Selecting the right standard form of contract is important to the success of any project in the Middle East. It is even more important when the project involves engineering with a significant testing and commissioning element to demonstrate that the completed plant performs and operates in accordance with the employer's set of output requirements.
The FIDIC suite of contracts are traditionally the contracts of choice for international projects. In the Middle East, the FIDIC forms are dominant and most projects even those with a process engineering element or are output based are procured using the FIDIC forms.
It is worth a reminder that there are other standard forms of contract available particularly when performance and operating conditions are a significant factor in the project's success.
IChemE publishes a suite of standard forms of contract which have been developed and published to reflect best practice. These standard forms are published in the English language and offer a lump sum contract, cost reimbursable and target cost pricing options.
The IChemE Red Book is a lump sum and is suitable for a wide range of industries, particularly those where a high technical input is required in design and construction. IChemE publishes the International Red Book which is suitable for international use.
For the purposes of this article, we will consider the following standard forms:
- The FIDIC Conditions of Contract for EPC/Turnkey Projects 1999 Edition known by its better name as the FIDIC Silver Book ("FIDIC Silver Book"); and
- The IChemE International Form of Contract for Lump Sum Contracts (the International Red Book), First Edition 2007 ("IChemE Red Book").
We shall focus on some key provisions which can affect an employer's choices on the appropriate form of contract to deliver a project, those being:
- the overall risk allocation; and
- the testing and commissioning regime.
Overall Risk Allocation
The key differences are:
- Good Faith: Under the IChemE Red Book the parties are to deal fairly, openly and in good faith with each other. There is no express reference to good faith in the FIDIC Silver Book. Depending on the governing law that applies, this may impose obligations upon the parties to act in accordance with good faith.
- Design: Under the FIDIC Silver Book the contractor is responsible for the design of the works and the accuracy of the employer's requirements except specific items which are subject to a carve out, which remain the employer's risk. Under the IChemE Red Book, the employer retains the responsibility for the accuracy of the information it provides.
- Fitness for purpose: Under the FIDIC Silver Book the works, when completed, must be fit for the purpose for which they are intended as defined in the contract. The IChemE Red Book does not include an express fitness for purpose obligation. The plant however when completed must in every respect comply with the requirements defined in the specification and any other provision of the contract. Depending on the governing law that applies, this may impose a fit for purpose obligation upon the contractor in respect of the plant.
- Physical conditions: Under the IChemE Red Book an employer retains the time and cost risk of unforeseeable physical conditions. Under the FIDIC Silver Book the contractor accepts responsibility for all physical conditions including ground risk.
- Delay: The grounds for claiming an extension of time under the FIDIC Silver Book are narrower in comparison to the other FIDIC books as a contractor under a FIDIC Silver Book is expected to take on greater risk when compared to the FIDIC Red and Yellow Books. Under the IChemE Red Book, the grounds for an extension of time are far wider than those afforded to a contractor under the FIDIC Silver Book. Therefore, under the FIDIC Silver Book the contractor is taking on more risk if certain events or circumstances arise that cause delay to completion of the works.
- Force Majeure Events: A contractor under a FIDIC Silver Book will be entitled to claim an extension of time for a force majeure event provided the event or circumstance satisfies specific conditions. In certain situations, the contractor would be entitled to recover additional cost depending upon the event or circumstance which has taken place and its occurrence. In comparison, under the IChemE Red Book, if a force majeure event occurs each party shall bear their own costs arising from the delay.
- Contract Management: Under the FIDIC Silver Book, the employer may appoint an employer's representative who acts on behalf of the employer. Under the IChemE Red Book, the project manager acts on behalf of the employer, and he / she is to act impartially and to the best of his / her skill and judgment as a professional engineer.
Testing & Commissioning
One of the key factors for selecting the appropriate standard form for the design and construction of a plant is the testing and commissioning process.
The IChemE Red Book is synonymous with plant that needs to undergo comprehensive testing and commissioning. The IChemE Red Book provides for the completion of the construction of the plant first with the issuance of the construction completion certificate before proceeding with the relevant taking-over tests with the issuance of the taking-over certificate. It then provides comprehensive provisions dealing with performance tests if specific guarantees are included in the contract. These provisions include detailed procedures for the performance testing of the plant, including setting out the steps for adjustments and modifications of the plant during the performance testing phase. The IChemE Red Book provides for performance liquidated damages, which is to compensate the employer if there are shortfalls in performance within certain pre-defined parameters.
The FIDIC suite of contracts provides for testing and commissioning prior to taking over of the works and post taking over once the works are completed and handed over to the employer to operate. However, the FIDIC Silver Book does not include comprehensive and detailed performance testing of plant which is to be tested and measured for performance, reliability and availability in the same manner as the IChemE Red Book does.
The IChemE Red Book offers a more comprehensive and detailed testing and commissioning regime in contrast to the FIDIC Silver Book. This is probably because the FIDIC suite of contracts are designed to be used for a broad range of international construction and infrastructure projects and are not sector specific. The IChemE Red Book is designed with process plants and process engineering in mind and would not necessarily be suited to a construction and infrastructure project which does not require a comprehensive testing and commissioning regime.
Standard form contracts for the engineering and construction of process plants require extensive and comprehensive testing and commissioning procedures to ensure the plant demonstrates it can perform and is reliable in accordance with the employer's specifications.
Therefore, where the FIDIC Silver Book is chosen for a particular project which requires the performance, reliability and the availability of the plant to be measured, this form of contract may need to be amended. This will be to ensure it adequately allows for comprehensive testing and commissioning plus remedies for shortfalls in performance, reliability and availability.
FIDIC v IChemE
These two standard form contracts are designed and intended to be used for international construction and engineering projects. However, there are significant differences between these two standard forms.
Before selecting the appropriate standard form, the knowledge of the client and its professional team on these two standard forms will be key. It is not uncommon for the FIDIC suite of contracts to be amended to include new and detailed particular conditions. In the Middle East, the FIDIC suite of contracts are typically heavily amended.
Therefore, because the employer and the professional team may have prior working knowledge on a particular standard form this may not always be helpful if new and extensive particular conditions are used.
It is advisable to use the standard form of contract which is best suited to deliver the project and to satisfy the employer's project specific requirements. If the project demands comprehensive testing and commissioning, then the employer should consider all standard form options before selecting the appropriate form for their use.
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.
