Practical Law

On 7 May 2019, FIDIC launched the Conditions of Contract for Underground Works (Emerald Book), the latest in its Rainbow Book series. The Emerald Book is a joint endeavour between FIDIC and International Tunnelling and Underground Space Association (ITA-AITES). This is the first dedicated international standard form for underground works. In this blog, I look at some of the fundamental principles behind the Emerald Book work and provide some first impressions.

Features of tunnelling and undergrounds works

Compared to other works, tunnelling and underground works involve several particular, even unique, features. Some of these are listed in the introductory notes of the Emerald Book:

• The method of excavation and ground support are major factors for the successful realisation of the project, and therefore part of the works.
• Physical access to the works is often limited to just a few locations or even a single location, which places serious constraints on construction logistics and the environment.
• The land, beneath which the works are to be constructed, typically belongs to a number of third parties.

In addition, FIDIC has identified two other, not necessarily unique, features; namely that this type of work requires extensive investment in contractor’s equipment and is very time-consuming.

Another important feature not listed (though perhaps implicit) is that there is often uncertainty as to the actual ground conditions at a specific location until they are encountered, even if extensive ground investigations are carried out during the tender stage. From a construction perspective, this means that decisions need to be taken daily, or even hourly, as to the appropriate method of excavation and support based on the actual ground conditions and their reactions. From a contractual perspective, the allocation of risk between the parties for differing ground conditions needs to be clearly delineated.

There are also other features such as the scope and availability of insurance and the importance of monitoring (both of the underground works and on the surface).

A number of different procurement methods are used around the world for tunnelling and underground works projects (for example, employer-design, early contractor involvement, design-build or EPC) with different pricing mechanisms (for example, measurement, cost plus, target cost or lump sum). The appropriate mechanism depends on various factors including:

• Ground conditions risk;
• Type of underground works involved;
• Stage of the design;
• Parties’ appetite for risk;
• Contractor’s relative bargaining strength; and
• Local contracting practices.

Principles behind the Emerald Book

The FIDIC-ITA Task Group chose the Yellow Book 2017 as the basis for preparing the Emerald Book. Following the Yellow Book, the Emerald Book is a design-build form of contract. Using this as the starting point, the Task Group have sought to reflect the fundamental principle that underlies all FIDIC contracts – the balanced risk allocation between the parties to the contract – when adapting the Yellow Book to tunnelling and underground works. The result is a form of contract with:

• Specific, new provisions that address in more detail the allocation of ground conditions risk (or physical conditions risk as it is called in the FIDIC forms);
• A hybrid pricing mechanism – on a measurement basis for excavation and lining works and lump sum for all other work; and
• A mechanism for adjusting the Time for Completion depending on actual ground/physical conditions encountered.

At the heart of the Emerald Book are enhanced provisions relating to disclosure by the employer of data and information on ground conditions at the tender stage (and their inclusion in the contract) and the Geotechnical Baseline Report (or GBR). Geotechnical baseline reports are widely accepted as best practice for contracts involving significant underground works to define the ground conditions risk assumed by the contractor. They are used in conjunction with differing site conditions clauses (sub-clause 4.12 in the FIDIC forms). The Emerald Book contains, in the Guidance for the Preparation of Tender Documents, relatively detailed guidance as to the role of the GBR and what FIDIC considers its content should be under this form.

The GBR is stated to be the single source contractual document that describes the anticipated subsurface conditions to be encountered in the execution of the works. Physical conditions falling outside of the GBR are considered to be “Unforeseeable” for the purposes of sub-clause 4.12 and therefore at the employer’s risk. In other words, the employer takes the risk of there being more onerous conditions than specified in the GBR.

For physical conditions falling within the GBR, the risk is shared through mechanisms for adjusting the Contract Price and the Time for Completion (found in a new sub-clause 13.8) based on information contained in a series of new schedules:

• Schedule of Rates and Prices (including a Bill of Quantities).
• Schedule of Baselines.
• Completion Schedule.

Example forms and guidance for these schedules are also contained in the Emerald Book.

In broad terms, the contractor takes the risk of pricing (as is standard in measurement contracts) and the risk of specifying production rates, and the employer takes the risk of quantities. While the measurement basis for valuing the work is quite conventional, the adjustment to the Time for Completion is less so. This is because not only can the Time for Completion be extended if the amount of more onerous conditions is higher than described in the GBR, it can also be reduced if the amount of the less onerous conditions is higher than described in the GBR. This potential reduction in the Time for Completion has been explained on the basis of a fair and balanced risk allocation. The FIDIC-ITA Task Group consider that fairness means that if the conditions are less onerous than expected, the employer should gain the benefit by requiring the contractor to complete in less time, presumably on the basis that less onerous conditions will allow higher production rates. This may not always play out in practice.

Risk register and risk management plan

Under a new sub-clause 1.16, the contractor is required to complete and maintain a Contract Risk Register and prepare and maintain a Contract Risk Management Plan. This is the first time that a FIDIC form has included these concepts. These are devices that are becoming common place – and best practice – for the management of risk in tunnelling and underground projects.

Risk registers will of course be familiar to users of NEC as they have been present in those contracts for many years. However, in practice, the role and purpose of risk registers is still not particularly well understood and this appears to be the reason that NEC has renamed the “risk register” as the “early warning register” in NEC4. There also seems to be a slight quirk in the drafting of the Emerald Book in that sub-clause 1.16 provides that the contractor is required to provide the Contract Risk Register and the Contract Risk Management Plan for review by the engineer within 28 days of the commencement date, whereas they are also stated to be documents forming part of the contract. This suggests that they need to have been prepared prior to execution of the contract.

First impressions

In seeking to produce the first international standard form contract for tunnelling and underground works, the FIDIC-ITA Task Group set themselves an unenviable task and the work that they have done over the last 5 years to arrive at the Emerald Book must be applauded. However, what the Emerald Book is not, is a one-size-fits-all form of contract that will be appropriate and acceptable for every project involving significant tunnelling and underground work. This is principally because it only deals with one procurement method: design-build with lump sum/measurement pricing. The concept of the Time for Completion being reduced where ground conditions are better than expected is also novel, if not radical, and goes against the usual principle that time can only be extended and never reduced. In addition, tunnelling and underground works encompass a broad spectrum of methodologies and risks (from simple drives using a tunnel boring machine and pre-cast linings to excavation using road-headers and sprayed concrete linings). Some of these will be more suited to the mechanisms for allocating risk based on production rates and prices than others.

The changes that have been made to the Yellow Book 2017 to tailor it to tunnelling and underground works are, in fact, surprisingly limited: only adding six or so pages. Most of the substantive changes contain enhanced provisions concerning the allocation of ground risk and are only found in eight sub-clauses. There are also additional provisions relating to “Contractor’s Equipment”. Most of the project-specific requirements, arising out the unique features of these works as identified by FIDIC, have been left to the parties to prepare, either in the GBR or schedules or in other contract documents. There is however useful guidance on these in the Guidance for the Preparation of Tender Documents. A “Contracts Guide” is also in the pipeline.

Critical for the successful implementation of a project under the Emerald Book will be the GBR, Schedule of Rates and Prices, Schedule of Baselines and the Completion Schedule. Although the principles behind these documents are relatively simple, their application in practice may be more complex. It will therefore be important that parties work together during the tender stage to ensure a common understanding and to prepare these documents carefully, at least until the Emerald Book has bedded in.