By Sarah Thomas of Pinsent Masons16 April 2008
The FIDIC ‘Gold Book' is the first attempt by any organisation to produce a standard form for design-build-operate contracts. Sarah Thomas of Pinsent Masons asks whether it will fill the gap in the market.
September saw the International Federation of Consulting Engineers (FIDIC) launch as a test edition, its new form of contract for Design-Build-Operate (DBO) work - the ‘Gold Book'. It was published, "To meet the growing need for a contract with combined design-build obligations with a long term operation commitment."
Those familiar with the FIDIC "Rainbow Suite" of contracts will be pleased to discover the familiar FIDIC structure - simple language (easily transferable to international jurisdictions), similar clause numbering, the same boiler plate conditions (such as definition termination, dispute resolution, etc). In fact, in terms of structure the form can be seen as two contracts in one because the design-build and ‘operation service periods' are kept very separate.
The design and build phase is essentially conventional Yellow Book - the FIDIC form that deals with this type of contract. FIDIC has opted for the more relaxed Yellow Book provisions and risk profile (e.g. in terms of relief for "Unforeseeable" conditions) rather than that of the more onerous Silver Book terms for turnkey contracts. The contractor is paid a lump sum design & build price in the traditional way throughout construction including an advanced payment.
The basic operation and maintenance (O&M) obligations are contained in Clause 10. This is where the bulk of "new" drafting lies. Essentially, the obligations are:
- to operate and maintain the facility as set out in the employer's requirements
- to comply with the procedures and requirements for operation maintenance provided by the employer (the employer's ‘Operation Management System'), the O&M manuals and the contractor's own O&M plan - the operating equivalent of ‘Contractor's Proposals' in design & build parlance.
In terms of payment, the total contract price is simply divided into a design build element and an O&M element. In addition, there is retention of 5%, thus providing the Employer a right of set off if maintenance is not carried out.
The treatment of maintenance under the new DBO is interesting. As the intended operation term is 20 years, not surprisingly, the Contract provides for capital replacements. This is covered by the establishment of an ‘Asset Replacement Fund.' However, the contractor has to map out in detail its schedule of replacement of items and when these will need to be replaced. Care should be taken because if any item is not identified or a replacement is required before the scheduled time, the contractor bears the cost!
Experienced operators will no doubt feel confident in the Replacement of Asset Schedules for New Build and it is true that form was designed to be used for ‘green field' only. However, in terms of potential use, how many DBOs involve a combination of takeover and upgrade of existing facilities alongside new build? For such projects, there would need to be some form of "asset condition schedule" agreed at the outset and/or the addition of latent defects as an additional employer risk.
In my view, the asset replacement fund regime is also potentially onerous as items not identified are the contractor's responsibility even if ‘unforeseeable.' This is not in keeping with FIDIC's traditional ethos when dealing with "unforeseeable" risk for design and build.
Other concerns may be that the DBO regime is not sufficiently robust in dealing with performance measurement for such a long term service period. Some employers may be concerned with the regime for failure to meet output requirements. For example, one might have expected to see a more sophisticated penalty point accumulation/payment deductions regime for failures in operating performance. This would offer certainty - in terms of financial consequences - for both sides.
The current form only provides (via Clauses 10.6 and 10.7) for recovery of the employer's loss, which may be negligible or hard to calculate and, where there is continuing failure to meet minimum levels, a right of termination with 56 days notice.
However the ‘nuclear option' of termination does not really help where the concession is operating below par but not to such an extent that the employer would want to replace the incumbent contractor.
Filling the gap?
As the only standard form DBO in the market, the Gold Book is certainly a useful starting point. While the design and build provisions, being essentially the Yellow Book, are robust and market tested, there are some issues with the O&M phase.
In practice, the form may be best suited for projects with a shortened operation period - for example where an employer wants the contractor to take the risk of operation of the facilities for, say five years post-completion, to ensure that all "teething problems" are ironed out before he takes over.
This is becoming particularly popular with specialist design and builders with operating arms within their group companies, or joint venture with operators - especially for facilities using cutting edge technology. This ought to allow a more prolonged period for training of the employer's operators before they have to take over. For these projects, funding would not be an issue and the contractor should not have to undertake capital replacement. In such situations much of the clauses dealing with the asset replacement funds and maintenance retention fund could be omitted.