<p>Consulting Engineers (the 'Red Book').&nbsp;This is a traditional form of contract  where the employer appoints its own designers to design the works and the  contractor is only responsible for constructing the works to the employer&rsquo;s  design.&nbsp;<br /><br />In recent years the 1999 FDIC Conditions of Contract for Plant  and Design - Build (the 'Yellow Book') has also become more widely used.&nbsp; Under  this form of contract the contractor accepts responsibility for both the design  and construction of the works and the resulting single point responsibility is  seen as being a significant advantage for employers.<br /><br />However neither of  these forms of contract is suitable for use where infrastructure projects are  concerned, for example oil, gas or petrochemical plants or where the project is  financed through third party lenders.&nbsp; FIDIC recognised this throughout the  1990's and in 1999 published its Conditions of Contract for EPC / Turnkey  Contracts (the 'Silver Book').&nbsp;The introductory note to the Silver Book states  that &ldquo;during recent years it has been noticed that much of the construction  market requires a construction contract where certainty of final price and often  of completion date are of extreme importance.&nbsp; Employers on such turnkey  projects are often willing to pay more - sometimes considerably more - for their  project if they can be more certain that the agreed final price will not be  exceeded&rdquo;.&nbsp;&nbsp;The note continues &ldquo;for such projects it is necessary for the  contractor to assume responsibility for a wider range of risks than under the  traditional Red or Yellow Books&rdquo;.<br /><br />The aim of the Silver Book is therefore  to transfer certain risks (which would normally fall to the employer) to the  contractor in order to achieve a degree of time and cost certainty while  recognising that contractors will, of course, price the degree of risk they are  expected to bear.&nbsp;The upshot is that employers will, in all likelihood, pay more  for a project procured under the Silver Book that they might otherwise do, were  the same project procured under say the Yellow Book.&nbsp;However in return employers  achieve a greater degree of time and cost certainty which is appealing to banks  and lenders. This article highlights some differences between the risk  allocations of the Yellow and Silver Books.<br /><br /><strong>Ground  Conditions<br /><br /></strong>The issue of responsibility for the physical  conditions of the site is an example of risk transfer under the Silver Book.&nbsp;The  Red and Yellow Books (at clauses 4.10 to 4.12) treat this issue in the same  manner.&nbsp;The employer is required to have made available to the contractor all  relevant information in his possession prior to the base date on sub-surface and  hydrological conditions at the site.&nbsp;The contractor is responsible for  interpreting this data.&nbsp;&nbsp;<br /><br />The contractor is deemed to have obtained all  necessary information as to risks, contingencies and other circumstances that  may affect the tender or the works, although this investigation is limited to  the extent practicable taking account of cost and time.&nbsp;The contractor is also  deemed to have satisfied himself as to the sufficiency of the accepted contract  amount however the contractor is deemed to have based the accepted contract  amount on the data and interpretations referred to  above.&nbsp;<br /><br />Notwithstanding these provisions, the existence at the site, of  unforeseen physical conditions will allow the contractor to claim an extension  of time and payment of any additional cost incurred provided the contractor  complies with the relevant procedural requirements and the condition is  'Unforeseeable' as defined in the Red and Yellow Books.&nbsp;<br /><br />The position is  however different under the Silver Book as while, according to clause 4.10, the  employer is to make available to the contractor all relevant data in his  possession on the subsurface and hydrological conditions at the site, the  employer shall have no responsibility for the accuracy, sufficiency or  completeness of such information.&nbsp;The contractor is responsible for verifying  and interpreting the data and the contract price is stated to cover all of the  contractor's obligations under the contract.&nbsp; Under clause 4.12 the contractor  is deemed to have obtained all necessary information as to risks, contingencies  and other circumstances which may affect the works and by signing the contract  the contractor accepts total responsibility for having foreseen all difficulties  and costs of successfully completing the works.&nbsp;The contract price shall not be  adjusted to take account of any unforeseen difficulties or costs.<br /><br />Under  the Silver Book therefore the risk of unforeseeable ground conditions falls to  the contractor.&nbsp;While the contractor will undoubtedly allow for this in his  tender, lenders and employers are afforded certainty with regard to their  potential exposure to additional costs in this regard.&nbsp;Where employers are not  wiling to pay for this certainty an alternative form of contract should be  used.&nbsp;&nbsp;&nbsp;&nbsp;<br />&nbsp;<br /><strong>Design</strong><br />&nbsp;<br />Design is another issue where  the contractor's obligations under the Silver Book, differ from those under the  Yellow Book.&nbsp; Both contracts impose a fitness for purpose obligation on the  contractor which is a high standard to comply with in the first place.&nbsp;However  under clause 5.1 of the Yellow Book the contractor is to review the employer&rsquo;s  requirements after receiving the notice of commencement and to give notice to  the engineer (within a certain number of days to be agreed on a case by case  basis) of any fault, error or defect found in the employer&rsquo;s requirements.&nbsp;On  receipt of the notice, the engineer shall determine whether a variation is to  apply.&nbsp;If an experienced contractor exercising due care would have discovered  the error, fault or other defect before submitting the tender, the time for  completion shall not be extended and the contract price shall not be  adjusted.&nbsp;<br /><br />In addition, under clause 1.9, if the contractor suffers delay  or incurs cost as a result of an error in the employer&rsquo;s requirements and an  experienced contractor would not have discovered the error when conducting the  clause 5.1 review referred to above, the contractor shall notify the engineer  and shall be entitled to an extension of time and payment of its costs plus  reasonable profit.&nbsp;&nbsp;<br /><br />The test therefore is whether an experienced  contractor would have found the error when conducting his previous reviews of  the employer&rsquo;s requirements.&nbsp;If not, the contractor shall be entitled to  relief.&nbsp;&nbsp;<br /><br />As would be expected, a different line is taken in the Silver  Book.&nbsp;Clause 5.1 of the Silver Book provides that the contractor shall be  responsible for the design of the works and for the accuracy of the employer&rsquo;s  requirements except in four limited circumstances. The employer is not  responsible for any error, inaccuracy or omission of any kind in the employer&rsquo;s  requirements and any data received by the contractor from the employer or  otherwise shall not relieve the contractor from his responsibility for the  design and execution of the works.<br /><br />This clause coupled with the  contractor&rsquo;s liability under clause 4.12 for unforeseen difficulties (referred  to above) and the overall fitness for purpose obligation means that the  contractor is under significant obligations with respect to design (including  any design which may be contained in the employer&rsquo;s requirements).&nbsp;While it is  open to the contractor to negotiate on these points, the single point of  responsibility of the contractor is likely to be on the employer&rsquo;s &lsquo;wish list&rsquo;,  even if it means that the employer will pay more for the works than would  otherwise be the case.&nbsp;<br /><br /><strong>Other Risks<br /><br /></strong>The Silver  Book imposes additional risks on the contractor in other areas too.&nbsp;Examples  include the provisions regarding extensions of time and employer&rsquo;s risks.&nbsp; In  relation to extensions of time, the contractor is not entitled, under the Silver  Book, to extensions of time in respect of exceptionally adverse climatic  conditions or for unforeseeable shortages in the availability of personnel or  goods caused by epidemic or governmental actions.&nbsp;The contractor is entitled to  an extension of time in respect of these events under the Red and Yellow  Books.<br /><br />Under clause 17.3 of the Red and Yellow Books the employer assumes  the risk of the occurrence of certain events.&nbsp;Under the Silver Book the  contractor bears responsibility for the following risks, the occurrence of which  would be an employer risk under the Red or Yellow Books:</p>
<ul>
<li>Use or occupation by the employer of any part of the permanent works, except  as may be specified in the contract</li>
<li>Design of any part of the works by the employer&rsquo;s personnel or by others for  whom the employer is responsible</li>
<li>Any operation of the forces of nature which is unforeseeable or against  which an experienced contractor could not reasonably have been expected to have  taken adequate preventative measures</li>
</ul>
<p>EPC contracts are, by their nature, different to traditional or design and  build forms of contract and are intended for entirely different types of  project.&nbsp;The risk allocation contained in them means that the contractor is  required to assume a greater degree of risk, although the rewards for the  contractor can also be greater, especially if the priced risks do not arise.&nbsp;  Many of the risks referred to in this article will be the subject of negotiation  but in today&rsquo;s market, where projects are few and contractors are many,  contractors might be willing to assume this degree of risk.&nbsp;<br /><br />In addition  the types of projects to which EPC contracts are suited are often highly complex  and there are often a limited number of contractors with the skills and  experience to perform the relevant works.&nbsp; In such cases it is perhaps proper  for contractors to assume a greater degree of risk as they are best able to  manage the occurrence of those risks and to mitigate the consequences of those  risks should they occur.</p>