Dr.

Sherif EL-Haggan
Partner / Director, Contract Administration & Arbitration Bureau
Fellow (FCIArb) / Approved Tutor, Chartered Institute of Arbitrators, London
CEDR/IFC Accredited Mediator (Train-the-Trainer), London
Professor (Construction Law), Arab Academy for Science & Technology (AAST)
DRBF (Dispute Review Board Foundation) Country Representative for Egypt (2012 – 2016)
Professor (Construction Law), American University in Cairo (1997 - 2018)
de Bono Thinking Accredited Certified Trainer, Oxford, England
Founder / Direcor, EL-Haggan Teaching Thinking Foundation
Who’s Who Legal (2015 / 2016)
 1

CONTENTS

RISK IN THE CONSTRUCTION INDUSTRY .................................................................... 3 

INTRODUCTION .............................................................................................................................. 3 

PRINCIPLES OF RISK MANAGEMANT ........................................................................... 5 

TYPES OF RISKS ................................................................................................................................... 6 

COST OF RISKS..................................................................................................................................... 6 

RISK MANAGEMENT ............................................................................................................................ 6 

RISK ANALYSIS.................................................................................................................................... 8 

RESPONSIBILITY AND LIABILITY ......................................................................................................... 9 

RISK CONTROL .................................................................................................................................... 9 

CONSTRUCTION RISK MANAGEMENT ....................................................................... 10 

CONSTRUCTION HAZARDS................................................................................................................. 10 

CONSEQUENCES ................................................................................................................................ 11 

RISK CONTROLS................................................................................................................................. 11 

RISKS WHICH MAY RESULT IN DELAYS AND/OR INCREASED COSTS TO AN EMPLOYER ..................... 11 

RISKS WHICH MAY RESULT IN DELAYS AND/OR INCREASED COSTS TO A CONTRACTOR................... 14 

RISK BIAS OF SPECIFIC DIFFERENT STANDARD CONTRACT FORMS ................................................... 15 

REFERENCE: L. EDWARDS, “PRACTICAL RISK MANAGEMENT IN THE CONSTRUCTION INDUSTRY”,

ENGINEERING MANAGEMENT, THOMAS TELFORD, LONDON, 1ST EDITION, 1995. ............................ 15 

TYPES OF CONTRCATS .................................................................................................... 16 

(1) LUMP SUM CONTRACTS............................................................................................................... 16 

(2) BILL OF QUANTITIES CONTRACTS / REMEASURED...................................................................... 16 

(3) COST REIMBURSEMENT CONTRACTS .......................................................................................... 17 

PROCUREMENT FORMS ................................................................................................... 17 

1. TRADITIONAL FORM:..................................................................................................................... 17 

2. DESIGN–BUILD FORM: .................................................................................................................. 17 

CONDITIONS OF CONTRACT .......................................................................................... 19 

PURPOSE OF CONDITIONS OF CONTRACT .......................................................................................... 19 

GENERAL CONDITIONS OF CONTRACT .............................................................................................. 20 

ALLOCATION OF RISKS IN THE FIDIC CONTRACT (THE RED BOOK) ................................................ 22 

Dr. Sherif EL-Haggan - CLAC 030

 2

LUMP-SUM CONTRACTS .................................................................................................. 24 

DESIGN & BUILD CONTRACTS ...................................................................................... 25 

SKANSKA CONSTRUCTION UK V EGGER (BARONY).............................................................................. 28 

CASES ..................................................................................................................................... 31 

YORKSHIRE WATER AUTHORITY V. SIR ALFRED MCALPINE & SON .................... 32 

(NORTHERN) LTD (1985)..................................................................................................... 32 

BOOT CONSTRUCTION LIMITED V ALSTOM COMBINED CYCLES LIMITED ....... 34 

SHARPE V. SAN PAULO BRAZILIAN RAILWAY CO. ..................................................... 37 

COMMISSIONER FOR MAIN ROADS V. REED & STUART PTY LTD ......................... 38 

MOLLOY V. LIEBE................................................................................................................ 38 

HOLLAND HANNEN AND CUBITTS LTD V. WELSH HEALTH TECHNICAL

SERVICES ORGANISATION ............................................................................................... 39 

THE SILVER BOOK - INTRODUCTORY NOTES.............................................................. 40 

Dr. Sherif EL-Haggan - CLAC 030

 3

RISK IN THE CONSTRUCTION INDUSTRY

INTRODUCTION

It is only by risking our persons from one hour to another that we live at all
William James (1897)

This chapter is aimed at providing the basic concept and some details related to the
subject of risk analysis and management. The main objective is to provide an
understanding of the general principle and to assist in comprehending the topics
covered in this program.

The subject of risk, its assessment, allocation and management in construction projects
has been developed and applied on an increasing scale over the last 20 years. Those
new to project management often create project goals that have more in common with
fairy tales than business objectives. Even the smallest projects are constrained by
reality. As projects get larger, more risks come into play that can change the vision of
utopia into a nightmare in hell.

Constraints, unlike risks, are known in advance. They are the real world limits on the
possibilities of the project. If you violate the constraints in defining your project, the
project will fail in some way.

Identifying risks and constraints beforehand provides you time to mitigate those that
can be fixed or to notify the stakeholders that the project may be in jeopardy even
before it begins. Going into a project with a “we can do anything” attitude may support
team spirit at the onset, but when reality sets in, your team will become frustrated,
management will complain, and you will kick yourself for not fixing the up-front
problems up front.

In the early 1990s the construction industry became more aware of a management
approach to dealing with hazards, already assimilated by certain other areas of
commerce and industry, called risk management. The basic processes of risk
management are quite simple: hazards are identified; the probabilities and
consequences of occurrence are assessed; priorities established; the resulting risks are
eliminated or reduced and then provision is made for residual risks (risks which cannot
be totally eliminated, substituted or contractually transferred to others).

Dr. Sherif EL-Haggan - CLAC 030

 4

Risk management is merely a mirror image of commercial management: the latter is

concerned with the identification and implementation of profit making
opportunities whilst the former is concerned with reducing the opportunities for,
and consequences of, loss.

The words ‘risk’ & ‘hazard’ are often used interchangeably. A ‘hazard’ is usually
considered to be something that might go wrong with adverse consequences, whereas a
risk is the multiple of the cost of that hazardous consequence and its possibility of
occurrence.

Dr. Sherif EL-Haggan - CLAC 030

 5

PRINCIPLES OF RISK MANAGEMANT

Risk is defined in British Standard No. 4778: Section 3.1: 1991,7.6 as 'A combination
of the probability, or frequency, of occurrence of a defined hazard and the
magnitude of the consequences of the occurrence'. In the same British Standard, the
definition of hazard is given as 'A situation that could occur during the lifetime of a
product, system or plant that has the potential for human injury, damage to
property, damage to the environment, or economic loss'. Based on these two
definitions, risk may be expressed in the form of a mathematical equation, as follows:

Risk = Probability, or frequency, of the occurrence of a defined hazard 

Consequences of the occurrence of that hazard; R = P  C

There are a number of points which flow from the above mathematical expression
which are as follows:
(a) An undesirable event may have a number of different causative factors, of which
one or any combination could lead to its occurrence. For example, if the
undesirable event is the collapse of a retaining structure at a construction site, such
collapse may have been caused as a result of bad ground conditions, material
failure, defective design, or a combination of some or all of these factors. All these
factors are referred to as hazards;
(b) A triggering incident is usually necessary for a hazard to eventuate into an
undesirable event. For example, if the retaining structure collapse was due to a
defective section in its wall, the triggering incident could be the imposition of an
additional loading beyond the limit sustainable by that defective section.
(c) The hazard may result in different levels of severity or magnitude of consequences
depending on the particular circumstances and timing of the event. For example,
the consequence of the collapse of the retaining structure may be a financial loss in
the form of the cost of the repair to the cofferdam, or it may extend to a critical
delay in the completion of the project, or it may go beyond the financial loss and
delay into personal injury and death.
(d) Expressing risk in a mathematical formula permits a comparison of the magnitude
of the various risks to which a project is exposed. Such a comparative analysis
may then be used to decide whether to accept a particular risk or take measures to
eliminate it or, at least, to mitigate its effect.

Dr. Sherif EL-Haggan - CLAC 030

 6

In summary, when a hazard eventuates into an undesirable event, the sequence of

events can be expressed as follows:
hazard  triggering incident  undesirable event  consequences 
assessment and evaluation.
Types of risks

 physical/material - loss due to fire, corrosion, structural defect

 consequential - loss of profits following fire, theft
 legal liabilities - statutory liabilities, contractual liabilities
 political - governmental intervention, inflationary/deflationary policies,
changes in legislation, sanctions
 financial - inadequate inflation forecasts, incorrect marketing decisions
 technical – increased technology in manufacture, communications, data
handling, methods of storage

Cost of risks
 direct costs of loss - repairs or replacement of damaged goods or property
 consequential costs of loss - loss of, or reduced output, losses whilst
retraining replacement staff or becoming familiar with replacement
equipment, accident investigation costs, increased premiums
 indirect costs of loss - loss of market share, poor workplace morale,
recruitment problems, adverse press relationship.

Risk management
Risk management is defined in BS 4778 as 'the process whereby decisions are made to
accept a known or assessed risk and/or implement actions to reduce the consequences
or probability of occurrence'.

When hazards are identified, assessed and analysed, their management must be
allocated to the various parties in order to keep them under control, prevent the
occurrence of their harmful consequences and thus reduce the risk. Such allocation is
part of the risk management process, where the party to whom a certain hazard and
associated risk are allocated should be selected in accordance with certain rules rather
than haphazardly. The rules for allocation of risks in a construction project may
simply revolve around the ability of a party to:

Dr. Sherif EL-Haggan - CLAC 030

 7

 control any arrangements which might be required to deal with the hazard or
any triggering incident relating to it;

 control the risk or to influence any of its resultant effects;

 perform a task relating to the project, such as obtaining and maintaining

insurance cover; and

 benefit from the project.

On the other hand, the rules may revolve around an already established policy, such as
the following terms:

‘... while an event may be foreseen ... employers may see advantages in a contract
which requires the contractor to assume that risk, and to include for the cost of
dealing with that situation in his tendered contract price. Where the risk is
uncertain, this logically requires that a contingent element will have to be included
in the original price which, in the event, may possibly not be required. If so, the
employer will have agreed to an unnecessarily high price but may regard that as
preferable ... than a lower price subject to post-contract upward adjustment at a
late stage should the risk materialise ... whether or not a particular risk should be
so included in the price is in essence a question of policy and not of "fairness",
"morality", or "justice."’

If risks are analysed on the basis of the effect they generate once they eventuate, two
basic types of risk can be identified:

The first type incorporates the risks which could lead to damage, physical loss, or
injury, e.g. defective design, defective materials, defective workmanship, fire, human
error and failure to take adequate precautions.

The second type incorporates risks which could lead to lack or non-performance of
the contract, delay in completion of the Works and/or cost over-run of the constructed
project, e.g. late possession of the site, delay in receipt of information necessary for
timely construction, changes in design, and variations to the original contract.

Dr. Sherif EL-Haggan - CLAC 030

 8

Risk analysis
Risk analysis comprises the following activities:

I. Hazard identification
As many hazards as possible need to be identified. Methods comprise:

 available records
 brain storming sessions
 physical inspections

II. Assessment of consequences

The consequences, usually financial, of a hazard occurring must be determined.

III. Assessment of probability

Probability of hazards may be determined from:

 historical records of the organization

 site specific records of physical risks

IV. Determination of risks and establishment of priorities

Order of priority can be established. This is usually done by using the formula:

Risk = Probability of Occurrence  Potential Loss

The following table gives a very simple example of how four risks of assessed
consequence and probability can be prioritized using the risk formula:

Hazard no. Loss potential Probability Risk Ranking

1 £l.00 m 1 in l00 £10,000 3

2 £0.50 m 1 in 20 £25,000 1

3 £1.50 m l in 200 £7,500 4

4 £0.20 m 1 in 10 £20,000 2

Dr. Sherif EL-Haggan - CLAC 030

 9

Responsibility and liability

Whatever the rules or the reasons for allocation of risks, the responsibility and liability
attaching to these risks when they eventuate, follow and flow from that allocation.
Accordingly, the simplicity and clarity of the wording where such allocation is made
is of paramount importance. This means that the contractual arrangements, the legal
rules of the applicable law of the contract and the technical documentation, such as the
specification and the drawings, must be clearly stated and fully understood. Once
liabilities are assigned through the contract documents, the parties involved have the
following options to finance the consequences of risks should these risks eventuate:

(a) To retain the responsibility for financing the costs of loss or damage or injury
(b) To transfer the responsibility for financing the costs of loss or damage or
injury or non-performance to:
i. Another party to the contract by agreement, thus creating a
sharing of risks;
ii. An insurer through an insurance contract. An insurer may impose
his own risk management conditions, thus creating another cycle
of transfer.

Risk control

Each significant risk must be considered in terms of:

 elimination of the hazard, e.g. no hot cutting/welding on premises
 substitution of the hazardous activity by a less hazardous one, e.g. use more
prefabricated structural components for construction over water
 reduction of the hazard, e.g. more guarding/watching to reduce theft
 reduction of the probability of occurrence, e.g. training and education of
personnel in use of specialized equipment
 minimization of the consequences, e.g. the provision of back-up and standby
equipment, emergency planning procedures
 contractual transfer or financial provision for residual risks.

Dr. Sherif EL-Haggan - CLAC 030

 10

CONSTRUCTION RISK MANAGEMENT

Construction hazards

Based on the statistics gathered in the past two decades on topics such as disputes in
the construction industry and international arbitration, accidents at work and exposure
to natural hazards around the world, it can be concluded that construction projects are
sensitive to an extremely large matrix of hazards and risks. This sensitivity is due to
some of the inherent characteristics of construction projects which are summarised as
follows:

(a) The time required to plan, investigate, design, construct and complete a
construction project spans such a lengthy period that it is often greater than
the period of cyclical recurrence, known as the 'return period', of many of the
hazards are exposed.
(b) The number of people required to initiate, visualise, plan, finance, design,
supply materials and plant, construct, administer, supervise, commission and
repair any defects in a construction project is enormous.
(c) Many civil engineering projects are constructed in isolated regions of
difficult terrain, sometimes stretching over extensive areas and exposed to
natural hazards of unpredictable intensity, frequency and return period.
(d) The materials selected for use generally include a number of new products of
unproved performance or strength.
(e) Extensive interaction is required between many of the parties involved in
construction, including those engaged as suppliers, manufacturers, sub-
contractors and contractors, each with its own different commitments and
goals.
(f) Construction projects are susceptible to risk cultivation by the parties them-
selves or by others associated with them or advising them.

It is therefore extremely relevant for the construction industry and those involved
in it to understand the concept of risk and to know how to manage properly the
risk matrix generated when a construction project is initiated.

Dr. Sherif EL-Haggan - CLAC 030

 11

Consequences
Construction hazards occurring can result in:

 failure to keep within budget

 failure to keep within the time contracted for handing over
 failure to meet the required technical standards for quality or fitness for
purpose.

Risk controls
Risks or their financial consequences can be:

 eliminated, reduced, controlled. For instance, design requirements can be

altered, construction methods or materials changed, more investigation
undertaken, more training given or more supervision provided. As a last
resort there may be a refusal to tender for work which is too risky

 transferred contractually to others, or insured. For example, risks can be

transferred:
 from client to contractor or insurer

 from contractor to subcontractor, or insurer

 from designer to insurer

 retained and financial provision made by self-financing.

Risks which may result in delays and/or increased costs to an employer

The following list cover some of the more usual risks:

Third-party-controlled risks

 Approvals:
 planning approvals
 use of hazardous substances on site
 tree preservation orders
 need for environmental impact assessments
Dr. Sherif EL-Haggan - CLAC 030
 12

 Legal agreements:
 rights of way
 noise control requirements

 Pressure groups, local protests

 Changes in regulations
 Changes in legislation
Inherent site-specific risks
 Access restrictions or limitations.
 Existing occupiers/users
 Effect of existing buildings:
 protection
 demolition
 Existing site boundaries
 Requirements for new services from statutory undertakings
 These will include water, gas, sewage, electricity, telephone
 Use of existing services:
 availability to suit site requirements, capacity, conditions
 need to determine location, effect of disruption
 need for relocation around site
 Ground conditions:
 extent of pre-construction investigations
 soil types and variability
 contaminated land
 Climate and weather conditions.
Direct client-controlled risks
 Inaccurate or insufficient terms of reference
 Changes in requirements
 Changes to timescale:

Dr. Sherif EL-Haggan - CLAC 030

 13

 late decision taking

 late handing over of site
 postponements, accelerations or delayed programme
 early handover of part or whole of contract
 Financial implications:
 availability of funds
 liabilities to others if contract completed late
Design-team risks
 Inaccurate interpretation of terms of reference
 Errors in design, contract documents, drawings
 Failure to meet required timescale
 Estimating inadequacies
 Experience of team
 Continuity of staff
Contractor risks
 Failure to meet programme:
 inadequate resources, estimates of duration of activities
 poor co-ordination of subcontractors
 inclement weather
 Poor workmanship
 Poor site management, quality control, staff experience, continuity

Dr. Sherif EL-Haggan - CLAC 030

 14

Risks which may result in delays and/or increased costs to a contractor

Client risks

 Client cancels project

 Client delays start of project
 Client suspends works
 Client delays payments of certificates and claims
 Client delays taking over works
 Deficiencies, errors, contradictions, ambiguities in contract documents
 Inadequate supply, quality, timing of information and drawings by client's
designers

 Unexpectedly onerous requirements by client's supervisors

 Unexpected inadequacy of pre-construction site investigation data
 Unforeseen ground conditions
 Late changes
Supplier/subcontractor risks
Constructional plant risks
Direct contractor risks

 Shortages of experienced staff and labour

 Contractor start delay
 Contractor poor performance
 Fire, theft, other physical risks
 Unforeseen events and delays not allowed for in tender
 Responsibility to correct defects in defects liability/maintenance period
 Long term responsibilities for latent defects
 Unforeseen services, obstructions, grand conditions

Dr. Sherif EL-Haggan - CLAC 030

 15

Financial risks
 Inadequate tender pricing
 Unexpected price escalation not covered
Third party risks
 Statutory changes affecting construction, e.g. health and safety requirements
 Unexpected difficulties as a result of need to liaise with other contractors on
site
 Delays in approvals by engineer, client, local authorities
 Local environmental pressure groups
Overseas risks
 Overseas skills/supervision shortages
 Overseas plant, spares and material shortages
 Local customs
 Import/export difficulties
 Exchange control restrictions
 Unexpected exchange rate movements
 Bureaucratic delays
 Remoteness of site access and/or facilities and/or communications.

Risk bias of specific different standard contract forms

Each type of contract will allocate risks differently between the parties. There are a
significant number of alternative standard construction contract forms used they
include for different ways of reimbursing a contractor for works undertaken, e.g. fixed
price or remeasurement; they allocate risks between the parties in different ways; The
following are some of the more common standard forms in the UK.

Reference: L. Edwards, “Practical Risk Management in the Construction

Industry”, Engineering Management, Thomas Telford, London, 1st edition, 1995.

Dr. Sherif EL-Haggan - CLAC 030

 16

TYPES OF CONTRCATS
A variety of Contractual arrangements are available and the engineer will often need to
carefully select the form of contract which is best suited for the particular project. The
principal types of contract used on civil engineering projects are examined:

(1) Lump Sum Contracts

The simplest type of civil engineering contract is a lump sum contract without
quantities, wherein the contractor undertakes to carry out specified works for a fixed
sum of money. The extent of the problems facing contractors will be influenced by the
nature and degree of certainty of the work. Ideally, the use of this form of contract
should be restricted to relatively small projects in which most or all of the work is
above ground and clearly definable.

In the absence of a bill of quantities, each contractor tendering will have to assess the
amount of works involved and this will normally have to be undertaken in a very short
period of time amongst other activities. Under these circumstances a contractor, unless
he is extremely short of works, is almost certain to price high to allow himself a
sufficient margin to cover for any items that he may have missed. Furthermore, there is
no satisfactory method of assessing the cost of variations.

(2) Bill of Quantities Contracts / Remeasured

This is the most commonly used form of contract for works of civil engineering
construction where the quantities of the works can be computed with reasonable
accuracy from the drawings and associated documents. The contractor enters a unit
rate against each item of work and the extended totals are added together to give the
tender total. This type of contract is a measure and value contract and provision is
made for the valuation and adjustment of rates for varied or additional works.
Bills of quantities assist in keeping tender figures as low as possible, as they offer the
following advantages:
 The contractor is paid for the actual amount of works done
 There is the facility for dealing with altered works

Dr. Sherif EL-Haggan - CLAC 030

 17

 All tenderers price on a comparable basis

 Adjudication of tenders is relatively straightforward
 Most contractors are thoroughly familiar with this type of contract and are
thus better able to submit a realistic price for the works.

(3) Cost Reimbursement Contracts

The employer pays to the contractor the actual cost of the work plus a fee which will
include the contractor’s over head charges, supervision costs and profit. The two most
common types of this method of procurement are:
i. Cost plus percentage fee
ii. Cost plus fixed fee contracts

PROCUREMENT FORMS

The construction industry has witnessed various methods of building procurement

such as the “Traditional Contracting Form” and the “Design-Build Form”.

1. Traditional Form:

A method of building procurement where responsibility for the design lie with the
employer’s consultants. Thus, the contractor is only responsible for construction works

2. Design–Build Form:

A form of building procurement whereby the contractor also undertakes the design
of the works. This is an evolution of the “Package Deal” method that started in the
late 1950s where contractors offered employers a complete “package” in contrast to
the traditional arrangements. The employer, frequently using the services of an
engineer, normally gives his requirements in broad outline to contractors, who are
asked to submit full details of design, construction and cost. This procedure has been
used in the chemical and oil industries and nuclear power stations. The evaluation and
comparison of contractors’ tenders is complicated as each contractor is likely to
interpret the brief in a different way. A number of names have emerged to describe
what is called different “varieties” of Design-Build procurement such as:

Dr. Sherif EL-Haggan - CLAC 030

 18

Type Leading Role

Develop and Construct Employer-led-Design

Design- Build (1-stage tender) Employer-led-Design
Design- Build (2-stage tender) Contractor-led-Design
Negotiated Design-Build Contractor-led-Design
Design and Manage Contractor-led-Design
Turnkey Contractor-led-Design

Employer’s input

Develop & Construct

Design-Build (1 stage)

Design-Build (2 stage)
Negotiated Design-Build
Design & Manage
Turnkey

Contractor’s input

Dr. Sherif EL-Haggan - CLAC 030

 19

CONDITIONS OF CONTRACT

Purpose of Conditions of Contract

The document referred to in engineering contracts as "Conditions of Contract" is
intended to regulate the relationships between the parties to the contract; it
defines the parties and their responsibilities to each other as well as their
responsibilities for various aspects of the contract. The liabilities of each of the
parties and the respective risks to be taken by them are usually implicit in the
defined responsibilities, but because of the complexity of the usual form of Conditions
of Contract, it is preferable for those liabilities to be explicitly defined.

Engineers concerned with the drafting of Conditions, or amendments to them,

should have a good knowledge of contract law; when in doubt they should take legal
advice on the subject. Also, it is essential that lawyers who check engineering
contracts should have specialist experience in the subject; a general lawyer without
this specialist experience is unlikely to be able to provide sound advice on the
subject.

Because of the nature of engineering contracts, particularly those involving a

substantial amount of site work, there is a need for administration, supervision and
inspection throughout the period of the contract. In the British system, which is
generally used throughout the Commonwealth (and in a modified form in North
America), and elsewhere in the form of the FIDIC Conditions, a professional engineer
or consultant is named and is usually entirely responsible for administration of the
contract and for deciding disputed points in a manner which is fair to all the parties to
the contract. The powers and responsibilities of the Engineer are a fundamental part of
the contract and their proper definition and description are important items in the
drafting of the contract documents.

Contracts for the construction of buildings may be considered in the same category as
civil engineering contracts. Many buildings are constructed under the ICE Conditions;
the government contract form GC Works covers both building and civil engineering
works. Building contracts in the British system introduce two new characters to the
draftsman, namely the Architect and the Quantity Surveyor, who jointly perform the
functions of the Engineer in an engineering contract.

Dr. Sherif EL-Haggan - CLAC 030

 20

General Conditions of Contract

The General Conditions are intended to govern and regulate the requirements of the
formal contract or agreement. They do not serve as a waiver of any legal rights that
either party to the contract may otherwise possess. The General Conditions of the
Contract are intended to regulate the functions of either party only to the extent that his
activities may affect the contractual rights of the other party or the proper execution of
the work. The General Conditions is the most overlooked, yet one of the most
important documents in the contract documents. It is this document that establishes the
ground rules for administration of the construction phase of the project.

International projects have their own standards, usually FIDIC. The documents of the
"FIDIC Conditions of Contract for Works of Civil Engineering Construction" are used
almost universally on international engineering projects financed by the international
banking industry, the United Nations, and others. The scope of coverage of the FIDIC
General Conditions includes:
1. Definition and interpretation
2. Engineer and engineer's representative
3. Assignment and subcontracting
4. Contract documents
5. General obligations
6. Labor
7. Materials, plant, and workmanship
8. Suspension
9. Commencement and delays
10. Defects liability
11. Alterations, additions, and omissions
12. Procedure for claims
13. Contractor's equipment, temporary works, and materials
14. Measurement
15. Provisional sums
16. Nominated subcontractors
17. Certificates and payment
18. Remedies

Dr. Sherif EL-Haggan - CLAC 030

 21

19. Special risks

20. Release from performance
21. Settlement of disputes
22. Notices
23. Default of employer
24. Changes in cost and legislation
25. Currency and rates of exchange

FIDIC represents the interests of independent consulting engineers worldwide. It

serves as the liaison for its membership with international banks and agencies, such as
the International Bank for Reconstruction and Development, the Inter-American
Development Bank, the African Development Bank, the Asian Development Bank, the
United Nations Development Programme, the Food and Agriculture Organization of
the United Nations, the World Health Organization, the United Nations Office of
Technical Cooperation, the European Development Fund, the Kuwait Fund for Arab
Economic Development, the Arab Fund for Economic and Social Development, and
others.

Standard forms of General Conditions have many advantages:

 They generally the result of collaboration with industry and government
leaders, and thereby should represent a fair and equitable method of handling
a construction contract;
 They have normally had the advantage of being thoroughly critiqued by
members of both the engineering and the legal professions;
 Many have been tested in court and can be relied upon to provide similar
protection to all who use them;
 They evolved into a form that has withstood the test of time and experience
 Such documents have become familiar to those who use them. After repeated
usage, a contractor will clearly understand all of its terms, meaning, and
implications. This is often reflected in a stability of tender prices, as the full
effect of the document's provisions on the contractor has already been
established, as far as costs are concerned.

Dr. Sherif EL-Haggan - CLAC 030

 22

Allocation of risks in the FIDIC Contract (The Red Book)

The FIDIC Form of Contract for Civil Engineering Works (the Red Book) is drafted
on the basis of sharing of risks between the employer and the contractor. The
principles of sharing of risks in the Red Book are similar to those in the ICE
(Institution of Civil Engineers, London) Form of Contract which can be best stated by
reference to the draftsman's reply to criticisms made after the publication of the Fifth
Edition of that Form. The principles were stated as follows:

'It is a function of a contract to define upon whom the various risks of an enterprise
shall fall, and it was decided that the Contractor should only price for those risks
which an experienced contractor could reasonably be expected to foresee at the time of
tender... It is the right and the duty of the Employer to decide, and by his Engineer to
design and specify that which is to be done, and it is the Employer's duty to allow the
Contractor to do that which is to be done without hindrance. It is the duty of the
Contractor to do what the contract requires to be done, as designed and specified by
the Engineer, but, subject to any specific requirement in the contract, it is his right and
duty to decide the manner in which he will do it. If there are to be exceptional cases
where the Contractor is to decide what to do or to design what is to be done, or where
the Employer or the Engineer is to decide how the work is to be done, the contract
must expressly provide for this and for the necessary financial consequences for the
protection of the Contractor.'

Whilst these principles were stated in connection with the 5th Edition of the ICE Form,
they are in essence the same for both the Red Book, the 6th and 7th Editions of the ICE
Form, although they may differ in detail.

Not all undesirable events or hazards in a particular construction project can be

foreseen and identified. Whereas it is possible to plan for those hazards which can be
foreseen and identified, it is extremely difficult, if not impossible, to do so for the
unidentified hazards. Accordingly, where risk management is concerned, the decision
on what is practicable or acceptable risk exposure is generally made without a
complete identification of the hazards and consequently their probability of
occurrence.

Dr. Sherif EL-Haggan - CLAC 030

 23

Risks involving unidentified hazards are, therefore, extremely difficult to allocate or

apportion between the parties. By definition, they cannot be avoided and their
consequences cannot be accurately assessed.

Should the employer decide, for financial or other reasons, that he is not prepared to
assume certain of the identified risks, the tender documents must reflect that policy
decision. Similarly, tenderers who participate in the tendering process must show that
they are prepared to accept that policy decision and may reflect the acceptance of the
risks allocated to them in their price.

Dr. Sherif EL-Haggan - CLAC 030

 24

LUMP-SUM CONTRACTS
A lump-sum contract is an agreement to complete a whole work for a lump sum. In
law this is an undertaking to get a certain result for a fixed sum of money. The
contractor is entitled to that sum only, however difficult it may unexpectedly turn out
to be to get the result. The simplest type of civil engineering contract is a lump sum
contract without quantities, wherein the contractor undertakes to carry out specified
works, to get a result, for a fixed sum of money. The use of this form of contract
should be restricted to relatively small projects in which most or all of the work is
above ground and clearly definable.

Case
Lump sum contract to lay the San Paulo Railway from terminus (A) to terminus (B).
As a result of errors in the engineer's plans almost twice the quantities of excavation
originally estimated were needed to complete the line.

Held: The contractor was entitled to no extra payment beyond the lump sum price in
his tender and no work indispensably necessary to get the result is an extra.

Therefore in a pure lump sum contract the contract price will be altered only where the
plans, etc., are varied by the employer; not where the change is necessary to complete
the project.

Of course, this principle works both ways. An employer has no right to make a
deduction from a pure lump sum contract price merely because the quantities are less
than he expected.

A contractor who agrees to a pure lump sum contract for work that is uncertain and
unforeseeable in extent will be considered by the courts simply to have taken a
voluntary gamble, and will be bound by the contract.

The attitude of the judges in the early cases which settled the law was clearly
influenced by the feeling that an employer obtains a tender and fixes a contract price
for work in order to know what he is in for, and that any relaxation of these rules
would destroy the whole object of getting a tender. This, of course, ignores the
difficulty in extent and difficulties between large scale engineering works and the
ordinary relatively simple building work.

Dr. Sherif EL-Haggan - CLAC 030

 25

DESIGN & BUILD CONTRACTS

Best Value

The government has decided that on most major government projects the preferred
method of procurement will be based upon the principle of contractor design.
Employer design is currently out of favour and, so far as government official thinking
is concerned, seems unlikely to return for some time. The key words of the moment
are Best Value which as a concept is difficult to fault. How Best Value is to be
achieved is a matter one would have thought would be the subject of a widespread
debate. If this is the case then there seems to be little evidence of how any form of
sensible public debate within the industry has taken place. We have been informed that
within the wheels of government it has been decided that contractor design provides
better value for money that employer design. It would seem that this decision has been
taken as a result of a survey which compares a number of completed contractor design
projects with a selection where an employer design procurement method has been
employed. A comparison of the final price and tender price was made on all projects
chosen for comparison. The results show that on average the percentage increase of the
final price compared with tender price on employer design projects is greater than on
projects where the contractor was responsible for the design. The logic then extends to
saying therefore design and construct is better value for money than employer design.
This is obviously the work of accountants, statisticians, economists and the like but
certainly not any construction professional. Even the most biased contractor’s
representative would be unwilling to use this type of statistic as logic for the premise
that contractor design provides better value for money than employer design.

Contingency Sum

When preparing Bills of Quantities on ICE and JCT contracts, both of which at one
time only catered for employer design projects, it used to be the norm for a
contingency sum to be included of approximately ten percent of the estimated tender
sum. This recognised the fact that these conditions represented comparatively low risk
from the contractor’s point of view and helped ensure that competitive prices were
secured. Unforeseen bad ground conditions, changes in legislation and increases in the
cost due to design development, to name but a few, are on employer design projects
normally at the risk of the employer. It would be somewhat unusual if one or more of
Dr. Sherif EL-Haggan - CLAC 030
 26

these risks didn’t arise on most projects. Usually this would not cause the employer to
lose confidence in the design team’s ability to properly financially manage the project
as the contingency sum was available to provide the extra money. For reasons which
are now lost in history, contingency sums have become almost extinct. Any extra cost,
which arises as a result of one of the employer’s risks becoming a reality, involves a
trip to the employer on the part of the Engineer or Architect to ask for more money. It
is rare for the employer to have it explained to him or her before entering into a
standard ICE or JCT employer design contract that it is a low risk contract from the
point of view of the contractor and that this fact is reflected in the price. As a
consequence there could well be a need for more money as the work proceeds if one or
more of matters which are an employer’s risk arises. Efficient financial techniques
would require the employer to provide a budget in case such an eventuality arises.
Requests for extra money on the part of the Engineer or Architect in the absence of a
contingency sum or a budget are often met with hostility or at least a grudging
acceptance of the situation. Employers understandably require price certainty before
committing themselves. If properly advised there is no reason why this cannot be
provided just as well under employer designed projects as on design and construct.

Design

It has been argued in support of contractor design that construction should be more
like the motor car industry and other manufacturing processes where the design is
undertaken by the organisation who produces the product. Construction it is said is the
only industry where the design is undertaken by the purchaser. I cannot think of any
industry which is less like the construction industry than the motorcar industry. The
idea that the design is best produced by the contractor from what happens in reality is
shot full of holes. Few contractors employ in-house design staff in sufficient numbers
to be able it to tackle the design of a project of any reasonable size. Where required to
design the project most contractors will turn to an outside engineering or architectural
consultancies. Often employers on employer-designed projects use those same
consultancies. It is a common practise on design and construct contracts for the
employer to commission the consultant in the early stages of the project and to have
the commission novated to the contractor when it is once appointed. The main input
from the contractor’s permanent staff will normally be to make proposals where

Dr. Sherif EL-Haggan - CLAC 030

 27

alternative design solutions are being considered. Often the contractors input is to
provide suggestions which represent the cheapest and quickest solution which is
sometimes not in the employers best interests. In recent weeks there has rather
belatedly been public debate as to the poor quality of design on some design and
construct projects. Whilst this may result in some improvement on future schemes it
does nothing for those already completed. Some completed PFI schemes, where design
and construct is employed on them all, have also been the subject of high profile
adverse criticism by users of the facility due to unsatisfactory design. We are now
perhaps beginning to see the downside in practical terms of design and construct

Disputes

The high number of disputes which arise on employer designed projects greatly
exceeds on a like for like basis those where design and construct is employed or so it is
said. This is probably true although there is little in the way of published statistics to
prove the point. If correct there are probably two main reasons. Lowest price tendering
attracts prices which are often below the true estimated cost for the work. Contractors
will then use every opportunity to improve their financial position by submitting
claims. Changing from employer design to design and construct will not prevent or
even encourage contractors to up their prices. What it may do is to leave the contractor
to try wherever possible to cheese pair the design once the contract has been entered
into to try to improve its financial position. Employers with no contingency in the Bill
of Quantities or budget for his or her risks will in many cases attempt to fight
contractors legitimate claims thus leading to protracted disputes. It has been argued
that lawyers have grown fat and rich out of disputes on construction work which has
been the result of employer design procurement and that this should be brought to an
end. If this is correct it is unlikely to be a situation which will continue much longer
with the astonishing success of quick and very low cost adjudication.

Tendering Costs

What is indisputable is that the cost of tendering where design and construct
procurement is employed is vastly in excess of tendering costs where employer design
is used. Employers and their advisers with the benefit of experience require the design
to be at a far more advanced stage before a contract is entered into than was the case
when design and construct was in its infancy. Employers like to keep more than one

Dr. Sherif EL-Haggan - CLAC 030

 28

contractor in the frame before making a final decision. This will often occur with
many employers only when they are sure in fairly precise terms exactly what they are
getting for their money. PFI contracts have suffered from this problem and it doesn’t
seem to be going away. Costs incurred by unsuccessful contractors is said to be
staggeringly high and in the final analysis it is the employer who will finish up paying.

Epilogue

It seems to me that the jury has brought in a verdict that design and construct provides
better value for money before a great deal of the evidence has been collected together
never mind heard. It may be that in the final analysis it is horses for courses but it
seems extremely premature to conclude at this stage that design and construct provides
better value for money than employer designed work.

Skanska Construction UK v Egger (Barony)

One of the main factors influencing clients in adopting design and build as a
procurement route, has been the assumption that a single source of responsibility will
reduce the incidence of claims. It is perhaps true that under traditionally procured
construction, claims often arise as a consequence of confusion and conflict between
the various participants to the construction process. It does not seem however that
design and build procurement necessarily reduces the incidence of claims.

A common problem in design and build contracts is doubt over the scope of works
intended by the employer’s requirements embodied within the contract. Disagreement
will concern whether design and construction work carried out by the contractor is
entirely the product of design development, for which the contractor carries a clear
responsibility under the contract or whether such work arises from changes in the
employer’s requirements. It is often very difficult to distinguish whether an item of
work carried out by the contractor is merely design development or constitutes a
change in the scope or character of the works.

Such conflict often starts with the design review procedures required under the
contract. It is understandable for a client to seek to be involved in the design process
by checking the contractor’s proposed design before construction commences on any
part of the works. This checking however can often lead to a distinct narrowing of the
Dr. Sherif EL-Haggan - CLAC 030
 29

freedom of design which the contractor intended by its commercial bid.

Often the employer or his advisors will be awakened to design issues only upon receipt
of the contractor’s submittals and will call for alterations to the proposed design
without firmly referencing these in the employer’s requirements. Contractor’s will call
this “preference engineering”, which, they will say, amounts simply to the instruction
of change for which they should be recompensed under the contract.

The most successful design and build contracts are often those led by experienced
clients who are able to specify within their employer’s requirements the parameters
which will dictate success of the project, whilst leaving the contractor a fairly free
hand to deliver a design that will meet those requirements. This is not a soft option, as
many employers are led to believe.

Examples of this type of problem were given in the recent case of Skanska
Construction UK v Egger (Barony) where the Court of Appeal had to review certain
aspects of a decision given.

Egger is a subsidiary of an Austrian company which produces chip board and other
timber based products at several factories throughout Europe. It entered into a contract
with Skanska for the design and construction of a factory to be built in East Ayrshire
in Scotland. Skanska agreed to undertake design development, management and
construction of the factory for a guaranteed maximum price of £12 million. Egger took
direct responsibility for the supply and installation of the specialist plant and
equipment.

By the completion, Skanska was making claims in the order of a further £12 million
relating to what it argued were extras to the contract. There was a counterclaim by
Egger for more than £4 million. At the heart of the dispute between the parties lay
the question of what was originally contained in the contract and what was a
change required by the employer. Egger’s position was that the complaints raised by
Skanska were merely instances of design development for which Skanska was
responsible.

Dr. Sherif EL-Haggan - CLAC 030

 30

The contract was loosely based upon the JCT Standard Form containing provisions
dealing with conflict within and between the employer’s requirements and the
contractor’s proposals. Skanska was thus obliged within the agreed price to design and
construct everything shown in the employer’s requirements and to carry out such
further design work as would be necessary to develop the specific requirements of
Egger into fully workable designs. Where however the employer’s requirements were
internally contradictory, Skanska’s contract proposals would prevail.

The Court of Appeal dealt with a number of instances where these difficulties had
arisen. An example was the requirement to provide a second water main to meet the
requirements of the fire fighting installations for the factory. Skanska succeeded in
demonstrating to the court that a satisfactory design could have been achieved with the
use of one water main. The court of appeal held that the judge was right to find that
Egger’s eventual instruction of two water mains was a change which entitled Skanska
to additional remuneration.

Conversely, Skanska was unsuccessful in its claim that the original contract did not
require them to include support steelworks for process plant and that in consequence
significant additional steelwork had been instructed by Egger. Again, Egger’s position
was that the steelwork was simply design development in respect of which Egger was
entitled to provide further information. The judge held that the tender drawings had
shown some support steelwork for the process plant, although it was poorly defined.
Indeed, at the time of tender, Skanska was not aware of the loadings which would be
applied and thus could not have been in a position to estimate with any accuracy such
steelwork. Nevertheless the judge held that this was a sufficient indication in the
contract documents. In so far as the employer’s requirements could be perfected at a
later stage, that was part and parcel of the risk that Skanska had accepted. Skanska’s
claim under this head was rejected and again the Court of Appeal refused to overturn
that decision.

Dr. Sherif EL-Haggan - CLAC 030

 31

Cases

Dr. Sherif EL-Haggan - CLAC 030

 32

Yorkshire Water Authority v. Sir Alfred McAlpine & Son

(Northern) Ltd (1985)

The specification required the contractor to submit with his tender a programme
showing that he had taken note of certain specified phasing requirements, this
being “in addition to the requirements of clause 14”

The method statement as submitted was approved and was incorporated in the
contract. It provided for the construction of certain tunneling works upstream.

This in fact proved impossible and the contractor proceeded with the work
downstream and claimed a variation under clause 51(1) with its reference to
“changes in the specified sequence method or timing of construction”

The High Court ruled in the contractor’s favour ;

The method statement was not the clause 14 programme. Its incorporation
into the contract imposed an obligation on the contractor to follow it, save in
so far as it was legally or physically impossible to do so. The method
statement had become a specified method of construction and the contractor
was entitled to a variation order and payment accordingly.

As Mr. Justice Skinner aptly put it:

“The standard conditions recognise a clear distinction between obligations

specified in the contract in detail, which both parties can take into account
when agreeing a price, and those which are general and which do not have
to be specified pre-contractually. In this case [the employers] could have left
the programme and methods as the sole responsibility of the [contractors]
under clause 14(1) and clause 14(3).

The risks inherent in such a programme or method would then have been the
[contractors’] throughout. Instead they decided they wanted more control
over the methods and programme than clause 14 provided.
Dr. Sherif EL-Haggan - CLAC 030
 33

Hence ... the method statement, [and] the incorporation of the method
statement into the contract imposing the obligation on the [contractors] to
follow it save in so far as it was legally or physically impossible to do so. It
therefore became a specified method of construction by agreement between
the parties”.

Comment. Another problem, when programmes become contractual documents,

arises in the event of it being impossible to carry out the work in accordance
with the programme. In the case of Yorkshire Water Authority v. Sir Alfred
McAlpine and Son (Northern) Ltd (1985) 32 BLR 114, the contractor's
programme and method statement became contract documents. The method
statement, which was the contractor's own chosen method of working, provided
for an outlet to a culvert to be constructed by proceeding upstream. The contract
obliged McAlpine to execute the works 'in all respects in accordance with the
contract documents.' It was found that this method was impossible and
McAlpine successfully argued that it was entitled to a variation order to enable it
to carry out the work. (It should be noted that the contract was based on the ICE
conditions which provided, in clause 13(1), for the contractor to be relieved of
its obligations to carry out work which is physically impossible.)

Dr. Sherif EL-Haggan - CLAC 030

 34

Boot Construction Limited v Alstom Combined Cycles Limited

The Issue: Application of under or over-priced rates in bills of quantities to

varied works.

Pre-contract negotiations included a requirement to lower the excavations by a

further meter within two areas of the project around the turbine hall and in the
location of the heat recovery steam generator. The work involved the addition
of sheet piling to the excavations and Boot submitted a lump sum price of
£250,880 relating to the work in the turbine hall only.

Sheet piling required in a more extensive area around the cooling towers 
Dispute  Whether a rate derived from the lump sum price for the turbine hall
could be applied to the full extent of the sheet piling work  Arbitration.

The arbitrator refused to apply a rate extracted from the lump sum price, firstly
because of the difficulty of extraction and secondly, because he regarded the
lump sum price to be mistaken and he considered it was not reasonable to
enlarge the ambit of that mistake.

Dispute  Clause 52 (1) ICE 6th edition:

Rule 1. Where work is of similar character and (ii) executed under similar
conditions to work priced in the Bi11 of Quantities it shall be valued at such
rates and prices contained therein as may be applicable.

Rule 2 . Where work is not of a similar character or is not executed under

similar conditions or is ordered during the Defects Liability Period, the rates and
prices in the Bill of Quantities shall be used as the basis for valuation so far as
may be reasonable.

Rule 3 . Failing which, a fair valuation shall be made.

The term “reasonable” required examination.

The reasonableness of the rate was to be gauged strictly by reference to the work
carried out. It was inappropriate to take into account how a rate or price was
arrived at and whether it was too high or too low.
Dr. Sherif EL-Haggan - CLAC 030
 35

Held: “The basic consideration is that the contractor has agreed to do all
work within the contract, original and varied, on the basis of his bill rates”.
Rule 2 provides a half-way house between Rule 1 and Rule 3, and is
mandatory. It applies when the work covered by the variation order is (i) of a
different character from work priced in the bill of quantities, or (ii) is executed
under different conditions.

It is the reasonableness of using the rates & prices, not the reasonableness of
the rates & prices, which has to be considered.

Dissenting judgement  The Engineer is entitled to consider the end result of

using the contract price, in judging whether or not that use was reasonable or not.

Implication: In assessing the reasonableness of a rate or price for varied

work regard may be had to whether the work is similar in character or
condition but not to the profitability or otherwise of the rate or price.

Comment. The Court of Appeal, in Henry Boot Construction v. Alstom

Combined Cycle (2000), gave a decision concerning the measurement and rating
of sheet piling. Alstom was the employer for the construction of a combined
cycle gas turbine power station at Connah’s Quay. Boot carried out the civils
work, employing an ICE 5th Edition contract.

In post-tender negotiations, Boot submitted a price of £250,880 for additional

and different temporary work in connection with the lowering of cold water
pipework. This extra work formed part of the contract. In calculating this figure,
Boot had made an error, resulting in the rate being much higher than it should
have been. This error remained undetected during post-tender, pre-contract
negotiations.

A variation was issued to the Heat Recovery Steam Generator and Cooling
Towers during the course of the work, involving additional sheet piling. Henry
Boot, in pricing the sheet piling, extrapolated a rate from the price agreed for
Dr. Sherif EL-Haggan - CLAC 030
 36

sheet piling which formed part of the £ 250,880 agreed in relation to lowering
the cold water pipework. This rate, being higher than it should have been,
produced an inflated rate for the varied work; ‘windfall’, to use the court’s term.

Alstom argued that clause 55(1)(b) of the contract provided for the use of
contract rates ‘as far as may be reasonable’. It was unreasonable, they said, to
use a rate which was obviously included in error. Further, they argued that, as
the sheet piling in the pre-contract agreed price was part of a lump sum, it
wasn’t reasonable to extrapolate a rate for sheet piling from this amount.

The Court of Appeal agreed with the judge in the lower court in finding in
favour of Henry Boot. The reference in clause 55(1)(b) to the use of the rate
being reasonable meant, not that the rate itself had to be reasonable, but that the
process of applying the rate must be reasonable.

The parties had agreed the rate and they were stuck with it; the mistake was
irrelevant. The Court of Appeal referred the matter back to the arbitrator for him
to decide whether it was reasonable to extrapolate the rate from the £250,880
lump sum, in spite of the conclusion that there was insufficient information to
show how Henry Boot had calculated the sum in the first place.

The process has thus gone full circle, starting with an appeal from the
arbitrator’s decision to the TCC, on to the Court of Appeal and back to the
arbitrator.

Dr. Sherif EL-Haggan - CLAC 030

 37

Sharpe v. San Paulo Brazilian Railway Co.

COURT OF APPEAL IN CHANCERY (1873) 8 Ch App 597

Contractors agreed to construct a railway. The contract provided that the

company should not, under any circumstances, be liable to pay to the contractors
a greater sum than £1,745,000, and the contractors bound themselves to execute
and provide not only all the work and materials specified, but also such other
works and materials as in the judgment of the employer’s engineer were
necessarily or reasonably implied in and by, or inferred from, the specification,
plans and sections. The contract also provided that the engineer’s certificate of
the ultimate balance of the account should be ‘final and conclusive’.

After completion of the works, the contractors claimed to be entitled to payment

in respect of extra works executed under the engineer’s direction, alleging that
they had done so upon the faith of his promise that they would be paid.

Held:

(i) The contractors were bound by the contract to complete the work for a
specified sum.

(ii) The engineer had no power or authority to alter the terms of the contract and
that his promise to pay, if made, was unenforceable.

(iii) This was so even if the amount of work was understated in the specification.

(iv) In the absence of fraud, the engineer’s certificate was conclusive between
the parties.

Dr. Sherif EL-Haggan - CLAC 030

 38

Commissioner for Main Roads v. Reed & Stuart Pty Ltd

HIGH COURT OF AUSTRALIA (1974) 12 BLR 55

Under a contract for road-works, contractors were to move and spread top-soil
as part of the works. The specification provided that if there was insufficient
top-soil on site, the Engineer may direct the Contractor in writing to obtain top-
soil’ elsewhere, payment to be made at a prescribed rate. Instead of invoking
this provision, the Engineer instructed a third party to bring more topsoil onto
the site.

Held: This was a breach of contract on the employer’s part. Although the
contract entitled the employer to omit work from the contract, it did not entitle
him to take away part of the contract work so that it might be given to another
contractor.

Molloy v. Liebe
PRIVY COUNCIL (1910) 102 LT616

A contract provided that no works beyond those included in the contract would
be paid for without a written order from the employer and architect. While the
works were in progress the employer required certain work to be done, which he
insisted was within the contract. The contractor insisted that the work was not
within the contract and must be paid for.

Held: It was open to the arbitrator, if he concluded that the works were not in
fact included in the contract, to hold that the employer had impliedly promised
to pay for them.

Dr. Sherif EL-Haggan - CLAC 030

 39

Holland Hannen and Cubitts Ltd v. Welsh Health Technical

Services Organisation

QUEENS BENCH DIVISION (1981) 18 BLR 80

The plaintiffs were the main contractors for the erection of a hospital at Rhyl
under JCT 63 (1969 revision). Crittalls, who were nominated sub-contractors for
the supply and installation of the window assemblies, began work in September
1973. By January 1974 it was clear that the window assemblies were failing to
keep rainwater out. In due course the judge held that the major reason for the
leaks were design defects although there were also defects in workmanship.

Crittalls proposed remedial works which were discussed at site meetings.

(Crittalls accepted that they would be liable either under the sub-contract, or
under the direct warranty which they had given to the employer). The architects
took the position that the defects were due to bad workmanship and that Cubitts
should put forward Crittalls’ remedial proposals as their own. (Evidence at the
trial showed that at another Welsh hospital being built at the same time with the
same architect and same window Subcontractor, a different main contractor had
acceded to this course and a variation order had been issued.) Cubitts took the
position that the defects were due to faulty design and that it was impossible to
complete the contract without a variation of the design.

Held: (inter alia): By their failure to issue a variation order, the architects had
made it impossible for Cubitts and Crittalls to complete the contract works.

Dr. Sherif EL-Haggan - CLAC 030

 40

The Silver Book - Introductory Notes

Dr. Sherif EL-Haggan - CLAC 030

 INTRODUCTORY NOTE TO FIRST EDITION

FIDIC's Red and Yellow Books (i.e. standard forms of contract for works of civil engineering
construction and for electrical and mechanical works) have been in widespread use for several
decades, and have been recognised - among other things - for their principles of balanced risk
sharing between the Employer and the Contractor. These risk sharing principles have been
beneficial for both parties, the Employer signing a contract at a lower price and only having further
costs when particular unusual risks actually eventuate, and the Contractor avoiding pricing such
risks which are not easy to evaluate. The principles of balanced risk sharing are continued in the
new "Construction" and "Plant and Design-Build" Books.

During recent years it has been noticed that much of the construction market requires a form of
contract where certainty of final price, and often of completion date, are of extreme importance.
Employers on such turnkey projects are willing to pay more - sometimes considerably more - for
their project if they can be more certain that the agreed final price will not be exceeded. Among
such projects can be found many projects financed by private funds, where the lenders require
greater certainty about a project's costs to the Employer than is allowed for under the allocation of
risks provided for by FIDIC's traditional forms of contracts. Often the construction project (the EPC
- Engineer, Procure, Construct - Contract) is only one part of a complicated commercial venture,
and financial or other failure of this construction project will jeopardize the whole venture.

For such projects it is necessary for the Contractor to assume responsibility for a wider range of
risks than under the traditional Red and Yellow Books. To obtain increased certainty of the final
price, the Contractor is often asked to cover such risks as the occurrence of poor or unexpected
ground conditions, and that what is set out in the requirements prepared by the Employer actually
will result in the desired objective. If the Contractor is to carry such risks, the Employer obviously
must give him the time and opportunity to obtain and consider all relevant information before the
Contractor is asked to sign on a fixed contract price. The Employer must also realize that asking
responsible contractors to price such risks will increase the construction cost and result in some
projects not being commercially viable.

Even under such contracts the Employer does carry certain risks such as the risks of war, terrorism
and the like and the other risks of Force Majeure, and it is always possible, and sometimes
advisable, for the Parties to discuss other risk sharing arrangements before entering into the
Contract. In the case of BOT (Build-Operate-Transfer) type projects, which are normally negotiated
as a package, the allocation of risk provided for in the turnkey construction Contract negotiated
initially between the Sponsors and the EPC Contractor may need to be adjusted in order to take
into account the final allocation of all risks between the various contracts forming the total package.

Apart from the more recent and rapid development of privately financed projects demanding
contract terms ensuring increased certainty of price, time and performance, it has long been
apparent that many employers, particularly in the public sector, in a wide range of countries have
demanded similar contract terms, at least for turnkey contracts. They have often irreverently taken
the FIDIC Red or Yellow Books and altered the terms so that risks placed on the Employer in the
FIDIC Books have been transferred to the Contractor, thus effectively removing FIDIC's traditional
prin i qlanced risk sharing. This need of many employers has not gone unnoticed, and
F)g . '.(''.~.red it better for all partie~ for this need to be openly recognise~ and regularised.
~~ ~..,dard FIDIC form for use In such contracts, the Employer's requirements for more
Ftis b the Contractor are clearly stated. Thus the Employer does not have to attempt
t~ .i::" o!-, r form intended for another risk arrangement, and the Contractor is fully aware of
" '}{J!C; "'\ ~;>'
'"'%'''':.:'''''''''-'''''''
CERTIFIED COP'r rUH t:Jl.vLU"IVt: u"t: t:) -{ THE AMERICAN UNIVERSI1Y IN CAIRO/DR. S EI-HAGGAN. SUPPLIED IN 2005
 the increased risks he must bear. Clearly the Contractor will rightly increase his tender price to
account for such extra risks.

This form for EPCfTurnkey Projects is thus intended to be suitable, not only for EPC Contracts
within a BOT or similar type venture, but also for all the many projects, both large and smaller,
particularly E & M (Electrical and Mechanical) and other process plant projects, being carried out
around the world by all types of employers, often in a civil law environment, where the government
departments or private developers wish to implement their project on a fixed-price turnkey basis
and with a strictly two party approach.

Employers using this form must realise that the "Employer's Requirements" which they prepare
should describe the principle and basic design of the plant on a functional basis. The Tenderer
should then be permitted and required to verify all relevant information and data and make any
necessary investigations. He shall also carry out any necessary design and detailing of the specific
equipment and plant he is offering, allowing him to offer solutions best suited to his equipment and
experience. Therefore the tendering procedure has to permit discussions between the Tenderer and
the Employer about technical matters and commercial conditions. All such matters, when agreed,
shall then form part of the signed Contract.

Thereafter the Contractor should be given freedom to carry out the work in his chosen manner,
provided the end result meets the performance criteria specified by the Employer. Consequently,
the Employer should only exercise limited control over and should in general not interfere with the
Contractor's work. Clearly the Employer will wish to know and follow progress of the work and be
assured that the time programme is being followed. He will also wish to know that the work quality
is as specified, that third parties are not being disturbed, that performance tests are met, and
otherwise that the "Employer's Requirements" are being complied with.

A feature of this type of contract is that the Contractor has to prove the reliability and performance
of his plant and equipment. Therefore special attention is given to the "Tests on Completion", which
often take place over a considerable time period, and Taking Over shall take place only after
successful completion of these tests.

FIDIC recognizes that privately-financed projects are usually subject to more negotiation than
publicly-financed ones and that therefore changes are likely to have to be made in any standard
form of contract proposed for projects within a BOT or similar type venture. Among other things,
such form may need to be adapted to take account of the special, if not unique, characteristics of
each project, as well as the requirements of lenders and others providing financing. Nevertheless,
such changes do not do away with the need for a standard form.

These Conditions of Contract for EPCfTurnkey Projects are not suitable for use in the following
circumstances:

o If there is insufficient time or information for tenderers to scrutinise and check the Employer's
Requirements or for them to carry out their designs, risk assessment studies and estimating
(taking particular account of Sub-Clauses 4.12 and 5.1).
o If construction will involve substantial work underground or work in other areas which
tenderers cannot inspect.
o If the Employer intends to supervise closely or control the Contractor's work, or to review
most of the construction drawings.
o If the amount of each interim payment is to be determined by an official or other intermediary.

FI% '~lB~ds that the Conditions of Contract for Plant and Design-Build be used in the above
c'ro l". Works designed by (or on behalf o~ the Contractor.
(:;1
!:.J
(£ I

CERTIFIED COP'r ,VH t::AvLU"IVt:: u"t:: ~ i THE AMERICAN UNIVERSI1Y IN CAIRO/DR. S EI-HAGGAN, SUPPLIED IN 2005