The Silver Book was FIDIC's response to market demands for greater risk security and cost and time certainty in construction projects. It seeks to mitigate the effects of delays and unexpected costs, and it allocates risk to a single entity, which makes it favourable to Lenders. Although controversial, the Silver Book is now commonly used in project financed construction projects.
The Silver Book has become synonymous with 'power' projects which involve a complex interaction between government, project companies, Lenders and Contractors, as well as the project's long term operation and maintenance. Inflexible budget requirements and a fixation on return on investment have led to a market preference for fixed, lump-sum contract prices that do not increase – even if unexpected circumstances arise, and even if it means an inflated contract price to cover these risks. The Silver Book is generally perceived as one-sided, and Contractors look upon it with some caution.
Many REIPPPP projects are based on the Silver Book. Although these 'power' projects represent considerable opportunities for Contractors, particularly local ones, those who are familiar with the Red and Yellow Books may not be aware of the nuances of - and pitfalls to be avoided in the Silver Book. A fundamental shift in mind-set is therefore required on the part of Contractors.
The new reality
The Silver Book was drafted with Lenders in mind and it is difficult to find any attempt at equitable risk allocation. The Lenders' requirements are paramount! As a result, the risk allocation in the Silver Book is by no means neutral and if it is not managed effectively, it is liable to consume Contractors. This is best illustrated by the fact that the 'Engineer' role has been removed from the Silver Book and the Employer's Representative takes over this role, providing no pretence that a third party is looking out for the Contractor's interests.
Regardless of the 'inequitable' risk allocation, the Silver Book has found favour with Lenders on the REIPPP projects, and it will continue to be used in the next rounds.
Two Major Perils
1. The first peril in the Silver Book relates to the Contractor's general design obligations (Sub-Clause 5.1.). Not only does it deem the Contractor to have scrutinised the Employer's Requirements, but it also holds the Contractor responsible for the Employer's Requirements as from the base date (the date on which the Contractor's tender price becomes the fixed contract price).
The issue is that the Contractor is simultaneously bound by a fixed contract price and by Employer's Requirements which are continually in flux. The Contractor's remedy is to try to limit its design risk by refusing to carry the risk of post-base-date changes to the Employer's Requirements. Alternatively, it must charge a hefty premium on the contract price - the Contractor should, in our view, be liberal in pricing even the remotest of risks. Lenders will usually accept an increased contract price in exchange for the contractor taking complete risk responsibility.
2. The second danger relates to the accuracy, sufficiency and completeness of site data, and this appears in Sub-Clause 4.10. This clause makes it the Contractor's responsibility to verify and interpret all site data, which for the most part the Employer will provide to the Contractor. Not only must the Contractor's tender price make provision for this responsibility, but the Contractor must also be afforded enough time to consider the potential risks on site. This will benefit both the Contractor and the Lenders. The Contractor should, in fact, use the lure of certainty as leverage to get as much time as possible to properly evaluate the site data and thereby tender an accurate price – the time spent on verifying site data pales into insignificance alongside the cost of an in-depth investigation.
In light of this, the Contractor should take advantage of the exception contained in Sub-Clause 4.10. This reads: 'The Employer shall have no responsibility for the accuracy, sufficiency, completeness of [site] data, except as stated in Sub-Clause 5.1' Sub-Clause 5.1 holds the Employer responsible for four portions of the Employer's Requirements, the fourth being 'information which cannot be verified by the Contractor except as otherwise stated in the Contract.' Accordingly, the Contractor should list those aspects of the site data that it was unable to verify given the time constraints, and insist on its inclusion in the particular conditions. This list will provide objectivity (and should be presented to the Employer on that basis) to a clause that could be the source of enduring, expensive and risky disputes. Yes the Contractor can bargain with the Employer - particular aspects of site data in return for further time to verify site data - but the list itself must be very high on the Contractor's agenda!
These are the two most commonly disputed issues in the Silver Book. There are, however, many more perils for the Contractor. The Contractor should, at minimum, insist that it is given the rights to which the Silver Book ordinarily entitles it. In other words, the Contractor should not agree to provisions that are more onerous than the standard ones. The Contractor must also exercise and exploit the limited rights that it does have with diligence and prudence, with the full knowledge that it faces two adversaries. The first: the Employer, acting in concert with the Lenders. The second: the Silver Book itself.
Let the Contractor beware!
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.