FIDIC - Universal agreement or necessary evil?

FIDIC conditions in this country

In connection with lack of orders from domestic investors and constantly increasing customer´s dictate, our contractors are forced to close agreements based on agreement conditions they do not have enough experience with, and that do not constitute their usual and established practice, such as construction based on Commercial Law. Among these are not only VOB supply conditions (Verdingungsordnung für Bauleistungen), used by German investors, but also FIDIC contract conditions, used in international construction practice. The FIDIC Conditions, including their modified versions, belong to the most used materials for closing of agreements for building works, and this not only in English speaking areas. Our contractors could have encountered FIDIC conditions already in the past, while working abroad (in Arabic countries and Middle East). However, in general, the FIDIC Conditions are regarded as unreasonable, one sided and basically putting clients into disadvantage, even if foreign contractors do not think so with regard to different practices. They do not think twice about wording of the conditions, since they present their everyday practice. In many cases contractors try to change a presented agreement instead of trying to live by it and execute work and other deliveries according to it. Especially projects Phare and ISPA, financed from European Union resources, contributed to dissemination of FIDIC Conditions in the last few years. With regard to continuously increasing share of these conditions in our market, and volume of infrastructure construction, it is necessary to know not only these conditions, but especially their interpretation, their practical application, and fundamental differences in comparison to commercial and construction practice here. An often used argument, not only of our contractors, but also some law offices, is an allegation that FIDIC Conditions are invalid, since they contradict our laws, especially the Commercial Code. This allegation, however, does not correspond to reality, since the FIDIC Conditions only extend the Commercial Code, which is insufficient for construction agreement conditions in cases of more complicated projects. Even though our contractors have a large amount of reservations to FIDIC Conditions, partially caused by insufficient knowledge of different agreement materials and different practice, there are not other agreement materials available in the world that would be created with such consistency, detail, and interlacing of individual agreement articles.

Origin of FIDIC Conditions

FIDIC Conditions are widely used as agreement conditions in World Bank and European Bank tenders, in complete or modified versions. The World Bank uses FIDIC Conditions for construction tenders, designated as SBD Works (Sample Bidding Documents for Civil Works). In this case the bank distinguishes a degree of obligation of fundamental materials, and differentiates between recommended materials and optional ones. FIDIC Conditions are also used as appendices of construction work agreements. How could it be that one agreement practice spread around the whole world, in spite of different specific conditions, laws, standards, languages, etc? The reason is primarily its flexibility and universal application practically for all types of construction work and technologies, independently of the work size, execution of construction work (general contractor, subcontractor agreements, project management) and share of local specifics. Original FIDIC Conditions of Fédération Internationale des Ingénieurs Conseils - International Federation of Consulting Engineers, headquartered in Lausanne, Switzerland, are used both for small projects, and for large investment units or infrastructure projects, transportation systems, road building, etc. One of FIDIC Conditions problems can be their translation - official translation of the English language version into the Czech language does not exist; at present, except of the basic English version, only Arabic, French, Spanish, Japanese and Russian versions exist. Although the translations are undoubtedly advantageous for contractors, phrases or some technical terms are not quite understandable in agreement negotiations. Already a division of the work itself, for example, to electrical and mechanical, does not correspond to our customs not only in name, but also in content. Therefore we recommend using the English version (original one) and use the translation only for control of an agreement text. English precedent law, professional terminology and long, and not always understandable sentences, do not make contractor´s work with agreement materials easier. However, using of a different legal order is practically ruled out. Results of legal disputes, argued according to FIDIC Conditions, are not made public, therefore a contractor cannot use this to his/her advantage.

Further Development of FIDIC Conditions

The FIDIC conditions react to developments in a construction area and projects in the world by publishing of next versions of the conditions, like, for example, a Silver Book. This takes into account construction conditions in both public sector for governmental organizations, and also a private sector. The original conditions, called the Red Book, stemmed from British Institution of Civil Engineers conditions. Conditions of the Yellow Book are used for deliveries of large equipment or investment projects, Conditions of Contract for Electrical and Mechanical Works are called FIDIC E&M Conditions in practical life. Publishing of this version was preceded by Conditions of Contract for EPC Turnkey Projects, and in 1998 by publishing of Conditions of Contract for Plant and Design-Build. A FIDIC Drafting Committee takes into account practical comments of contractors, and also results of litigation argued according to closed agreements, for updating of FIDIC Conditions. The last changes of FIDIC Conditions were published as the New Red Book and the New Yellow Book in 1999, during which time so called Short Form of Contract came into being. Even though the color marking of the agreement versions are no longer official in the world since 1998, it is still used unofficially.

FIDIC Conditions for Project Work

A specific case are work conditions, where a contractor is also responsible for the project work. The contractor then performs also the project work at his/her own cost for complex works, larger construction or technology projects or complete industrial plants. Prerequisite for this, in our practice unusual agreement arrangement, is willingness of an investor to transfer risk, resulting from project work, to a contractor. The general responsibility, normally carried here by a project engineer, is then transferred to a building contractor. The reason for such arrangement is, on investor´s side, the effort to shorten preparation process and construction itself by letting them run practically concurrently. An undisputable advantage is a time saving for the investor, even if the documentation approval process is longer, which can negatively affect a construction schedule. This fact is presented already in a selection procedure, where requirements for project work should be clearly and unambiguously described with enough detail. Especially this contractor´s request is often not fulfilled and presented investor´s project documentation is full of errors, disagreements in materials, and often has a minimal evidence capability. It is not unusual that the investor presents documentation that does not even have parameters of documentation for a building permit, and in fact has a character of a study. Although a contractor´s price is higher than a sum of project and execution costs, since his risk (contained in the price offer) is higher, this manner of execution, called D-B (design-build) in practice, is used more and more. Although the risk of errors in the project documentation is on the side of a contractor, an investor is required to continuously check the project work and approve partial project outputs. The project work is then performed by the contractor at his/her own cost in a form of a subcontract, usually based on an agreement with a project organization. However, a guarantee is problematic for the building contractor in practice; it is its amount, in a case of a project engineer, that usually does not cover all possible damages caused by designing activities. For the investor is then important that a share of additional costs - claims due to errors in project documentation, is significantly lower than in other types of work, even the price is higher. The extra costs for the investor then represent only direct requests of the investor for changes, or requests of a final user, possibly tenants (in commercial objects). The newest version of FIDIC D-B Conditions from 1999 correspond to these types of works.

Scope and Use of General and Special FIDIC Conditions

If we do not consider content of the FIDIC Conditions itself, at the first glance we are surprised by a disproportion of an agreement size and size of its appendices. The agreement itself then represents about 2-4 pages of text, while on the other side we have large appendices, primarily representing commercial and technical agreement conditions and technical specifications. The Conditions for Contracts for Works of Civil Engineering Construction (The Red Book) are the most used part of the FIDIC conditions, and are divided into:

• Part I - General Conditions and
• Part II - Conditions of Particular Applications

Even although the both parts are referring to each other in the text and originate from the same principles, they are clearly divided and have limited validity. The General Conditions that consist of 25 chapters and 77 articles (pre-1999 version), describe rights and obligations of agreement parties that stem out of usual building contracts, and are not tied to any particular country. Inner interlinking of individual parts, as well as whole chapters of these conditions are common. Every contractor must realize this when working with FIDIC Conditions, since every change of one part of these conditions impacts other conditions and contractor agreement obligations. On the other hand changes of so called Conditions of Particular Applications, specific for each project and agreement, have a limited impact on the General Conditions. If contents of the first part are the General Conditions, then the other part, i.e. Conditions of Particular Applications solve specific conditions and agreements of both agreement parties. They have a character of alternative solutions that can a client use depending on local conditions, project specifics, laws, local currency, payments, etc. Among the content of Conditions of Particular Applications are a language of the agreement, standards, bank guarantees, location of arbitration court, etc. In checking of agreement conditions a contractor checks a scope of the Conditions of Particular Applications that have a character of a list or additions to the General Conditions first. However, in general the Conditions of Particular Applications are shorter than General Conditions.

Submitting Offer Based on FIDIC Conditions

At the time of an offer submission a contractor easily recognizes, which part of General Conditions an investor requests to change. A larger size of Conditions of Particular Applications should warn a contractor of possible project risks, although sometimes it is only due to lack of experience and insecurity of the condition´s author, who wants to be "on the safe side". If General Conditions present an adequate amount of risk from a point of view of price, than Conditions of Particular Applications present significantly higher risk. There is enough cases in practice, where a contractor does not take into account investor´s requests in Conditions of Particular Applications and does not reflect them in the price of an offer. In general, however, a scope of these conditions is specific and depend on each particular case, that is why there is no criterion of "recommended or prescribed scope". This fact was also a reason for a division of the Conditions to General and Particular ones in the first place. FIDIC Conditions do not, on principle, specify, among other things, use of standards that must be negotiated between an investor and contractor - usually a request to use particular standards is a part of Conditions of Particular Applications (S.C.C.). Poor knowledge of FIDIC Conditions in practice leads to situations, where a contractor wants to change or add to General conditions during a selection procedure. Also in case of so called negotiated contracts an investor allows discussion only within a scope of Conditions of Particular Applications and then only a limited one. However, there are still more and more selection procedures, where an investor submits other types of agreements, in which any suggestions by a contractor are excluded. These are called tendered contracts, and are based on "take it or leave it" principle. Even although most investors are convinced that this is the best way of a selection procedure, which solves all investor´s problems of increase of extra costs, in practice it brings the most contractor claims. This state is a reflection of the fact that a scope of materials in a selection procedure is not always clear, unambiguous, understandable to a contractor, and that minimally general conditions are not negotiated with the contractor. A significance of a negotiated agreement is then underestimated on the investor´s side, and although we do have a customer dictate, we also have increasing number of additional contractor requests, submitted after the agreement close. If the contractor is then forced to include all ambiguities and risks into his agreement with an investor, than his price increases intolerably.

Check of Submitted Agreement According to FIDIC Conditions With regard to significantly different contractor agreement obligations in comparison to our commercial and construction practice, we recommend a check of submitted FIDIC Conditions in a below specified extent. Creation of analysis of these conditions submitted by an investor, their interpretation, and determination of project risks is then practically necessary and significantly lowers a contractor´s risk due to lack of knowledge of these conditions. We recommend to perform the inspection of the FIDIC Conditions minimally in this extent:

• which version of FIDIC Conditions was submitted by investor?
• is extent of Conditions of Particular Applications defined?
• is hierarchy of materials and documentation defined?
• are contractor´s suggestions taken into account in an investor´s
• Letter of Acceptance?
• what are guarantees requested by investor?
• what are critical competencies of engineer based on submitted agreement?
• are risks on investor´s side defined, including Force Majeure?
• does contractor need to be additionally insured?

A prerequisite for successful execution of a project is not only a seminar on FIDIC questions or an interpretation of agreement conditions text, but primarily practical knowledge of FIDIC Conditions and their detailed analysis.