Practical Law

An Employer may be torn between using the FIDIC Yellow Book and FIDIC Silver Book. The Yellow Book, a design-build contract, may give greater flexibility and a lower tender price. The Silver Book, an EPC or turnkey contract, should provide greater cost certainty and risk transfer. That tension may lead to an Employer trying to get the best of both worlds, by shifting Silver Book principles into what is ostensibly a Yellow Book contract.

One recent example of this trend is forms of highways contracts let in Romania and other CEE (Central and Eastern Europe) States. This post considers some of the ways an Employer may try to include Silver Book principles in a Yellow Book contract.

Contract administration: the role of the Engineer reduced to an Employer’s Representative

The role of the Engineer under the Yellow Book is sometimes controversial because he is an agent of the Employer, who must also be a fair decision-maker for key matters under the Contract. Public sector employers in CEE countries frequently restrict the Engineer’s authority by requiring the Engineer to obtain the express approval of the Employer, before deciding those key matters.

In theory, that requirement does not prevent the Engineer from making determinations fairly. However, there is a risk that the Employer may instruct the Engineer to withhold his determination or direct him to make a particular determination. If this happens, in effect the Engineer’s role will then be limited to an agent of the Employer.

Ultimately, if the Employer were to instruct the Engineer to withhold his determination or to instruct him to make a particular determination, then the Employer would be in breach of its undertaking under Sub-Clause 3.1 not to place any further constraints on the authority of the Engineer. The Contractor may also be able to rely on Sub-Clause 1.3 [Communications] which provides that any:

“Approvals, certificates, consents and determinations shall not be unreasonably withheld or delayed.”

Extra risk transfer to the Contractor

In a number of CEE States such as Poland and Romania, key risks borne by the Contractor under the Silver Book are now being allocated to the Contractor, even in design and build projects where the Silver Book is not suitable. Those risks include errors in the Setting Out data, inaccurate or incomplete Site data, Unforeseeable physical conditions and errors in the Employer’s Requirements.

Setting out data

The key difference between the two forms of contract is that, under the Yellow Book, the Contractor is entitled to time and Cost plus profit for work that was necessitated by an error in the setting-out data, which an experienced contractor could not reasonably have discovered. However, under the Silver Book, the Contractor takes responsibility for any errors in the setting out data contained within the Employer’s Requirements.

Inaccurate or incomplete Site data

Under Sub-Clause 4.10 of both the Yellow Book and the Silver Book, the Employer must make available to the Contractor all relevant data in the Employer’s possession on sub-surface and hydrological conditions on the Site. Some employers in CEE countries have sought either to expressly exclude the Employer’s responsibility for the accuracy or completeness of such data, as in the Silver Book, or (for example, in Poland) to insert a wording limiting that obligation to the tender stage and expressly excluding the Contractor’s right to claim for an extension of time and/or additional payment in the event of inaccurate or incomplete information.

Unforeseeable physical conditions

The risk of encountering unforeseeable adverse physical conditions, in particular ground conditions, may be one of the greatest risks in a construction project. The FIDIC Yellow and Silver Books provide two radically different approaches. Under the Yellow Book, that risk is borne by the Employer to the extent that such physical conditions could not reasonably be foreseeable by an experienced contractor. However, the Silver Book generally places that risk on the Contractor.

The most extreme example of risk transfer for unforeseeable physical conditions is once again in Romania, where the wording of the Silver Book has replaced Sub-Clause 4.7 of the Yellow Book for public work contracts in the road sector.

Errors in the Employer’s Requirements

Instead of tackling errors in the Employer’s Requirements by improving the quality of the project documentation, some employers have chosen simply to adopt the regime of design responsibility of the Silver Book by allocating that risk to the Contractor. The problem is that they did so without allowing sufficient time at tender stage and certainly without accepting the cost premium attached to this significant risk.

Cap on adjustments to the Contract Price

To obtain almost a guarantee of certainty with the Contract Price, the Romanian Government went as far as including a cap on any adjustment to the Contract Price, save for adjustments resulting from changes in legislation under Sub-Clause 13.7 and changes in costs under Sub-Clause 13.8 (if the Contract include a price escalation mechanism). Its form of contract provided that the Contract Price shall not be increased by more than 10% of the Accepted Contract Amount, meaning that any payment of variations instructed by the Engineer will be capped to that level.

Conclusion

Admittedly, the Employer’s clear objective in some CEE countries is to obtain a higher degree of certainty. This is because many public works projects in those countries rely on EU financing (frequently in the region of 75-85% of the original Contract Price) and very limited state funds exist to finance a cost overrun on these projects.

However, some CEE countries may have taken that objective a step too far. For example, the Romanian government’s approach has attracted a great deal of attention among contractors bidding for highways work in the region, and, beyond Romania, there is a growing trend for significant risks, traditionally borne by the Employer under the FIDIC Yellow Book, to be transferred to the Contractor.

I would argue that this trend calls for a rapid change in EU secondary legislation to ensure that EU-financed contracts reflect FIDIC’s principles of balanced risk sharing.