC “suite of contracts” The Silver Book Issues in EPC Projects Key Risks and Related Clauses in Silver Book Case Studies Typical Amendments Workshop This afternoon, I will be speaking on the subject of ‘FIDIC conditions of contract for EPC projects’. It’s not feasible to cover the entire aspects of all FIDIC contract types in a 2 hour presentation. However, my presentation will include an overview of the FIDIC suite of contracts. We will then look at some pertinent issues in EPC contracts specifically, and how these issues are addressed by the FIDIC Silver Book which is the FIDIC standard form of contract for EPC contracts. I was also hoping that we would be doing a case study workshop where we will address some contractual scenarios related to the delivery of EPC projects. ??? 5

QUANTITY SURVEYORS FIDIC Suite of Construction Contracts Written and published by International Federation of Consulting Engineers (Federation Internationale des Ingenieurs-Conseil). FIDIC forms of contracts are organised around the extent of design and other responsibilities assumed by the Employer and the Contractor. New suite of contracts published in 1999 Red Book Yellow Book Silver Book Green Book Red, Yellow and Silver Books updated in 2017 The FIDIC suite of construction contracts is written and published by the International Federation of Consulting Engineers. The FIDIC acronym stands for the French version of the Federation’s name (Federation Internationale des Ingenieurs-Conseil). The different forms of contract within the FIDIC suite are organised around the extent of design and other responsibilities assumed by the Employer and the Contractor - with the different standard forms given different colour appellations. The suite is therefore aligned with common procurement strategies rather than the nature of the construction works. The best known of the FIDIC contracts are the Red Book (building and engineering works designed by the Employer) and the Yellow Book (M&E, building and engineering works designed by the Contractor). The original edition of the Red Book dates back to 1957. In 1999 FIDIC published a revised suite of contracts with updated versions of the Red and Yellow books together with a Green Book as the short form of contract and a Silver Book for turnkey contracts. In 2005 FIDIC published an amended version of the Red Book for use by Multilateral Development Banks and in 2007 published a seminar edition of the Gold Book for Design, Build and Operate contracts. Most recently, in December 2017, FIDIC published new editions of the Red, Yellow and Silver books. 6

QUANTITY SURVEYORS FIDIC 1999 Suite of Construction Contracts Red Book – Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer. Used in “traditional” contracts with design carried out by the Employer. Yellow Book – Conditions of Contract for Plant and Design Build, for Electrical and Mechanical Plant, and for Building and Engineering Works Designed by the Contractor. Used in mechanical and/or electrical plant, and design and execution of building or engineering works where the design is carried out by the Contractor. Silver Book – Conditions of Contract for EPC/Turn Key Projects. Used in process, power and infrastructure projects where the Contractor takes full responsibility for the Engineering, Procurement and Construction of the works Green Book – Short form of Contract. Recommended for building or engineering works of relatively small capital value, for relatively simple work, or work of short duration The Red Book provides conditions of contract for construction works where the design is carried out by the Employer. The Red Book is intended for use on projects where the employer carries out the design (or the majority of the design) but it also allows for some elements of the project to be Contractor designed. The Red Book is not suitable for use where most of the works are to be designed by the Contractor. Payments are normally determined by measurement and applying the rates and prices from the bill of quantities. There is an option for payment to be on the basis of a lump sum. The Yellow Book provides conditions of contract for construction works where the design is carried out by the Contractor. The Yellow Book is therefore applicable to the provision of electrical and mechanical plant, and for the design and execution of building or engineering works. Under the usual arrangements for this type of contract, the Contractor designs and provides the works in accordance with the Employer’s requirements which may include any combination of civil, mechanical, electrical and/or construction works. Interim payments are typically based on instalments specified in a schedule. The Silver Book is suitable for use on process, power and private-infrastructure projects where a Contractor is to take on full responsibility for the design and execution of a project. Risks for completion to time, cost and quality are transferred to the Contractor and so the Silver Book is only suitable for use with experienced Contractors familiar with sophisticated risk management techniques. The Green Book or Short Form of Contract is recommended for engineering and building work of relatively small capital value. The Guidance Notes for the Green Book recommended that generally it should not be used on projects with a contact value greater than US$500,000. However, depending on the type of work and the circumstances, the Green Book may be suitable for contracts of considerably greater value. The Green Book is most suited fairly simple or repetitive work or work of short duration that will not require input from specialist sub-contractors. 7

QUANTITY SURVEYORS Other FIDIC forms of contracts Blue/Green Book “Dredging Form”– Form of Contract for Dredging and Reclamation Works. Gold Book – Conditions of Contract for Design Build and Operate Projects Pink Book “MDB” Form – Conditions of Contract for Construction (Multilateral Development Bank Harmonised Edition) for Building and Engineer Works Designed by the Employer. Red Book Subcontractor – Conditions of Subcontract for Construction for Building and Engineering Works Designed by the Employer. The Blue Book is concerned with dredging and reclamation work and ancillary construction. In this form of contract, the Employer undertakes the design of the project. The Gold Book is the FIDIC standard form of contract for Design, Build and Operate projects. The Gold Book combines design, construction, operation and maintenance of a facility into a single contract, and is intended for “Design, Build and Operate” projects. The project’s commissioning testing is followed by a 20 year operation and maintenance period, during which the Contractor must achieve various operational targets and then hand over the project to the Employer in an agreed condition. The Pink Book is a modified version of the Red Book specifically intended for projects funded by Multilateral Development Banks, such as the World Bank, the African Development bank or the European Bank for Reconstruction and Development. It is mandatory for use on World Bank projects, unless the Bank agrees on other Bank Standard Bidding Documents on a case-by-case basis. The Red Book (Subcontract) is the FIDIC standard form for subcontracts for Construction for Building and Engineering Works Designed by the Employer. Sub-contracts for the other standard forms are also under preparation. 8

QUANTITY SURVEYORS Other FIDIC forms of contracts (contd) White Book – Client / Consultant Model Services Agreement. Used when employing consultants for pre- contract works and for construction and project management. Sub-Consultancy Agreement JV (Consortium) Agreement – Note this is for a Consultant JV not a Contractor’s JV. Model Representative Agreement - where a consulting firm appoints a representative to perform certain services on its behalf in a foreign country The White Book is the FIDIC standard form for Client/Consultant Agreements. It is an agreement to be used by the Employer and its consultant, and is recommended for general use for the purposes of pre-investment and feasibility studies, designs and administration of construction and project management. The Sub-Consultancy Agreement is used when a consultant engages a sub-consultant for part of the services. For example, where a local firm acts as a sub-consultant to an international firm on a project, providing specific services for the international firm; or where an international firm acts as a sub-consultant to a local firm providing specific specialist or general advisory services to the local firm. The Joint Venture (JV) Model Agreement is for an association between two or more consultants where the association is for performing the services required for a specific project, rather than for a more permanent type of arrangement. The Model Representative Agreement (also known as the “Purple” Book) is intended to be used where a consulting firm appoints a representative to perform certain services on its behalf in a foreign country. The Representative Services might be general marketing and business development-related services or project-specific services, or both. This form of contract is suitable for consulting firms looking to promote themselves, and ultimately win and conduct work, in jurisdictions in which they have no presence or in which they may face difficulties in establishing a local presence. Such firms are likely to enter into arrangements with local firms for the latter to represent them and assist them in: identifying business opportunities; bidding for projects; and possibly, performing some services in connection with successful bids. 9

QUANTITY SURVEYORS Popularity of FIDIC forms of contracts Tried and tested – Employers (Developers / Government Bodies etc) wishing to attract reputable international firms use FIDIC forms because they are model contracts that have been in use and developed/updated for over 60 years. Fair and Balanced Risk Allocation (except Silver Book) The FIDIC forms of contract are the most widely used forms of contracts on international construction contracts where you have multiple entities from different countries and jurisdictions being parties to the execution of a construction project. One factor which appears to explains their popularity is the fact that FIDIC forms are tried and tested internationally, having been in use and developed for over 60 years. Therefore, they are often used by Employers (Developers / Government Bodies etc) wishing to attract reputable international firms to work on their projects. Another element which explains their popularity is what is considered to be a fair and balanced allocation of risk to the parties in a FIDIC contract. FIDIC has historically allocated risk based on which party is best placed to assume the risk. The Red Book and The Yellow Book, the employer takes on risks such as unforeseeable ground conditions, unforeseeable operations of the forces of nature, force majeure (such as acts of war, terrorism and natural disasters) planning and environmental permits, and changes to the law. The party who prepares the design takes on the responsibility for its defects. In contrast, The Silver book adopts an approach of placing the majority of risk on the contractor, primarily including design and design co-ordination, along with any employer design. 10

QUANTITY SURVEYORS Typical Content - Red, Yellow and Silver Books Clause Title Description Clause 1 General Provisions Definitions of Terms used in the Contract Clause 2 The Employer Employer’s Obligations Clause 3 The Engineer or Employer’s representative Role of Engineer Role of Employer’s Ref. Clause 4 The Contractor Contractor’s Obligations Clause 5 Design (Yellow & Silver Books) / Nominated sub-Contractor (Red Book) Design Responsibility (Silver Book) Appointment of nominated sub-contractors Clause 6 Staff and Labour Engagement of staff & labour, and provision of facilities Clause 7 Plant, materials and workmanship Quality of the work / Testing of plant, materials & workmanship Clause 8 Commencement, delays and suspension Construction period, including programmes and extension of time From a practical point of view, the key to reading and understanding the main FIDIC forms (Red, Yellow, Silver) is to understand their structure. The main FIDIC forms have 20 clauses which are perhaps best viewed as chapters covering the key project topics. Those clauses are as follows. Clause 1 deals with General provisions, including definition of terms used in the contract, communications protocols, the law governing the contract and the language to be used in communicating. Clause 2 addresses the obligations of the Employer, including issues such as provision of access to site, the Employer’s role in securing permits and approvals, the Employer’s Financial Arrangement, and Employer claims against the Contractor. Sub-Clause 2.4, for example, requires the Employer to provide evidence that “ financial arrangements have been made and are being maintained which will enable the Employer to pay the contract price punctually”. Clause 3 deals with the duties and authorities of the Engineer and the Employer’s Representative. Clause 4 addresses the obligations of the Contractor, including general obligations in relation to subcontractors, setting out, safety, quality assurance and equipment. Clause 5 addresses Contractor’s obligations in relation to nominated subcontractors imposed on the Contractor by the Employer, and Contractor’s obligations in relation to design. Clauses 6 and 7 deal with personnel, and with plant, materials and workmanship. In relation to personnel, Clause 6 specifies that the Contractor must not only engage labour and staff, but must also make appropriate welfare arrangements for them. Clause 7 sets out the Contractor's duties with respect to the quality of the work and the testing of any plant, materials and workmanship. Clause 8 governs the construction time period of the project, and makes provision for: the commencement date of the project, Time for Completion; the Contractor’s programme of works; extension of time; delays; and suspension of work. In particular, sub-clause 8.3 sets out the manner in which the Contractor should provide programmes showing how it proposes to execute the works. 11

QUANTITY SURVEYORS Typical Content - Red, Yellow and Silver Books Clause Title Description Clause 9 Tests on completion Specifies procedures to be undertaken for Tests on Completion Clause 10 Taking over Procedure by which works are to be taken over by the Employer Clause 11 Defects liability Contractor’s obligations to rectify defects during the Defects Notification Period Clause 12 Measurement and Evaluation (Red Book) / Tests after completion (Yellow & Silver Books) Method of Measurement Procedure for tests after completion Clause 13 Variations and adjustments Variations and adjustments to contractual scope of works Clause 14 Contract price and payment Financial aspects of contract Clause 15 Termination by Employer Criteria and procedures for termination by Employer Clause 9 specifies the procedures to be undertaken for Tests on Completion, which must be executed by the Contractor following completion of the works and prior to the issue of a Taking-Over Certificate by the Engineer. Clause 10 prescribes the procedure by which works are to be taken over by the Employer, after which responsibility for the works will pass to the Employer. Clause 11 obliges the Contractor to rectify any defects notified to the Contractor during the Defects Notification Period, as defined in the Appendix to Tender. Clause 12 of the Red Book deals with measurement and evaluation and addresses the method of measurement and rules for evaluation of new rates and prices, where there is no rate specified in the Contract for similar work. Clause 12 of the Yellow and Silver Books deal with tests after completion. Clause 13 addresses variations, including adjustments to the Contract Price for changes in legislation and changes in costs. Clause 14 addresses the financial aspects of the project, including: advance payment; application for payment; and the issue of interim and final payment certificates. Clause 15 specifies the circumstances in which the Employer may terminate the contract, and the procedures that the Employer must follow if it takes the decision to terminate the contract, including the financial obligations. 12

QUANTITY SURVEYORS Typical Content - Red, Yellow and Silver Books Clause Title Description Clause 16 Suspension and termination by Contractor Criteria and procedures for termination by Contractor Clause 17 Risk and responsibility Risks and responsibilities for which one party to the contract must indemnify the other Cap on liability Clause 18 Insurance Insurance requirements to be implemented at or prior to commencement of the works Clause 19 Force majeure Provisions for force majeure events (war, natural catastrophes etc) Clause 20 Claims, disputes and arbitration Procedures for Contractor’s claims, and for resolving disputes Clause 16 specifies the circumstances in which the Contractor may terminate the contract, and the procedures that the Contractor must follow if it decides to terminate the contract. Clause 17 specifies the risks and responsibilities for which each party must indemnify the other. Clause 18 lists the insurance requirements to be implemented at or prior to commencement of the works. Clause 19 deals with Force Majeure which is defined as an exceptional event or circumstance. This clause defines the criteria under which an event or circumstance constitutes Force Majeure and the obligations of the parties in relation to Force Majeure events. Finally, Clause 20 deals with claims, disputes and arbitration. The clause describes the procedure to be followed by the Contractor in the presentation of its claims, and provides for settlement of disputes through a Dispute Adjudication Board, through an Amicable Settlement process, and through Arbitration. 13

QUANTITY SURVEYORS Sequence of principal events under FIDIC contracts WING IT … Base Date is date by which Contractor is deemed to be aware of conditions affecting pricing. Clause requires the Employer to make available to the Contractor all relevant data for pricing prior to this date – stipulated in the General conditions as 28 days before the Tender submission date. Any changes in conditions after this date can lead to a change in the Contract price. Performance Security 14

QUANTITY SURVEYORS Sequence of payment events envisaged in Clause 14 of FIDIC contracts Clause 14.4 specifies schedule of payments – typically monthly but could be otherwise 15

QUANTITY SURVEYORS Sequence of dispute events envisaged in Clause 20 Disputes can be adjudicated by referral to a Dispute Adjudication Board (DAB). The DAB will comprise of one of three members, the default position being three. (Clause 20.2) How are the DAB members appointed? The contract may include a list of potential members, from which the board is selected. If three members, each party nominates one member for approval by the other party. Parties and members agree on the appointment of the third member, who will be chairman. (Clause 20.2) The form of the DAB appointment is the General Conditions of Dispute Adjudication Agreement, as set out in the contract Appendix, entered into by the parties and the member, a Tri-Partite Agreement (TPA). Can DAB members be replaced? Yes, parties can agree to replace a member at any time, or if a member declines to act, dies, resigns, on disability or termination of a member's appointment. What is the effect of the DAB decision? The decision is binding, and must be complied with immediately, until revised by amicable settlement or arbitration. Parties must give effect to it. If no notice of dissatisfaction is served, it is final and binding. (Clause 20.4) Unless settled amicably, any dispute in respect of which the DAB decision (if any) has not become final and binding shall be finally settled by international arbitration. The Rules of Arbitration of the International Chamber of Commerce (ICC Arbitration) applies, with the appointment of three arbitrators (clause 20.6). 16

QUANTITY SURVEYORS Amendments / Particular Conditions FIDIC standard forms are generic and need to be tailored to specific projects. General Conditions Standard Conditions Particular Conditions Amendments typically involve transfer of balance of risk to benefit either Employer or Contractor. E.g. some government bodies and developers have customised FIDIC forms with their own amendments for use as their standard contracts on construction projects The FIDIC standard form contracts are generic documents that need to be tailored to each specific project. Amendments to the standard published FIDIC contracts are incorporated by the inclusion of Particular Conditions. Through the use of Particular Conditions it is possible for the Employer and Contract to agree alternative risk sharing arrangements before entering into the Contract. In the U.A.E., several government bodies and developers have customized FIDIC forms with their own amendments in the Particular Conditions, and have adopted this for use as their standard contracts on construction projects. For example, a lot of the major developers in Dubai have standard construction contracts based on the FIDIC Red Book which procure and deliver their construction projects through standard forms of contracts. Typically, amendments involve the transfer of risk from Employer to the Contractor rather than vice-versa. We will look at a number of the typical amendments. 17

QUANTITY SURVEYORS Amendments / Particular Conditions FIDIC strongly recommends that the Employer, Contractor and all drafters of Special Provisions should have due regard to five ‘Golden Principles’ when making modifications: The duties, rights, obligations, roles and responsibilities of all the Contract Participants must be generally as implied in the General Conditions, and appropriate to the requirements of the Project. The Particular Conditions must be drafted clearly and unambiguously. The PCs must not change the balance of risk/reward allocation provided for in the GCs. All time periods specified in the Contract for Contract Participants to perform their obligations must be of reasonable duration. All formal disputes must be referred to a Dispute Avoidance/Adjudication Board (or DAB, if applicable) for a provisionally binding decision as a condition precedent to arbitration. FIDIC strongly recommends that the Employer, Contractor and all drafters of Special Provisions and Particular Conditions should have due regard to five ‘Golden Principles’ and ensure that any modifications to the General Conditions are limited to those necessary for the particular features of the site and the project and/or are necessary to comply with the applicable law. These 5 Golden Principles are: 1. The duties, rights, obligations, roles and responsibilities of all the Contract Participants must be generally as implied in the General Conditions, and appropriate to the requirements of the Project. 2. The Particular Conditions must be drafted clearly and unambiguously. 3. The PCs must not change the balance of risk/reward allocation provided for in the GCs. 4. All time periods specified in the Contract for Contract Participants to perform their obligations must be of reasonable duration. 5. All formal disputes must be referred to a Dispute Avoidance/Adjudication Board (or DAB, if applicable) for a provisionally binding decision as a condition precedent to arbitration. 18

THE NIGERIAN INSTITUTE OF Amendments / Particular Conditions
QUANTITY SURVEYORS Amendments / Particular Conditions (Typical Examples) Employers Abu Dhabi Government forms are based on the Fidic ’99 but they made some changes, e.g. the contractor has to be responsible for the design prepared by the owner even if the design contains some errors The Abu Dhabi Government forms also change the termination provisions in Fidic ’99 so that the employer can terminate on 14 days notice, for example, whereas a contractor must take longer than that. Some contracts include express provisions whereby Contractor can’t claim an Extension of Time for periods of Employer delay that are concurrent with Contractor culpable delays. We will now look at some typical practical examples of amendments made to the FIDIC standard forms. As stated earlier, Employers typically seek to amend the forms to reduce their risk and transfer risk to Contractor. For example, the Abu Dhabi Government construction contracts are based on the Fidic ’99 Red Book standard form but they make some changes, such as, that the contractor has to be responsible for the design prepared by the owner even if the design contains some errors. The Abu Dhabi Government forms also change the termination provisions in Fidic ’99 so that the employer can terminate on 14 days notice, whereas a contractor must take longer than that if the contractor wishes to terminate the contract. Some employers also modify the express provisions in the FIDIC standard forms so that a Contractor can’t claim an Extension of Time for periods of Employer delay that are concurrent with Contractor culpable delays. For example, under the Abu Dhabi version, clause 8.4 requires the Contractor to have made “reasonable and proper” efforts to mitigate delay. It also spells out that the Contractor shall not be entitled to an extension of time, if the delay is concurrent with another delay for which the Contractor is responsible. 19

QUANTITY SURVEYORS Amendments / Particular Conditions (Typical Examples) Employers Although FIDIC contains reasonably extensive programming requirements, it is not unusual to see Sub- Clause 8.3 rewritten or substantially amended to provide additional programming obligations on the part of the contractor, including the requirement to provide electronic copies of the program and to agree on a baseline program at the outset, which is required to be regularly updated (as changes and other delays are encountered) to show a live critical path as the project progresses Another amendment often made by Employers is to the programme submission requirements. Although FIDIC contains reasonably extensive programming requirements, it is not unusual to see Sub-Clause 8.3 rewritten or substantially amended to provide additional programming obligations on the part of the contractor, including the requirement to provide electronic copies of the program and to agree on a baseline program at the outset, which is required to be regularly updated (as changes and other delays are encountered) to show a live critical path as the project progresses. 20

QUANTITY SURVEYORS Amendments / Particular Conditions (Typical Examples) Contractor Many contractors seek to delete the requirement (contained in Sub-Clause 20.1) that notice of claims must be given not later than 28 days after the contractor becomes aware, or should have become aware, of the event or circumstance giving rise to the claim, as this provision is an absolute time bar, meaning that if the contractor fails to give notice of a claim within that period then it will not be entitled to an extension of time or any additional payment. A typical example of amendment made by Contractors is to delete the requirement (contained in Sub-Clause 20.1) that notice of claims must be given not later than 28 days after the contractor becomes aware, or should have become aware, of the event or circumstance giving rise to the claim. The reason for Contractors wanting to amend this clause is that it is potentially a time bar, such that if the contractor fails to give notice of a claim within that period then it will not be entitled to an extension of time or any additional payment. 21

QUANTITY SURVEYORS Silver Book Turnkey contract which departs from usual balance of risk allocation in FIDIC contracts Contractor takes total responsibility for design, procurement, construction, ready for operation at the ‘turn of a key’. Higher degree of certainty of final price and time (Lump Sum Contract Price). Intended for Engineering Procurement and Construction (“EPC”) arrangements. e.g. process or power plant, factory or similar facility, infrastructure project or other similar type of development Now that we’ve had a look at FIDIC contracts in general, we will focus on the ‘Silver Book’ which is the main subject of today’s presentation. The Silver Book is intended for contracts on which the contractor is required to engineer, procure and construct the required works and then, once ready for operations, to hand over the keys to the owner so that it may operate the facility. This approach to contracting is called a Turnkey or EPC contract, where the completed facility is handed over ready for operations at the turn of a key. EPC contracts are typically used on process, power and private-infrastructure projects where a Contractor is to take on full responsibility for the design and execution of a project. Risks for completion to time, cost and quality are transferred to the Contractor. To obtain this increased cost certainty the Silver Book requires the Contractor to accept a higher level of risk than is typical under most other forms of contract. For example, the Silver Book transfers the risk of ground conditions to the Contractor. Similarly, the Contractor also assumes responsibility for the accuracy of the Employers Requirements which is a major difference to usual design and build contracts. 22

QUANTITY SURVEYORS Turnkey / EPC Projects Engineering, procurement and construction contracts are most common form of contract used in major international infrastructure projects. An EPC Contractor’s obligations typically include “Turnkey responsibility” to deliver: a complete facility for a guaranteed price by a guaranteed date which must perform to a specified level Because EPC Contracts involve Contractor taking a high level of risk they are, to some extent, resisted by contractors (partially due to high insurance costs). That said, they are still the dominant model because sponsors and lenders prefer certainty they offer. EPC contracts are a common form of contract used on major international infrastructure projects. An EPC contractor’s obligations typically requirements to: deliver a completed facility; at a guaranteed price; by a guaranteed date; and which must perform to a specified level. It is of critical importance in such projects not only for the project to be delivered within time and cost constraints but also to be delivered so that it is capable of meeting its designed production and output levels. In EPC projects funded through project financing, performance of the asset is particularly key and Lenders’ security is dependent largely on the ability of the completed facility to operate and generate revenue - whether power, chemicals, processed metals or road toll revenue. This is reflected in the General Conditions of the FIDIC Silver Book: where the ‘Time for Completion’ of the works includes not simply completing the works so that the owner can take them over, but also ‘achieving the passing of the Tests on Completion’. Because EPC Contracts involve Contractor taking a high level of risk they are, to some extent, resisted by contractors (partially due to high insurance costs). That said, they are still the dominant model because sponsors and lenders prefer certainty they offer. 23

Example Contractual Structure of Power Project
THE NIGERIAN INSTITUTE OF QUANTITY SURVEYORS Example Contractual Structure of Power Project This is a typical contractual arrangement on an EPC contract for a power project. In this case, the project company enters into a concession agreement with the governments to provide power. The Project Company is owned by Sponsors with equity shareholdings. The project to develop the power facility is funded by a Lender (a financial institution). The Project Company enters into an EPC contract with a contractor to design and construct the power facility. Typically, the Project Company will also enter into a contract with an Operations &Maintenance contractor to operate the facility on completion of the EPC contract. There would also typically be other agreements in place for fuel supply to the power facility, and for the purchase of the power generated from the facility. 24

QUANTITY SURVEYORS EPC Contracts – Bankability EPC contracts must have risk allocation that satisfies Lenders Lenders focus on ability of (or more particularly the lack of) Contractor to claim: Additional costs; and/or Extensions of time The less comfortable Lenders are with the above, the more equity the Sponsors will be required to contribute Lenders will also need to be satisfied with technical risk Price is a general “bankability” issue also (but a broader project issue) As can be seen from the contractual arrangement shown in the previous slide, it is very important that EPC contracts have a risk allocation that satisfies Lenders who provide the project funding. Lenders want certainty in the project, and are concerned with issues such as the Contractor’s ability to claim additional cost and additional time. The less Lenders are satisfied with these, the more the more equity the Sponsors will be required to contribute. Lenders will also need to be satisfied with technical risk, and therefore the performance of the facility is particularly of key importance. Also, the security of lenders is directly dependent on the ability of the constructed plant to operate properly and generate revenues. All these key aspects are reflected in the general conditions of the FIDIC Silver Book. 25

Key aspects of EPC Contracts vs Silver Book
THE NIGERIAN INSTITUTE OF QUANTITY SURVEYORS Key aspects of EPC Contracts vs Silver Book Aspect / Issue Description of conditions Related clauses in Silver Book Single point of responsibility Contractor is responsible for all design, engineering, procurement, construction, commissioning and testing activities If the EPC Contractor is a Joint venture, liability / responsibility is joint 4.1, 5 Fixed contract price Limited opportunities for the contractor to claim extra cost/time Generally limited to directed variations to works 13.1, 14.1, 20 Fixed completion date Guaranteed date for completion Failure to meet the date will attract liquidated damages; in order for these to be enforceable they must be a genuine estimate of the loss that the project company will suffer if the facility is not completed on time. 8.2, 13, 20 26

THE NIGERIAN INSTITUTE OF QUANTITY SURVEYORS Key aspects of EPC Contracts vs Silver Book Aspect / Issue Description of conditions Related clauses in Silver Book Performance Guarantees Project companies revenue will come from the project revenue. This is important to service project debt; It is vital that facility performs in terms of output, efficiency and reliability. This is the purpose of the Performance Liquidated Damages payable by the Contractor if performance requirements are not met; Performance Liquidated Damages must also be genuine pre-estimate of loss. E.g. in case of a power station what this might mean is if plant output is 5MW less than required performance, liquidated damages will be designed to compensate project company for that loss of revenue for life of project by being unable to sell that 5 MW. Silver Book does not specifically provide for ‘Performance Liquidated Damages’. However, Clause 9.4 can be amended as required. 27

THE NIGERIAN INSTITUTE OF QUANTITY SURVEYORS Key aspects of EPC Contracts vs Silver Book Aspect / Issue Description of conditions Related clauses in Silver Book Caps on liability Most EPC Contractors will be against unlimited liability. Usual practice is a cap at 100% of the Contract Price. Sub-caps of 20% of Contract Price on delay and performance liquidated damages also common There may be some exceptions to the caps e.g. (e.g. wilful misconduct, breach of patent rights) 17.6 28

THE NIGERIAN INSTITUTE OF QUANTITY SURVEYORS Key aspects of EPC Contracts vs Silver Book Aspect / Issue Description of conditions Related clauses in Silver Book Security EPC Contract will require that performance security be supplied by the Contractor in respect of its obligations under EPC Contract. Market Security includes: Bank guarantee for between 5-15% of Contract Price Retention (withholding of 5-15%) of each payment under EPC contract Advance Payment Guarantee – if an advance payment is made Parent Company Guarantee – to secure Contractor’s performance if it does not perform 4.2, 14.3 29

THE NIGERIAN INSTITUTE OF QUANTITY SURVEYORS Key aspects of EPC Contracts vs Silver Book Aspect / Issue Description of conditions Related clauses in Silver Book Variations Project Company must have right to order variations and/or agree to suggested variations – clause must contemplate omission of work as well as Pricing. 3.5, 13 Defects Liability Contractors required to repair defects months following completion of performance testing – can be one period or tiered 11 Intellectual Property Contractor must warrant it has the rights regarding any proposed solutions and patents. Also note there is often an indemnity for breach. 17.5 30

THE NIGERIAN INSTITUTE OF QUANTITY SURVEYORS Key aspects of EPC Contracts vs Silver Book Aspect / Issue Description of conditions Related clauses in Silver Book Force Majeure Parties excused from performance for certain Force Majeure events 19 Suspension Project company has this right 8.8 to 8.12 Termination Contractor has very limited rights e.g. non-payment/extended suspension, material breach by employer; Project company has much broader rights. This will be tied with third party agreements. Can terminate: For convenience For breach/insolvency, otherwise 16.2 15.5 31

EPC Project Case Study - Sohar Independent Water Project
THE NIGERIAN INSTITUTE OF QUANTITY SURVEYORS EPC Project Case Study - Sohar Independent Water Project EPC Contract to: “perform the engineering, procurement and construction of a new desalination plant located in the Sohar Port Industrial Area, Sohar in the Al Batinah North region of the Sultanate of Oman” Scope of Work / Employer’s Requirement “construct a seawater desalination plant for the purposes of the production and supply of potable water in accordance with the specifications and conditions set out therein, maintain and operate the plant, and make available a certain monthly capacity of potable water for sale to OPWP over a period of 20 years commencing from the plant’s Commercial Operation Date (“COD”)” 32

Case Study - Sohar Independent Water Project Contract Agreements
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EPC Project Case Study - Sohar Independent Water Project
THE NIGERIAN INSTITUTE OF QUANTITY SURVEYORS EPC Project Case Study - Sohar Independent Water Project Time for Completion 755 days (approx. 2 years) Lender’s Requirement Delay < 400 days Delay Issues Late issuance of construction permit Groundwater contamination Reduction in widths of seawater pipeline corridor and site access corridor Availability of utilities and services connections Current Delay 440 days 34

THE NIGERIAN INSTITUTE OF Silver Book – Particular Conditions
QUANTITY SURVEYORS Silver Book – Particular Conditions Typical Examples Employers Warranties: Sub-Clause 4.1 in both Silver and Yellow Books is often replaced with a bespoke set of warranties. Performance Security: Provisions relating to performance security (e.g. Sub-Clause 4.2). are often amended by employers seeking to protect themselves against the instability of the banking and financial institutions which typically provide the security concerned e.g. by adding provisions that the institution providing the performance security must have a particular rating (e.g. Moody's or Fitch or S&P) and by adding related provisions as to what is to happen when particular financial institution is down-graded. Sub-Clause 4.1 (Contractor’s obligations) requires the Contractor to deliver a facility that is fit-for-purpose. Employers often replace this clause with a requirement for a bespoke set of warranties from the Contractor to indemnify against failure to meet the fit-for-purpose requirement. 35

THE NIGERIAN INSTITUTE OF FIDIC Silver Book – Particular Conditions
QUANTITY SURVEYORS FIDIC Silver Book – Particular Conditions (Typical Examples) Employers Sub-contracting: Employers will often look to amend the Silver Book to restrict subcontracting, for example by providing that certain key equipment or materials are only provided from certain named subcontractors Sub-contracting: Employers also reserve the right to give final approval to the terms of subcontracts and/or to be copied on each subcontract and may require that certain provisions are be included within subcontracts (including, for example, the requirement that subcontractors be novated or assigned to the employer in the event of termination) or that key subcontractors with design responsibility provide a collateral warranty to the employer so that the employer has a direct contractual link to (and remedy against) the most important subcontractors 36

QUANTITY SURVEYORS FIDIC Silver Book – Particular Conditions (Typical Examples) Employers Cooperation / Coordination: The Silver Books has a short provision (Sub-Clause 4.6) on cooperation, but Employers commonly include more extensive cooperation provisions providing that each contractor must co ordinate and cooperate with other contractors employed by the employer. Such provisions are becoming increasingly elaborate in placing the onus (and risk) on the shoulders of a contractor to coordinate its works with other related contractors 37

QUANTITY SURVEYORS FIDIC Silver Book – Particular Conditions (Typical Amendments) Contractors Notice of Claims: Many contractors seek to delete the requirement (contained in Sub-Clause 20.1) that notice of claims must be given not later than 28 days after the contractor becomes aware Fitness for purpose: The Silver Book has requirements that the works, when completed, should be fit for the purposes for which they are intended, as defined in the contract. Such fitness for purpose obligation may not be covered by a contractor's professional indemnity insurance. Many contractors will seek to avoid an obligation for fitness for purpose by deleting this reference in Sub-Clause 4.1, or, alternatively, at least seeking to define exactly what is meant by fitness for purpose within the context of the project. 38

QUANTITY SURVEYORS FIDIC Silver Book – Particular Conditions (Typical Amendments) Contractors Employer’s Requirements: Clause 5.1 of FIDIC's Silver Book has a potentially onerous obligation on the contractor making it responsible for the accuracy of the employer's requirements (including design criteria and calculations). This can mean that the employer is not responsible for any error, inaccuracy or omission in the employer's requirements, which he or his consultant may have drafted. The key to the acceptability of such clause is usually the ability of the contractor to verify the employer's requirements during the tender stage. If the tender period is short and there is not sufficient time to do so, contractors are often reluctant to take on this potentially unlimited obligation, and even where there is such time, will seek to push back on such an obligation 39

QUANTITY SURVEYORS FIDIC Silver Book – Particular Conditions (Typical Amendments) Contractors Liability: Towards the very top of the list of important issues for the contractor in any EPC contract will be limitation of liability (Sub-Clause 17.6). FIDIC's limitation of liability clause is often left intact but contractors do usually seek to limit their liability to less than the contract price (which is the FIDIC default position). Depending on factors such as location, industry, market conditions, size and complexity of the project, overall liability limits may range from as low as 20% of the contract price to 100% (or no limit at all). The leading contractors will rarely accept to contract, however, without the exclusion of all indirect and consequential losses that Sub-Clause 17.6 in its un-amended form provides. 40

QUANTITY SURVEYORS FIDIC Silver Book – Particular Conditions (Typical Amendments) Contractors Intellectual Property: Increasingly, contractors are being more protective over their intellectual property rights (IPR). However, Sub-Clause 1.10 (Employer's Use of Contractor's Documents) can be a negotiation battleground as employers seek a wide-ranging ability to use and recreate the contractor's IPR and contractors seek to restrict this as much as possible to ensure that employers cannot (without paying) re-use the IPR on future projects. The existing wording does need amendment if a contractor is to adequately protect its IPR. 41

QUANTITY SURVEYORS Silver Book – Main Features Enhanced testing procedures to demonstrate achievement of specified end result Contractor carries majority of risks, so Employer pays more Final price and time to be more certain Small number of tenderers with negotiation Contractor given freedom to use own Methods Has to prove reliability and performance 42

QUANTITY SURVEYORS Silver Book – Not suitable if: time or information is insufficient before Contract signature considerable work underground or difficult to inspect Employer intends to supervise closely or control or review an intermediary certifies interim payments part of the Works is designed by Employer tendering process involves public bidding without negotiations (for such circumstances, Yellow Book ‘P&DB’ should be used instead) 43

QUANTITY SURVEYORS THANK YOU 44

FIDIC conditions of contract for EPC projects [Silver Book]

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FIDIC conditions of contract for EPC projects [Silver Book]

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