A new era for risk allocation?
Brian Allan explores the balance of risk in the new Abu Dhabi public contracts.
In our second analysis of the new Abu Dhabi public contracts, Brian Allan, a director with Hill International's Middle East Claims Group, explores the balance of risk in the new forms.
In January of this year the government of Abu Dhabi issued two new forms of construction contract for use by all public departments in the emirate, which replace the previous public works contract that was originally published in 1982 (The General Conditions of Contract for Civil Engineering Works). The two forms issued are called: Conditions of Contract for Construction and Conditions of Contract for Design and Build. The 2007 Abu Dhabi Conditions of Contract is based on the corresponding FIDIC 99 conditions for construction, plant and design and build.
In issuing these new contracts, the government of Abu Dhabi has significantly changed the basis upon which public works contracts are let in the emirate and, theoretically, the respective risks assumed by the government and contractors. I say ÃƒÂ¢Ã¢â€šÂ¬Ã‹Å“theoretically', as it is of course open to the government to amend the general conditions of contract via special conditions of contract. But insufficient time has passed since the gazetting of the new contracts to comment with certainty on the implementation policy.
Whereas the 1982 contract was officially published only in Arabic, both of the new forms of contract are published in dual language format (Arabic and English).
There are many advantages associated with adopting the FIDIC standard forms. They are generally recognised as being fair to both parties in terms of the apportioning of risks, rights and obligations. Additionally, they are widely used internationally, which should lead to contractor confidence and lower risk contingencies. The FIDIC forms have been adopted by organisations such as the European Commission, the World Bank, the Islamic Bank for Development and the Asian Development Bank.
FIDIC also publishes a number of guides to the use of its various forms, which should provide valuable assistance to those working with the new Abu Dhabi contracts.
It is likely that the large majority of contracts let by the various departments will be under the Conditions of Contract for Construction, which is considered further below.
In terms of risk allocation, perhaps the most significant of the new provisions is the introduction of a "fluctuations" clause. Sub-Clause 13.8 (adjustments for cost) includes a formula for calculating adjustments for changes in labour, equipment and materials costs based on indices. The extent of adjustment to the contract price depends on the resources chosen for adjustment and the non-adjustable element. However, there appears as yet to have been no policy decision as to the source of the required cost indices or reference prices.
Sub-Clause 4.12 (unforeseeable ground conditions) also introduces a significant shift in risk allocation versus the 1982 conditions. Whereas the contractor previously assumed the risk for the existing ground conditions, the employer now assumes the risk to the extent that such conditions are "unforeseeable". There is a caveat to this provision, however, as the employer may offset against any claims for unforeseeable ground conditions and the financial effect of grounds conditions within the site that turn out to be more favourable than was reasonably foreseeable.
Further innovations to the 1982 conditions include the following:
ÃƒÂ¢Ã¢â€šÂ¬Ã‚Â¢ Sub-Clause 4.9 - the contractor is required to institute a quality assurance system.
ÃƒÂ¢Ã¢â€šÂ¬Ã‚Â¢ Sub-Clause 13.2 - value engineering. This provision allows the employer to benefit from the contractor's experience through cost and time savings.
ÃƒÂ¢Ã¢â€šÂ¬Ã‚Â¢ Sub-Clause 14.8 - in the event of late payment by the employer, the contractor is now entitled to receive "financing charges compounded monthly on the amount unpaid during the period of delay".
ÃƒÂ¢Ã¢â€šÂ¬Ã‚Â¢ Sub-Clause 20.1 - contractor's claims. Within 42 days of receiving a claim or any further particulars supporting a previous claim of the contractor, the employer is now expressly required to "respond with approval, or with disapproval and detailed comments".
Another highly significant development within the new contract is in relation to dispute resolution. Previously, the parties' only recourse in the event of unresolved claims and disputes was to the courts. Clause 20 of the new contract provides for the appointment of ad hoc dispute adjudication boards, followed by arbitration if necessary.
Arguably, certain new provisions favour the contractor whereas others tend to favour the employer. In this respect the contract is reasonably balanced and fair to both parties.
The employer is retaining a number of duties that would otherwise (in the standard FIDIC conditions) have been carried out by the engineer (e.g. Sub-Clause 8.4 - extension of time for completion). The executing department will therefore need to ensure that they have the resources in place to effectively exercise these duties.
In summary, the 2007 conditions for both construction and design and build are fair and balanced to both parties. Risk has generally been allocated to the party best able to deal with that risk. Whilst more detailed than the 1982 conditions, project management procedures have been greatly improved and the contracts are user-friendly. If the new 2007 contracts are used un-amended, improved contractor confidence should result in more competitive pricing and shared benefits.