November 5, 2019

Addition to FIDIC’s Rainbow Suite - Emerald Book

In May 2019, FIDIC launched the new Conditions of Contract for Underground Works – this latest addition to FIDIC's Rainbow Suite will be known as the Emerald Book.

Issued as a joint endeavour with the International Tunnelling and Underground Space Association, the Emerald Book is FIDIC's first attempt to address the unique characteristics of tunnelling and underground works.  In FIDIC's view, these unique features are:

  • the method of excavation and ground support are major factors for the successful realization of the project, and therefore part of the Works;
  • physical access to the Works is often limited to just a few locations or even a single location, which places serious constraints on construction logistics and the environment; and
  • the land, beneath which the Works are to be constructed, typically belongs to a number of third parties.

In addition, though not unique to tunnelling work, FIDIC also recognises the time intensive nature of excavation and lining works, taking a particular approach in respect of this element of the works compared to the balance (as we discuss further below).

So how has FIDIC attempted to address these unique features?  Based on FIDIC's 2017 Design-Build Yellow Book, the Emerald Book follows the basic structure and risk allocation introduced by the 2017 suite of contracts, with a few significant exceptions.  The main differences relate specifically to how the Excavation and Lining Works are dealt with in terms of the risk share between the parties and the subsequent adjustments to the Contract Price and the Time for Completion.

Physical Conditions Risk

As an acknowledgement to the unpredictable nature of underground works, and to ensure a balanced approach to risk allocation, FIDIC have sought to adopt a more sophisticated mechanism for sharing the risk of sub-surface physical conditions between the Contractor and the Employer.

A new contractual document has been introduced to address the risk of sub-surface physical conditions.  The Geotechnical Baseline Report (GBR), defined as the report describing the sub-surface physical conditions, serves as the basis for the execution of the Excavation and Lining Works, including design and construction methods, and the reaction of the ground to such methods.  The Employer is responsible for producing the GBR and issuing it as part of the tender package.  Any errors in the GBR that would not have been discoverable by an experienced contractor when scrutinising the GBR will entitle the Contractor to additional time and money.

The Contractor shall be deemed to have based its tender on the sub-surface physical conditions and ground reactions described in the GBR.  As such, all sub-surface physical conditions described within the limits specified in the GBR will be deemed to be "foreseeable".  Any conditions outside the limits defined in the GBR (or not dealt with in the GBR at all) will be considered "unforeseeable" and shall entitle the Contractor to an extension of time and additional money. 

Unforeseeable sub-surface physical conditions will be dealt with under clause 4.12 (essentially the standard FIDIC clause dealing with Unforeseeable Physical Conditions).  However, the impact on progress and/or Cost of any conditions described within the GBR (foreseeable sub-surface physical conditions) will be measured under clause 13.8 (Measurement of Excavation and Lining Works and Adjustment of Time for Completion and Contract Price).  In this way, the Emerald Book arguably also shares the risk of foreseeable sub-surface physical conditions between the parties by applying a measurement approach to the Excavation and Lining Works (see further below)

Given the importance of the GBR to how sub-surface physical condition risk is allocated between the parties (note that it is expressed to take precedence over the General Conditions), it will be imperative for the parties (not just the Employer) to ensure that the GBR is as accurate as possible.  FIDIC have helpfully included detailed guidance in Appendix A to the Emerald Book as to what needs to be included in the GBR.

Adjustment of the Contract Price

Unless otherwise stated in the Contract, the Excavation and Lining Works will be subject to measurement and the remainder of the Works (including any other underground works that do not comprise excavation and lining activities) will continue to be subject to the lump sum pricing mechanism.

A Schedule of Baselines will be included in the Contract, which will list out the anticipated activities for this work and their corresponding quantities based on the sub-surface physical conditions set out in the GBR.  It will also include the Contractor's production rates and durations for each activity.  Alongside the Schedule of Baselines will be a Bill of Quantities detailing the Contractor's unit rates and prices for the Excavation and Lining Works (including fixed rate items, time-related items and quantity related items).  As is fairly typical of measurement contracts, the Contractor's rates and prices will not be subject to change but the Employer will take the risk of the as-built quantities differing to those in the Schedule of Baselines.  

The Contractor will measure the Excavation and Lining Works in accordance with the Contract and submit the measurements to the Engineer for agreement or determination.  The price will be adjusted by the Engineer applying the appropriate rate or price in the Bill of Quantities to the agreed or determined measurement. 

Such a mechanism is obviously quite favourable to the Contractor, with the Contractor being paid for the actual amount of work required to deal with actual sub-surface physical conditions (based on its submitted rates and prices).  Apart from having provision for fixed rate items (where the rate or price is not subject to adjustment for any change in quantity) there are no restrictions on the extent of any change in quantities.  Accordingly, the measurement mechanism applies to whatever conditions are foreseeable under the GBR, even if the actual quantities turn out to be significantly more than what was originally anticipated.

Adjustment of the Time for Completion

In addition to the above, FIDIC have also introduced a time-based risk sharing mechanism in respect of the Excavation and Lining Works.  

A new Completion Schedule has been introduced which will set out Milestones for the Works and a Time for Completion in respect of each Milestone – these Milestones must include the completion of the Excavation and completion of the Lining.  The Time for Completion of the Milestones in the Completion Schedule must be based on and consistent with the production rates and durations provided by the Contractor in the Schedule of Baselines for the Excavation and Lining Works.  The time allowed in the Completion Schedule or Programme for completing the Underground Works will be reassessed (extended or reduced) by the Engineer applying the Contractor's production rates or durations to the measured quantity of each item of work or activity in the Schedule of Baselines.  Based on this re-assessment, the Time for Completion of the relevant Milestone will be adjusted accordingly.

Importantly, this mechanism also allows for the Time for Completion to be reduced as well as extended – if activities take less time than anticipated as a result of sub-surface physical conditions being better than expected, then the Time for Completion may be reduced.  This is obviously quite different to how time is usually dealt with in construction projects.  The rationale appears to be that this represents a fair and balanced risk allocation; if conditions are less onerous than anticipated, the employer should receive the benefit of this by way of a reduced timeline. 

Ultimately, while the Contractor benefits if conditions are worse than originally anticipated, the Employer benefits if conditions are better than originally anticipated.

Things to think about…

It will be interesting to see how quickly the new Emerald Book will be adopted for use on tunnelling projects and, when it is, to what extent parties seek to amend the form.  Given that the Emerald Book follows the basic structure and risk allocation introduced by the 2017 suite of contracts, we would expect to see changes in the same nature of those generally made to the rest of the suite.  Regarding the elements of the form specific to tunnelling and the issues raised above, some stakeholders are querying the usefulness of the form if a different procurement method was sought beyond a basic design and build approach. 

While a measurement approach is not uncommon on tunnelling projects, such a mechanism is obviously pro-Contractor.  While this may be seen to be 'balanced' by the reduction in the Time for Completion available to the Employer if conditions are more favourable than expected, it would not be unsurprising if Employers sought to impose additional restrictions on the measurement mechanism in an attempt to regain some control and cost certainty in this regard.  In addition, while the novel approach to time may be welcomed from an Employer's point of view, such fluidity with respect to the Time for Completion is likely to not only increase the administrative burden on the parties but also give rise to further disputes between the parties.  

Finally, it should be noted that the substantive changes to the form are relatively limited, with most of the key detail left to be completed by the parties.  It will be important, therefore, for the parties to accurately complete the GBR, the Bill of Quantities, Schedule of Baselines and Completion Schedule, and understand how these documents interact with each other and the substantive provisions more generally.