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Serbia: Will FAC-1 Resolve Issues in FIDIC Multiparty Contracts in the Eastern Balkans?

Serbia: Will FAC-1 Resolve Issues in FIDIC Multiparty Contracts in the Eastern Balkans?

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In recent years we have seen major infrastructure projects in the Eastern Balkans, ordinarily based on International Federation of Consulting Engineers (FIDIC) standards, face significant delays and impediments due to complex decision-making processes.

Such projects have for a long time exceeded a structure that encompasses only the contractor, employer and engineer. They now include financiers (international institutions or other funds), beneficiaries and authorities, so the project structure and procurement have become even more challenging. This is especially the case when projects are financed through foreign governmental loans and based on international agreements, such as highways, power plants and similar projects of natural interest. But those major and most surveyed projects commonly face delays and escalating costs that exceed more than 30 % of the original values. One of the reasons for this escalation is the unregulated structure from the outset, which becomes even more sluggish when a claim or dispute occurs.

Project structuring: design for build vs. design and build?

A crucial question at the outset of a project is structure. Who are the key entities during project development and how will their roles be allocated?

The two most frequently used models depend on design production. In other words, the person or company in charge of developing the design that will later serve as the basis for construction. But you need more than just an excellent designer or a skilled contractor to achieve the desired outcome.

Project development, from idea to final product, depends on multiple factors. Some of them, which this article will explore, are project structuring and awareness of things like geological and geotechnical requirements, and consequently the extent to which those factors can affect the end result. Similar issues may easily be encountered in minor projects, from the construction of a house on a private plot all the way to the development of a major infrastructure project with a vast number of interested parties, including the government. 

At the beginning of a project set up, the first question that arises is who is responsible for the project design. This question is relevant not only in terms of the project's "beauty", but also its suitability for achieving the purpose. For example, has the hydropower plant been designed in a way that meets the desired capacities and, even more importantly, expected performance? Ultimately, who is liable if the project is not attractive enough, does not fulfil its purpose or is just not constructible? And who will pay for damages suffered as a result? To get to the bottom of these questions, we must go back to the following:

  • Who oversaw the design? Was it a contractor or was it an architect or designer engaged by the employer?
     
  • Who provided the input data for the design? Were they sufficiently accurate or was one of the individuals who interpreted them just not skilled enough?
     
  • Did the contractor notice and communicate any of the issues affecting the project? If not, what were the effects of its failure to do so?
     
  • What was the outcome? Does it matter what the applicable law states? Where might the law and the contractor collide?
     
  • What could be done differently to resolve or either overcome these obstacles more efficiently or expeditiously? Can we get exactly what we want from a project and is there a recipe?

Contractor or employer?  

Design is tackled by multiple project participants. It is flexible and usually must be adjusted according to project needs. Even for a design & build project structure, the employer may engage a consultant designer to create the preliminary design or conceptual design. What should be regarded as a preliminary design or conceptual design at an early stage of a project is rather vague (e.g. pre-feasibility study with technical specifications, working drawings, tender drawings) and also depends on legal interpretation, if any exists. 

By developing the basic manner of construction practice the design risk allocation becomes visible in a few standard contract models. So, design may be produced, from a project structure aspect, by a designer or architect engaged on behalf of the employer (classic construction contract, FIDIC Red Book) or by a designer or architect engaged by the contractor (EPC, design & build, FIDIC Yellow or Silver Book).

The first model is typically used in projects where the employer wishes to maintain control over the design process and the implementation of the project, while the contractor is simply expected to perform works based on the defined project. Take, for example, the construction of a road or highway, where the design depends on activities performed by the employer (expropriation issues) and thus must be retained in its scope. Having in mind the FIDIC Red Book, which envisages a remeasurement concept, the risk with such a structure is the possible price escalation if the design must be amended (e.g. due to unforeseen underground conditions).

The design & build contract model (Yellow Book) or turnkey contracts (Silver Book) provide greater  certainty when it comes to design amendments, as liability lies with the contractor, even in the case of unpredictable ground conditions. But the question here is whether full liability can be transferred to the contractor lawfully, even if the data provided by the employer was inaccurate or misleading.

But what creates additional issues in real life is the fact that liability for design largely lies with the entity or person who, possessing relevant knowledge and experience corresponding to an agreed or prescribed standard, produced the design.

Traditional or modern procurement method?

The procurement method includes a set of rules and procedures applicable for the election of participants within a construction project, which includes clients, consultants and construction companies.

Traditional procurement models in construction projects primarily rely on a strict division of liabilities between the included participants. Traditional methods are somewhat slow and are being either replaced or repressed by more modern methods requiring, among other things, a greater focus on the collaboration between various participants, instead of on only one stream of risk sharing. Modern methods of procurement and construction assume collaboration between the participants already listed in the procurement phase, e.g. early contractor employment, early supplier involvement. Still, the applicability of modern concepts in procurement, especially in the public sector, depends on the legal framework of the country in which it is being implemented. 

Each procurement model is reflected in its accompanying contract model, risk allocation and management, so consequently different legal implications stem from them. The choice of procurement route itself depends on the client's required balance of time, cost, quality and risk components referred to above and the analysis of how that can be achieved and later managed.

Like procurement methods, contracting models differ in the way in which they require cooperation between affected participants, risk allocation and sharing. The traditional model of contracting assumes full liability of the contractor, whether during the initial stage in the form of design & build or the turnkey model or in classic construction contracts. For example, design & build presumes that the contractor assumes liability for the design during the initial stage (e.g. based on the employer's requirements) and then executes the works. Since the contractor often is not also the designer, design tends to be subcontracted, creating an umbrella project structure. 

In the other case, design is produced during the initial stage through a separate procurement procedure and then transferred to the contractor (chosen during a subsequent procurement procedure) with the goal of binding it to execute the works according to the stated project, without the contractor being familiarised with the project during the drafting stage.

Correlation between traditional and modern risk-sharing approaches: FIDIC and FAC-1 

FAC-1 is a framework model, or in other words an "agreement between one or more contracting authorities and one or more economic operators, whose purpose is to establish the terms governing contracts awarded during a given period, in particular with regard to price and, where appropriate, the quantity envisaged."

FAC-1, as a model for collaborative/alliance contracting, can also be used together with more traditional contract models such as FIDIC (though 2017 editions show collaborative tendencies through some provisions). 

As per the brief on FAC-1, the European Bank for Reconstruction and Development is starting a mining project in Kazakhstan, where FAC-1 will integrate multiple FIDIC contracts.

Finally, according to the latest news, the FIDIC is developing collaborative contracts inspired by DM contract models. As stated by the board of the FIDIC, the organisation has agreed to set up a new task group by the FIDIC contracts committee, which in time will lead to the development of a new FIDIC Collaborative Contract. The new contract will be aimed at the global market and is a significant development for the FIDIC in an important area of the international engineering, construction and infrastructure industry. The task group will research the collaborative contracts currently used in the market to establish a clear framework of various approaches currently being used in collaborative contracting, consider what collaborative contract options are available to the FIDIC and identify a preferred collaborative contract solution.

Conclusion

The key question is whether claims currently affecting major international construction projects all over the Eastern Balkans are preventable or can at least be mitigated to allow for the projects to be successfully completed. A positive and straightforward answer is difficult to achieve because the respective projects include international bodies, governments, multilateral development banks, international contractors and engineers, and naturally sometimes opposing interests and priorities.

In the Eastern Balkans these factors often lead to FIDIC contract conditions being used in a way that is far from balanced and equitable when compared to their true purpose. Accordingly, parties began creating their own "consolidated FIDIC versions" that were able to easily transform a standard FIDIC Red Book to a Silver Book, assigning all risks to the contractor, even for underground conditions. Even the FIDIC golden principles are introduced in the hope of alleviating these unfortunate circumstances, which might very well lead to the destruction of a project.

The poor quality of the default project has become the most common reason for claims in projects executed in this region. There are many possible explanations for this poor quality, but most relate to underground soil conditions, i.e. whether they are predictable or not. Accordingly, the goal of this article was to assess the potential solutions, bearing in mind the vast theoretical and practical experience of English legal and technical practitioners in this field.

By Ivana Panic, Partner, Schoenherr

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