THE NEW GOLD BOOK FIDIC FOR DESIGN BUILD AND OPERATE PROJECTS

The 1999 suite of contracts published by FIDIC standardized the procurement systems offered by FIDIC by creating a platform providing for conventionally designed work by the Employer (Red Book); Design and Build by the Contractor where the Employer requires significant involvement through the use of an Engineer (Yellow Book); Turnkey Design & Build where the Employer has less involvement and no Engineer is appointed (Silver Book); and a short form of contract (Green Book). In 2006 FIDIC also updated the white form for professional services and within the 1999 suite, although of little interest to South Africa, is the dredgers contract for dredging and reclamation works. This last document being something of an anomaly in that it is discipline specific whereas all of the other documents are multi disciplinary.

During 2007 FIDIC published the pre- press seminar edition of the Conditions of Contract for Design, Build and Operate projects (Gold Book) which is intended to be published in full together with all the relevant sample forms and guidance notes during 2008. This document, based on the Yellow Book, is intended for projects where the Employer engages the services of the Contractor to design and build the facility and thereafter continues to operate and maintain that facility for a substantial period of time, nominally 20 years. This approach is much favoured by Employers and overcomes the difficulties associated with Design and Build where the objectives of the respective parties, Employer and Contractor, may differ leading to the Contractor designing down to a price rather than focusing on Employers key objectives of functionality, maintainability and cost effective operability. The Design Build Operate approach thereby combining all the functions of design, construction and long term operation and maintenance into a single contract awarded to a single Contractor who might be a joint venture or consortium who can bring to the contract the necessary skills required for the DBO (Design, Build, Operate) requirement.

Clearly this will be for the larger projects and well suited to projects such as power plants, water treatment plants, and transportation systems e.g.: toll roads and rail transport systems. Given that the Contractor under this regime takes the responsibility for operating and maintaining the plant during the operational period, it is to be expected that Contractors will focus a great deal of attention on the design of the facility with a view to the subsequent long term operation and thus deal with aspects such as cost effective operation in terms of both maintenance and operating cost itself. This will not of course change the prospect of an approach by a tenderer to provide a high quality facility with low operation and maintenance costs alternatively a lower quality facility with higher operational and maintenance costs. Employers who adopt this document as the procurement system will tend to specify performance or functional specifications as opposed to detailed specifications and, unless an Employer wishes to have standardization in respect of existing facilities, generally speaking, choice of equipment to meet the requirements should be left to the tenderer to offer equipment and technical solutions to match the functional requirement.

The Gold Book is suitable for the “Green Field” approach although a FIDIC guide is planned for publication during 2008 which will provide guidelines on the changes necessary for a “Brown Field” arrangement. Nominally the operational period has been set at 20 years operation but this can obviously be amended to suit the requirements of the Employer.

The format of the Gold Book is consistent with the other long forms in the suite being based around 20 clauses and using similar terminology and definitions. The document carefully considers the different stages of the project; design and planning, build and construction, operation and maintenance. In particular the allocation of risks and insurance have been substantially revised.

It would be inappropriate in an article like this to go into detail of the changes made in the Gold Book but some of the key changes are: the necessity to clearly differentiate between the design and build period and the operational service period and to create proper and workable provisions for the interface and transfer between these two situations. Clause 9, the Design-Build clause contains provision similar to the Yellow Book but now addresses the end of the design build period by requiring the issue of a “Commissioning Certificate” equivalent to the Taking-Over certificate in the other forms. This certifies that design and build is complete and triggers the commencement date for operations. The Employer’s right to terminate the contract if the Contractor fails to complete by the “Cut-Off Date” allows the Employer to terminate if the Contractor is seriously late. It is assumed that operational service will commence immediately the Commissioning Certificate is issued and if this is not to be the case, the Contractor will be entitled to additional compensation. Clause 10 deals with “Operational Service” and this clause us substantially different to those clauses found in the Yellow and Silver Books. An operational management system and a maintenance plan are to be agreed between the parties. (Clause 10.1). Provision is made for the establishment of an independent compliance audit to ensure that the Contractor fulfils its obligations during the Operation Service Period and both parties participate in this audit. Significantly the Employer’s representative is replaced by a totally independent auditing body to monitor the performance of both parties to ensure compliance with the requirements of the contract. This auditing body does not have direct authority but monitors and advises the parties who would then be obliged to take action in terms of the contract if there were to be a failure to adhere to the requirements of the contract. This body is appointed by the Employer but paid by way of a Provisional Sum. (Clause 10.3). Raw materials remain the responsibility of the Employer (clause 10.4). Should there be delays or interruptions during the operational service life then clause 10.6 addresses this depending upon whether the delays are caused by the Contractor, the Employer or perhaps by a suspension ordered by the Employer in which case compensation will be paid to the Contractor but no provision exists to extend the operational service period. (Clause 10.6). In the event of failure to reach production outputs then clause 10.7 provides for financial compensation or perhaps termination if the situation should warrant it. Defects are dealt with in clause 12 but the Defect Notification Period has been eliminated since the Contractor is responsible for operating the plant he is clearly also responsible for attending to any defects which might arise. Clause 14 regulates payments and now the necessity to split payment for the design and build work and separately the operational service requirements are provided. To the extent that retention is used and in the absence of the Defects Notification Period the second half of the retention money is only released at the end of a 12 month retention period which allows the Employer to utilize the leverage of the balance of the retention to ensure the Contractor completes all defects noted at the time of issue of the Commissioning Certificate. Clause 14.18 provides for the establishment of an Asset Replacement Fund in order to provide funds for essential replacement during the Operation Service which are not the responsibility of the Contractor. For example, items which are not regular maintenance items or replacement of spares. In addition clause 14.19 provides for a Maintenance Retention Fund which is used as security to ensure the Contractor carries out essential maintenance required under the contract whereafter this fund would be paid out to the Contractor.

Clauses 15 and 16 in the FIDIC suite regulate termination by Employer and Contractor respectively. In particular the Employer is given, in clause 15.5 of the Red, Yellow and Sliver Books, the right to terminate for convenience. While such a clause is appropriate for Red, Yellow and Silver Books the question must be asked as to whether it is appropriate during the 20 year Operational Service Period. The approach taken by the Gold Book is to allow termination for convenience even during the Operational Service Period but not for the purposes of obtaining another Contractor to complete the operation service and not if such termination would be contrary to the Law. By virtue of the decision in the South African case of Hydro Holdings versus Minister of Public Works 1977 (2) SA 778 (T), this would in any event, be the common law position albeit such a position could modified in contract.

There have been some significant changes to the risks and insurance clauses (17, 18 and 19) and a more logical sequence has been adopted being: Risk, Responsibility, Liability, Indemnity, Insurance. Given that the potential risks arising during design and build may be significantly different to those during the Operation Service Period changes to the clauses have been necessitated but the general principle that unallocated risks, generally unforeseen, will become the responsibility of the Contractor has not been changed. In addition the term ”force majeure” has been eliminated to make the clause more precise since this terminology has different meanings in different jurisdictions. In clause 17 risk allocation is treated in two separate categories classified as risk of loss or damage and risks leading to financial or time loss. These are allocated to the Employer or the Contractor as appropriate such that liability becomes clear. Limitations of liability have also been retained in clause 17.8. Clause 18 “Exceptional Risks” replaces the “force majeure” provisions although the contents of clause 18.1, which identifies the Exceptional Risks remains essentially the same as in the other books. Clause 20 still deals with claims disputes and arbitration but there have been some significant changes. In particular the very strict time bar contained in the second paragraph of clause 20.1 in the other long forms of contracts may be overridden by the DAB (Dispute Adjudication Board) if the DAB considers the circumstances justify late submission. Significant changes to the details required to be furnished within the 42 day period following the Contractor becoming aware of his entitlement have also taken place and a time bar has been introduced which once again may be overridden by the DAB under certain circumstances. The appointment of the 3 person DAB expires upon the issue of the Commissioning Certificate and accordingly the construction phase DAB does not function during the Operation Service Period. The DAB is then replaced during the Operation Service Period with a one person DAB jointly agreed between the parties at the time of issuing of the Commissioning Certificate. The period of appointment is for 5 years but may be extended by agreement between the parties. The fall-back position remains arbitration under the rules of arbitration of the International Chamber of Commerce, which, whilst appropriate for international disputes, should be replaced by a more user friendly approach where this contract is applied in South Africa. (e.g. Association of Arbitrators (Southern Africa) Rules)

Early indications are that internationally the Gold Book has received strong support but it remains to be seen whether Employers in Southern Africa will be prepared to depart from the current approach which is to design contracts on a one off basis for specific projects rather than rely upon a standardized document such as the FIDIC Gold Book. Copies of the document are available from the South African Association of Consulting Engineers in Bryanston and anyone interested in using this document may contact the author of this article by e-mail at cdb@bca.co.za.

Chris Binnington