Does every silver lining have a cloud?
As the challenges for the UAE construction industry mount, Chris Larkin discusses how risk can be better allocated.
The construction market in the UAE poses many challenges: the number and scale of projects have generated a tremendous demand for construction services; the weakening of the US dollar against other major currencies coupled with other inflationary factors has further increased the cost of construction; and the potential impact on the global economy caused by difficulties in the US sub-prime market has created uncertainty amongst investors. These issues give rise to particular risks for developers and contractors alike.
The allocation of risk is one of the most important matters of any construction contract. The traditional approach was to provide a fair balance of risk sharing. This approach had advantages and disadvantages for clients. A client would only pay additional costs when particular risks arose. thus obviating the need for the contractor to price in its tender for risks which might not eventuate. The result was better value for the client in that the price closely represented the cost of the work undertaken but this was at the expense of price certainty.
Some clients, however, require a form of procurement that gives greater certainty of the final price and completion date. For many years, these clients either used their own bespoke forms of contract or extensively modified standard forms as there were no standard forms suitable.
FIDIC standard forms of contract have been used throughout the world for several decades. One of FIDIC's traditional principles underlying its contracts is balanced risk sharing. In 1999, FIDIC published a new rainbow of contracts. In addition to its traditional red and yellow books, FIDIC introduced some new colours, one of which was the Silver Book, the Conditions of Contract for EPC/Turnkey Projects. The Silver Book is aimed at those clients who want greater certainty of the price and completion date.
The Silver Book was heavily criticised following its publication. FIDIC was accused of abandoning its principle of balanced risk sharing as the Silver Book allocated particular risks to the contractor that had been traditionally retained by the Employer.
Was this criticism fair? Let us examine some of the risks that received most criticism by comparing the Silver Book to FIDIC's more traditional Yellow Book, Conditions of Contract for Plant and Design-Build.
First, under the Yellow Book the Employer is responsible for the completeness and adequacy of the Employer's Requirements. Not so under the Silver Book as Sub-Clause 5.1 states "The Contractor shall be responsible for the design of the Works and for the accuracy of the Employer's Requirements (including design criteria and calculations)..."
Second, the Silver Book goes on to state in Sub-Clause 5.1 that "The Employer shall not be responsible for any error, inaccuracy or omission of any kind in the Employer's Requirements as originally included in the Contract and shall not be deemed to have given any representation of accuracy or completeness of any data or information...". In contrast, under the Yellow Book the Employer would retain responsibility for the accuracy of its information.
Third, under a Yellow Book contract if unforeseen adverse physical conditions are encountered then the Contractor is entitled to payment of additional cost and to an extension of time if completion is delayed. There is no such entitlement under the Silver Book.
The allocation of these risks, with some others, is what gives the greater certainty of price but is it unfair to the contractor? Well, at tender stage the onus is on the contractor to familiarize itself with the provisions of the contract, the Employer's Requirements and the site. It must decide whether the risks are acceptable and on the amounts to be included in its tender to cater for them. If it decides that the risks are not acceptable or that it has insufficient time to assess them then it should not submit a bid. If the contractor is careless in how it contracts then that is not the fault of the form of contract.
FIDIC did recognise that the Silver Book would be unsuitable in certain circumstances. In its introductory note to the Silver Book, FIDIC said it should not be used where there is insufficient time or information for tenderers to check the Employer's Requirements, carry out design and assess the risks.
Clearly, difficulties will arise if the Employer does not allow sufficient time for tenderers to consider the risks and/or if the contractor is neglectful in preparing its tender. The message for clients seeking greater certainty of the final price and completion date is threefold: ensure your procurement strategy suits how you wish to deal with risk (do not think it is a simple case of dumping risk on the contractor); be prepared to pay more for the certainty you obtain; and be careful with whom you contract.
Chris Larkin is associate director of Brewer Consulting.