Buffer Shares Note from Mack:
Under the usual arrangements for this type of contract, the entity carries out all the Engineering, Procurement and Construction: This type of contract is usually negotiated between the parties.
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 hard to evaluate.
These risk sharing principles are continued in the new updated versions of the Red and Yellow 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 - often 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 Co writing a book contract money. 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 serious 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 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 BOT package.
Apart from the more recent and rapid development of privately financed projects demanding contract terms ensuring increased certainty of price 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.
This need of many employers has not gone unnoticed, and FIDIC has considered it better for all parties for this need to be openly recognised and regularised. By providing a standard FIDIC form for use in such contracts, the Employer's requirements for more risk to be taken by the Contractor are clearly stated.
Thus the Employer does not have to attempt to alter a standard form intended for another risk arrangement, and the Contractor is fully aware of the increased risks he must bear.
Clearly the Contractor will rightly increase his tender price to account for such extra risks. 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.
A feature of this type of contract is that the Contractor has to prove the reliability and performance of his plant and equipment. 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 of having a standard form. Various drafts were reviewed by the following persons or organisations: FIDIC wishes to record its appreciation of the time and effort devoted by all the above.
Conditions of Contract for Construction, which are recommended for building or engineering works designed by the Employer or by his representative, the Engineer. Under the usual arrangements for this type of contract, the Contractor constructs the works in accordance with a design provided by the Employer.
Conditions of Contract for EPC Turnkey Projects, which are recommended where one entity takes total responsibility for the design and execution of an engineering project.
Short Form of Contract, which is recommended for building or engineering works of relatively small capital value. Depending on the type of work and the circumstances, this form may also be suitable for contracts of greater value, particularly for relatively simple or repetitive work or work of short duration.
The forms are recommended for general use where tenders are invited on an international basis.Negotiating a book contract is a lot like buying a car—there’s some give and take, not everyone will get the same deal and sometimes you have to pass on the sunroof to get the deal done.
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