Master Thesis

MasterThesis
M.Sc.StudyCourse:
ConstructionandRealEstateManagement
Submittedon16.01.2012from
MuradR.Pateev
StudentReg.No.527099
FirstSupervisor: Dr.Gtz-SebastianHk
SecondSupervisor: Dr.NicoleRiediger

HowFIDICcontractmodelmightbenefitfor
Russianpublicprocurementininfrastructure
projectsofroadconstruction
I
StatutoryDeclaration
I herewith formally declare that I have written the submitted dissertation
independently. I did not use any outside support except for the quoted literature
andothersourcesmentionedinthepaper.
I clearly marked and separately listed all of the literature and all of the other
sources,whichIemployedwhenproducingthisacademicwork,eitherliterallyor
incontent.
Iamawarethattheviolationofthisregulationwillleadtofailureofthethesis.
MuradPateev
Studentsname Studentssignature
0527099 Berlin,16.01.2012
Matriculationnumber City,date
II
ConceptualFormulation
HOWUSINGFIDICBASEDCONTRACTMODEL
FORINSFRASTRUCTUREPROJECTS(ROADCONSTRUCTION)
COULDENHANCERUSSIANPUBLICPROCUREMENT
IsFIDICRedBookanappropriatemodelforpubliccontractsinRussian
Federationtoproperlyidentifyandallocatecontractorsrisks?
Public procurement of infrastructure projects in Russian Federation has been
discussed and criticized in press since it was first published back in 1994. The
existing Russian practice of tendering, public contract awarding and
implementation in road construction and infrastructure projects was named
complicated and non-transparent by most of the authors. Most of the time risks
involved are hard even to identify and estimate. For foreign companies willing to
take parts into public projects in Russia, the lack of risks information make the
decision hard or sometimes impossible. At the same time, there is a well-defined
and widely accepted contract model of general contracting activities, known as
FIDIC Red Book contract. The main question of the work is Could FIDIC
contractingmodelbeusefultoproperlyidentifyandfairlyallocaterisksamongthe
parties involved, at the same time conforming the current public procurement
laws(FederalLaw94,orFL94)?
An empirical investigation of Russian public construction projects related to the
infrastructure (particularly state-funded road construction following FL94) and
FIDIC Red Book contract model, comparison of them and answering the above
questionisthemainaimofthiswork.WhatpartofFIDICcontractcouldcorrelate
to FL94, explaining some parts of the Russian public procurement? What is the
risks allocation approach of FIDIC and FL94? How contractors risks could be
identified,estimatedandhandledincontrollablewayusingFIDICcontractand/or
FL94?Iwilltrytofindbest-suitedanswersforthequestionsinthiswork.
Toperformthistask,Imgoingtocreateaquestionnairetointerviewconstruction
industryandgovernmentexperts.Followingthecollectionofsampleprojectsdata,
Ill try to identify risks areas and then apply risk allocation approaches of both
FIDICandFL94,andcomparetheoutputofbothapproaches.
III
Acknowledgments
The special thank goes to my primary supervisor, Mr. Gtz-Sebastian Hk and to
my helpful second supervisor, Miss Nicole Riediger. The supervision and support
that they gave truly help the progression and smoothness of my work. The co-
operationismuchindeedappreciated.
Great deals appreciated go to the contribution of my university ConREM team. I
would also like to thank the both Coordinators of ConREM - Prof. Dietrich Bunte
andMr.EricPollockandallthestaffintheConREMofficethatpatientinhelpingus
completethisprogram,bothinBerlinandHelsinki.
LastbutnotleastIwouldliketothankmyfriendsespeciallythosewhoworknext
to me, Emilie Ebel, Karent G. Mendez and Louise can de Worp for the wise ideas
throughouttheproject.
Special thanks also to my wife who have encourage, support and help me in
completingthisprogramsuccessfully.
IV
Abstract
This master thesis presents an overview of Russian public procurement of road
construction projects. The main purpose of this work is to identify possible areas
where using FIDIC Conditions of Contract for Construction might bring mutual
benefits to employers and contractors working on public projects of road
construction in Russian Federation. The effective risks management, well defined
claims procedures and introduction of powerful and educated engineer might
createawin-winsituationforbothpartiesofthecontract.Thecontractorwillget
more support for his technical part of the work, while enjoying easement of risks
pressure. The employer will enjoy more transparent contract price structure,
predictable project timeline and economic benefits. The duties and powers of the
Engineer, Contract Risks management, Claims negotiation and Dispute
AdjudicationaspresentedintheFIDICConditionsofContractforConstructionwill
bediscussedinapplicationtotheRussianroadprojectprocurementmodel.
Keywords
FIDICConditionsContractConsultingEngineerRoadConstructionRussianPublic
ProcurementRiskManagementClaimResolutionDisputeAdjudication
V
TableofContent
StatutoryDeclaration.............................................................................................................................I
ConceptualFormulation......................................................................................................................II
Acknowledgments.................................................................................................................................III
Abstract......................................................................................................................................................IV
Keywords..................................................................................................................................................IV
TableofContent......................................................................................................................................V
ListofFigures.......................................................................................................................................VIII
ListofTabulation................................................................................................................................VIII
Abbreviations..........................................................................................................................................IX
1. Introduction......................................................................................................................................1
1.1.Statementoftheresearchproblem................................................................................2
1.2.ResearchMethod....................................................................................................................2
1.3.StructureoftheMasterWork...........................................................................................3
2. WorkDesign......................................................................................................................................4
2.1.Survey.........................................................................................................................................6
2.2.Participants...............................................................................................................................7
2.3.Measurements.........................................................................................................................8
2.4.Procedure..................................................................................................................................9
3. ContextualBackgroundInformation...................................................................................11
3.1.ConstructionPlans..............................................................................................................11
3.2.ProjectLifeCycle.................................................................................................................12
3.3.ConstructionCosts..............................................................................................................13
3.3.1. CostsStructureinRussianFederation........................................................14
3.3.2. CoststructureinEuropeandUSA.................................................................16
3.4.RoadProcurementinGeneral.......................................................................................20
3.5.SomeDifferencesBetweenFIDICandRussianContractModels...................23
VI
3.6.ProjectDocumentation.....................................................................................................24
4. ConstructionProcurementinRussianFederation........................................................26
4.1.RussianPublicLegislation...............................................................................................27
4.1.1. TheFederalLaw94........................................................................................27
4.1.2. CriticismoftheLaw.............................................................................................27
4.1.3. TheFL-94Amendments....................................................................................30
4.2.ClassicalStepsforPreparingaProgrammeforaNewRoad............................32
4.2.1. SchemeIdentification,FeasibilityandPreliminaryDesign................33
4.2.2. StatutoryGovernmentalProcesses...............................................................34
4.2.3. DesignandTenderProcesses..........................................................................34
4.2.4. ConstructionContracts......................................................................................35
4.2.5. ContractualMaintenancePeriod...................................................................36
5. FIDICConditionsofContractforConstruction...............................................................37
5.1.TheEngineer.........................................................................................................................40
5.1.1. TheEngineerinContractMatrix....................................................................40
5.1.2. IndependenceandImpartiality......................................................................43
5.1.3. ServicesoftheEngineer....................................................................................44
5.1.4. FunctionsoftheEngineer.................................................................................47
5.1.5. TheCodeofEthics................................................................................................48
5.2.RisksinContract..................................................................................................................51
5.2.1. ExamplesofUnforeseenConditions.............................................................52
5.2.2. ResidualRisks........................................................................................................53
5.2.3. RiskAllocation.......................................................................................................54
5.2.4. IndemnityandInsuranceofRisks.................................................................56
5.2.5. InsuranceOverlapsandGaps..........................................................................59
5.2.6. RiskMitigationInstruments............................................................................61
5.3.ConflictsResolution...........................................................................................................62
VII
5.4.Claims.......................................................................................................................................64
5.4.1. ClaimsCategories.................................................................................................65
5.4.2. ClaimsTimeFrames............................................................................................67
5.4.3. CauseandCompensation..................................................................................68
5.5.DisputeResolution.............................................................................................................69
5.5.1. DisputeAdjudicationBoard.............................................................................69
5.5.2. DisputeAdjudicationProcedure....................................................................71
5.5.3. DisputeAdjudicationTimeframes................................................................71
5.6.Arbitration.............................................................................................................................73
6. Discussion.......................................................................................................................................75
6.1.FIDICFormsinRussia.......................................................................................................75
6.2.CurrentPracticeandFIDIC.............................................................................................76
6.3.ClaimsandDAB....................................................................................................................78
6.4.FIDICperspectives..............................................................................................................79
7. Conclusion.......................................................................................................................................80
Bibliography...........................................................................................................................................82
Glossary....................................................................................................................................................87
VIII
ListofFigures
Figure1.WorkDesignFlowchart.....................................................................................................4
Figure2.ProjectLifecycleTimeScale........................................................................................12
Figure3.HighwayconstructioncostsinUSA,2003-2005.................................................17
Figure4.Simplifiedstepsinthepreparationofaprogrammeforanewroad.........32
Figure5.Projectmatrixorganization.........................................................................................40
Figure6.Riskresponseoptions....................................................................................................55
Figure7.PossibleCoverageforRisksofLoss,InjuryorDamage....................................58
Figure8.PossibleEconomicandTimeRisksInsuranceCoverage.................................59
Figure9.Retainedandinsuredrisks...........................................................................................60
Figure10.ClaimsCategories...........................................................................................................66
Figure11.FIDICClaimProcedure................................................................................................67
Figure12.FIDICDisputeAdjudicationProcedureTimeframes......................................72
ListofTabulation
Table1.Roadconstructionplansfor2010-2015.................................................................12
Table2.Nationalexpendituresfornewroadconstruction,maintenanceand
operation........................................................................................................................................18
Table3.RecommendedResponsibilityforShopDrawings..............................................25
Table4.AmendmentstoFederalLawFL-94............................................................................31
Table5.FunctionsoftheEngineer...............................................................................................47
Table6.ConsultingEngineerCodeofEthics...........................................................................49
Table7.ClaimsCategoriesandConditions...............................................................................65
Table8.ContractorsClaimsCauseandCompensation.......................................................68
IX
Abbreviations
ADR AlternativeDisputeResolution
CPM CriticalPathMethod
DAB DisputeAdjudicationBoard
DB Design&Build
DBFO Design,Build,FinanceandOperate
DBO DesignBuildOperate
DMS DetailedMethodStatement
DRB DisputeReviewBoard
ea. Abbreviationforeach
EOT ExtensionofTime
EPC Engineering,Procurement,Construction
EPCM Engineering,Procurement,ConstructionManagement
FIDIC FdrationInternationaledesIngnieursConseils(French)
InternationalFederationofConsultingEngineers
FL-94 FederalLaw94
GMS GlobalMethodStatement
ICAC InternationalCommercialArbitrationCourtofRussianFederation
ICC InternationalChamberofCommerce
LCIA LondonCourtofInternationalArbitration
mio,mln million
MTRF MinistryofTransportationofRussianFederation
MRD MinistryofRegionalDevelopment(inRussian:
,orshort
)
NEC NewEngineeringContract
OPRAM OperationalProjectRiskAnalysisandManagement
PAN ProjectActivityNetwork
PERT ProgramEvaluationandReviewTechnique
PMBOK ProjectManagementBodyofKnowledge
PMI ProjectManagementInstitute
PRAM ProjectRiskAnalysisandManagement
PRN ProjectRiskNetwork
RCU RussianConstructionUnion(inRussian:
)
X
RF RussianFederation
Rub RussianRuble,currencyofRF,ca.40rub/
SC Sub-Clause
SPRAM StrategicProjectRiskAnalysisandManagement
SRO Self-RegulatingOrganization
UBC UniformBuildingCode
UESR UnifiedEnergySystemofRussia
VOB VergabeundVertragsordnungfrBauleistung(German)AwardRules
forBuildingWorks
YSE Finnishstandardconditionsofcontractforconstruction
Chapter1.Introduction 1
1. Introduction
PublicprocurementlawforinfrastructureprojectsinRussianFederation(Federal
Law 94, or FL-94
1
) has been discussed and criticized in press since its been
commenced in early 2006. The existing Russian practice of tendering, public
contract awarding and implementation in road construction and infrastructure
projects is complicated and non-transparent
2
. In most cases risks involved are
hidden, thus complicated even to identify and estimate. For foreign companies
willing to take part into public projects in Russia, the lack of risks information
makesthedecisionhardorevensometimesimpossible.
InthelastfewyearsitsquiteoftentoseestandardRussianconstructioncontracts,
basedonthecivilcode,toincludedifferentelementsofinternationalcommonlaw
contracts. The amount of inclusions might vary from particular clauses, for
example including performance bond, warranty or insurance clause, to the
borrowingthewholecontractstructure.Suchcontractscouldbefoundmostoften
in the projects with foreign investors or international contract management, as
well as in the projects financed by international investment organizations, like
World Bank etc. The role of foreign investor or contract management
administration is greatly simplified by working with international contract
standards. During the number of years Russian developers hire western
companies specialized in project management and development. These
professional companies used to work at much higher performance level if the
whole project structure and contract administration matched common
international standards. Thats reason why many Russian companies and
developersareinterestedinofficialintroductionofinternationalstandardformsof
constructioncontracts,suchasFIDIC,NEC,YSE,VOBandothers.
1
InRussian94-,
,;
Source:(,94-,2005)
2
Source:(2010),seealsodetaileddiscussioninsec.4.1.2onpage27.
When huge infrastructure construction projects were initiated by the Russian
government in the last few years, like general construction program for Sochi
Winter Olympic Games in 2014, World Football Championship of 2018, Asian
Pacific Forum at Far East or massive road construction of Saint Petersburg
beltway, several international construction and developing companies were
invitedtotakepartintonumberofstateownedprojectsinRussianFederationthat
raised certain opportunities for introducing internationally accepted contract
management models, such as FIDIC contract for construction, at the government
level.
1.1. Statementoftheresearchproblem
ThemainthesisoftheworkisthatimplementationofFIDICConditionsofContract
forConstructionasstandardcontractformcouldbenefitonalongtermtoRussian
public procurement of road construction. The preconditions for implementation
and areas of application will be identified during the work. As a result, this work
willtrytopointouttheareasofapplicationsandwhatkindsofproblemscouldbe
addressedusingFIDICConditionsofContractforConstruction.
1.2. ResearchMethod
Main source of the information used in this work is publicly accessible on the
Internet, or in the printed books. Also different materials made available by the
MinistryofRegionalDevelopmentwereanalyzedandprocessed.
Thisworkisadeductivestudy,whilesomematerialsanddataforfurtheranalysis
willbecollectedviaasurveyprocess.Themaingoalofthesurveywillbecollecting
qualitative data on the current situation in public procurement with emphasis on
road construction. Analysis of these data will allow drawing a model of how the
project goes on from the initial idea to the commissioning. Another point of
analysiswillbeidentifyingoftheproblemsrelatedtothecontractmodelusedfor
publicprocurement.Lateron,theFIDICConditionsofContractforConstructionwill
be analyzed to determine if and how it could benefit to solve the identified
problems.
1.3. StructureoftheMasterWork
The Master Thesis consists of six parts and Conclusion. First section is an
Introductionandresearchstatement,followedbythesectiondescribingtheMaster
Work design, preconditions and procedures. Next the Contextual Background
section presents road construction situation in RF. The section Construction
Procurement describes all the steps usually taken to implement a project of new
road construction, both in Russian Federation and generally. Next section FIDIC
Conditions of Contract for Construction analysis FIDIC contract structure and
features.Thissectionscomprisesoffourmainsub-sections,discussingaroleofthe
Engineer, risks in project, claims and dispute resolution, which seem to be the
most interesting for implementation. Following this, the Discussion section
presents discussion of the facts and findings of the work. The last section
Conclusionwillsummarizetheresultsofthework.
Chapter2.WorkDesign 4
2. WorkDesign
The main purpose of the work was to make project research of Russian public
procurement to identify areas, which could be enhanced in terms of benefits for
boththeContractorandtheEmployeroftheproject.Potentialbenefitsforbothof
them could possibly be reaped by implementing the FIDIC Conditions of Contract
forConstruction(FIDICRedBook).Workstructureispresentedbelow.
Figure1.WorkDesignFlowchart
Thesis Methodology
Develop Instruments
Select Participants
Analyse Structure Conduct Research
Analyse Data
Areas of Interest
Literature Study Survey
Contract Procurement FIDIC Conditions
Analyse Data
Prepare Thesis
Identify Solutions
Thesis Methodology: Using available literature on research methods, select and
shapethemethodologytouseduringthework.
InstrumentsDevelopment:atthisstagepreliminaryinterviewsandliteraturestudy
were performed to identify areas of interest, target of the research and possible
meansofresearchtouseduringthemainwork.
Survey: organize and prepare survey materials, i.e. questionnaire, select
participantsandexperttointerviewandactuallydointerviews.
Literature Study: select and prepare literature for the topic of interest, including
access to some materials of the MRD and ROSAVTODOR. Thoroughly read and
choose information both on Russian public procurement, particularly related to
road construction in accordance with FL-94, analyze the available data. At the
sametimegetaccesstoFIDICcontractsandliteratureonthetopic.
Areas of Interest: using data obtained at the previous stages, identify areas of
interesting, i.e. the most interesting or obvious areas of Russian public road
procurement,thatcouldbenefitfromusingFIDICformsofcontract.
PrepareThesis:layouttheresultsofthework,discussionandconclusion.Prepare
areportandformallysupplyittoHTWcommission.
2.1. Survey
Survey research is the method of gathering data from respondents thought to be
representative of some population, using an instrument composed of closed
structure or open-ended items (questions)
3
. There are six common ways to get
information. These are: literature searches, talking with people, focus groups,
personalinterviews,telephonesurveys,andmailsurveys
4
.Forthepurposeofthis
workliteraturesearches,talkingwithpeopleandpersonalinterviewswereusedto
obtaindataoncurrentsituationatRussianpublicprojectprocurement.
Literature analysis was conducted on Russian literature on the topic, including
specialized periodicals (MRD and ROSAVTODOR
5
publications) and Internet sites.
Talksandpersonalinterviewswereconductedwithanumberofroadconstruction
and maintenance companies working in different regions of Russian Federation,
namelyMoscow,St.Petersburg,Yaroslavl,Stavropol,RostovandVolgograd.These
talks helped a lot to develop a set of issues for investigation using more formal
questionnairebasedsurvey.Twelveofthecompaniesgeneralmanagers,aswellas
project developers and managers were personally interviewed following the
prepared questionnaire. In case of the personal interview the questionnaire was
simply a list of topics that the researcher wanted to discuss with an industry
expert. For the interview and questionnaire preparation, Dr. Naoums (2007)
surveying manual
6
was used as a guideline. General checklist and applicability of
the questions were additionally checked against recommendations in (Garson
2002).The analysis of the resulting answers allowed distinguishing several areas,
which were most sensitive to the respondent and could be tested for possible
improvementsbyusingFIDICcontractmodel.
3
Source:(Garson2002),p.238-246
4
Source:(Walonick2004)
5
RussianabbreviatednameoftheStateAgencymeansRussianAutomobile
Roads.ThisAgencyservesandmaintainsallthefederalroadsinRF.
6
Source:(Naoum2007),pp.63-87
Theparticularareasofinterestidentifiedduringthesurvey/personalinterviews
inputanalysis:
ItsworthnotingthattheFIDICConditionsofContractforConstructionwasmostly
unknown to the participants, and surely nobody of respondents has ever been
working with it. Only people with legal background from MRD were theoretically
aware of the FIDIC contract model, though they also havent had any experience
workingundertheFIDICcontract.
2.2. Participants
Participantobservationduringthetalksprovidesfirst-handinformation,yieldhigh
face validity, and involves reliance on relatively simple and inexpensive methods.
Thedownsideofparticipantobservationasadatagatheringtechniqueisincreased
threat to the objectivity of the researcher, unsystematic gathering of data, and
reliance on subjective measurement
7
. The objectivity of response is also quite an
issue.Participationisaformofinvestmentoftime,energy,andself,andassuch,it
raises obvious questions of possible bias
8
. A chance to talk in person was used to
collect as much feedback as possible to create the best subjective image of the
7
Source:(Garson2002),p.234
8
Source:(Garson2002),p.234-235
Contract Risks
Claims
Conflicts anu Bisputes
investigatingprocess,bothatthepreliminarystageandduringthedatagathering
process.
Participants of the research were the employees of Western and Russian
companies and owners representatives, who had already undertaken road
constructionprojectsinRussiaorhaveconsideredsuchaproject,andnevertheless
didnttakepartinit.
To compensate the possible participants bias, their answers were divided into
threegroupsbasedonthepositionoftherespondentandhisroleintotheproject,
namely General Management
9
, Technical
10
and Project Management
11
. Their
answers were weight-scaled to the appropriate coefficients. General management
provedtobelessbiasedintheirevaluationsoftheimportanceofdifferentnegative
factors. Contrary, technical managers tended to present technical issues as most
important ones, sometime completely ignoring legal environment and general
provisions. Project managers were somewhere in between, depending on the
experienceandtechnicalbackground.
2.3. Measurements
Duetoverydifferentlevelofinvolvementoftheparticipants,fromsiteandproject
managers to vice minister and general company management, the results of the
surveyareasubjectofweightscaledapproach.Usually,inanysurveyresearchone
9
Thisgroupincludedgeneralmanagersoftheconstructioncompaniesandbusinessowners,who
aremanagingtheirownbusiness.
10
Technicaldirectors,engineersandconsultants,aswellasconstructionspecialistsfromMRD
wereincludedinthisgroup.
11
Projectmanagersandprojectdirectors,bothfromcontractorandemployer,wereinterviewed
inthisgroup.
mustdecidehowtohandlethefactthatnotallrespondentsanswerallitemsinthe
questionnaire.Garson(2002)describesthemostcommonmethods
12
:
1. Archivalcomparison.Meansandproportionsfromsurveydataare
comparedwithknownarchivaldata,asbycomparingpercentfemalein
onessamplewithpercentfemaleinthecensusdistrictonewaspolling.
2. Waveextrapolation.Dataarecodedaccordingtowhetherthesurveywas
receivedinthefirstinstanceorinthesecondorthirdwaveofcallbacksto
subjectswhohadnotyetresponded.Ifthereis,say,asmallerpercent
femaleineachsuccessivewave,itisinferredthatthefigurewouldbelower
stillamongnon-respondents.
3. Nonresponsesurveys.Itisalsopossibletoundertakeaveryintensiveeffort
togetresponsesfromarandomsampleofnon-respondents,perhaps
offeringaddedinducementstoparticipate.
2.4. Procedure
Selection of actually working companies with all levels of experience in road
constructionseemedtobethemostimportant.Thiswouldallowdrawingmoreor
less objective picture of the situation and the common problems. Following the
preliminary screening and selection of the candidates for the survey, they were
contacted and the best efforts were taken to convince them for participation.
Unfortunately, most of the companies leaders and top tier professionals were
simplytoobusytofilltheformalquestionnaire,inbestcasedelegatingthisworkto
theirassistantsorsecretarialworkers.
12
Source:(Garson2002),p.245
Abetterresponsewasobtainedinpersonalinterviews,whilenotallthequestions
were suitable for this situation. Thus, most of quantitative answers were best
guessedandinsomecaseswerenotansweredatall.Asimpletopicslistwasused
for the personal interview instead of formal questionnaire and the interviewer
took the notes of the answers. Later on, the answer notes were used to fill the
questionnaire.
Additional information obtained from the literature and periodicals was used to
complete the picture of the Russian public procurement. Information on FIDIC
forms of contract was obtained from literature and lectures presented at HTW
course in 2009 by Dr. Gtz-Sebastian Hk, with vital additions presented at
consultationswithsupervisors.
Most of the work was literature study following the deductive study of the
information.Dataprovidedbythesurveycombinedwiththeinformationobtained
from the literature on Russian public procurement allowed identification of the
problematic areas that could be enhanced by using procedures and features of
FIDIC forms of contract. Application of the FIDIC forms and highlight of the
contractpartiesbenefitswasanimportantpartandmainresultofthework.
Chapter3.ContextualBackgroundInformation 11
3. ContextualBackgroundInformation
Automobile roads and especially high-speed motorways are complex and
expensive engineering constructions, intended to serve its purpose for extended
number of years. The main goal of the road owner, who is in most cases a state
governmentofRussianFederation,shouldbecontrolofexpensesduringthewhole
life span selection of project, documentation, construction, maintenance and
repair. Balance of expenses and work quality should be thoroughly maintained
fromtheverybeginningoftheproject.
3.1. ConstructionPlans
In 2008 Russian Federation Ministry of Transportation have approved a special
federal program titled Special-purpose Federal Program of Transportation
Development for 2010-2015
13
. This program was created at National Projects
Institute for Territorial Development and Transportation Infrastructure
14
under
direct supervision by Ministry of Transportation of Russian Federation. As the
program states, it is created to develop a modern and effective transportation
infrastructure to improve mobility of goods and reduce its expenses; increase
mobilityofthecountryspopulation;increasegeneralcompetitivenesslevelofthe
Russian transportation system; create reliable transit channels.
15
Total financial
capital to invest in the program is 4341,93 billion Russian Rubles (approximately
108,55 billion Euro), during 2010-2015 period different types of federal roads
shouldbebuiltinRFunderthisprogram.SomeinformationislistedinTable1.
13
InRussian
20102015,source:( , 2008)
14
InRussian:-
15
Source:( , 2008, p.2), own translation from Russian
Table1.Roadconstructionplansfor2010-2015
16
Roadtype Tobebuiltin
2010-2015,km
Totallength
in2015,km
Federalpublicroads 1990 55980
CategoryIandCategoryIIfederalroads 4700 30520
Federalpublicpavedroads 3710 55450
3.2. ProjectLifeCycle
Infrastructure projects vary in size and complexity, however all of them could be
mappedtothefollowinglifecycle
17
structure:
Startingtheproject,
Organizingandpreparing,
Carryingouttheprojectwork,and
Closingtheproject.
Figure2.ProjectLifecycleTimeScale
18
16
Source:(2008)
17
InaccordancewithPMIrecommendationsfrom(PMBOK-Guide,2008)
18
Basedon:(UherandDavenport2002)p.29
CONCEPT
DESIGN
TENDERING
PRE-CONSTRUCTION
CONSTRUCTION
COMISSIONING
-100% 100%
Approximate project lifecycle time-scale
0
From the Employers point of view, there is also long period of maintenance and
service works, which could be treated as separate project of infrastructure object
usage. In case of the construction project at some point of the last stage the
material result of the construction will be transferred to the Employer and post-
contractual relations take place in some form. Contract time frame is normally
widerthanthetime-scaleofconstructionprojectitself,coveringpost-construction
dutiesoftheparties,includingmaintenance,warranty,retentionperiodetc.
3.3. ConstructionCosts
RussiangovernmentdoesnotregulatepricesforconstructionmaterialsinRussian
Federation, and occasionally they rise significantly on free market in a course of
oneyear.Atthesametimegovernmentfinancesalltheroadworks,includingnew
construction and maintenance, from the state budget, and these expenses are
mostly fixed in annual budget plan, only allowing certain amount of inflation to
apply.Thisinflationindexdoesnotreflectrealcostdifferenceofmaterials,plants,
machines and workmanship. At the tender stage Employer, which is usually state
AgencyorcertaindepartmentoftheMinistryofRegionalDevelopment,willtryto
push the tender price as down as possible, trying to improve the initial budget.
Usually construction cost included into the budget is not based on thorough
calculationofalltechnicalconditionsandcomplexityofthework,civilengineering
constructions,etc.whicharesimplynotpossibleatthisstage,butratheronsome
averageestimationfiguresforparticularcountryregioncombinedwithsubjective
estimationoftheprojectowner.
3.3.1. CostsStructureinRussianFederation
To provide first aid for project cost estimation, in 2009 Ministry of Regional
Development (MRD) have created the estimation handbook called Reference
handbook of cost indicators on selected civil engineering projects (similar
objects)
19
fortheprojectsinRussianFederation.
Thishandbookshouldbeusedtoestimatecostcalculationsoftheprojectreceiving
financial support from the government. Cost estimations from the handbook are
setting the upper limit for the project expense based on the actual cost of the
analogue projects. The cost estimate data from handbook shall only be used for
unified projects with standard project documentation. It should not be used for
uniqueprojects.
Collected statistical cost data for civil engineering and construction projects
brought into operation by 01.08.2001 were taken into consideration, as stated by
the official explanation letter of FGUFCCS
20
. According to this letter, presented
estimationsincludeaverageweightedcostsforthefollowingexpenses:
Constructionexpenses,withmaterialandplantcostsincludingaverage
transportationcostfortheregion;
Laborandmachineryoperationcost;
Overheadexpensesandnominalprofit;
Expensesfortemporaryconstructions,worksandwintertimeoverhead;
Technicalconditionssurvey,projectdocumentationassessmentand
constructionpermitreceiving;
19
InRussian:
(-),see(,2009).Recent
downloadablecopyofthishandbookinRussiancouldbefoundatMRDofficialwebsite
http://www.minregion.ru.
20
Copyofthisletterdated11.05.2010withoutgoingnumber114-08/couldbereceivedfrom
FGUFCCSbytelephoneat+7(495)930-72-98ordirectemailrequesttotps@fgufccs.ru,as
statedattheofficialwebsiteofFGUFCCS:http://www.fgufccs.ru/consultation/info.php.The
citedpartoftheletter,retrievedon20.08.2011,couldbefoundatthefollowinglink
http://www.fgufccs.ru/consultation/19-other/detail.php?ID=34845
Insuranceexpensesforconstructionrisks;
Clientservices;
Certainreserveforunpredictableworksandexpenses.
Besides of the above, the following expenses could be additionally included if
provedtobenecessary:
Otherexpenses,likestafftraveling,workerstransportation,remote
locationsorganizationandmachinesoperationcosts;
Realestatepurchasingandtaxesduringtheconstructionperiod;
Technicalcommunicationconnections(electricity,sewage,waterdisposal
etc.)expenses;
Compensationexpensesforthegroundpreparation,includingexisting
constructionsdemolition,localinhabitantsresettlementandsoon;
Additionalexpensesrelatedtoremotelocationswithoutrunning
infrastructure,aswellasunderstraitenedcircumstances.
AtthesametimeMRDalsointroducedReferencehandbookofcostestimationfor
selected construction object in foreign countries
21
. Both of the handbooks were
actuallyintroducedbyFGUFCCS
22
,thesamestateagencythatassessesallthestate
owned projects and introduces basic parameters for the cost calculations for the
whole construction industry of RF. The latter document, Reference handbook of
cost estimation for selected construction object in foreign countries was created
using projects data collected by Russian embassies and chamber of commerce in
foreign countries, with all the expenses converted to Rubles. This handbook is
intended only for information purposes, though in practice it is sometime used to
evaluatemodernprojectsonearlystages.
21
InRussian:
,see( , 2009). Recent
copyofthishandbookinRussiancouldbefoundatMRDofficialwebsite
http://www.minregion.ru.
22
FGUFCCS:FederalStateAgencyofgeneralconstructioncostcalculationandprojectcost
documentationassessment,orinRussian
3.3.2. CoststructureinEuropeandUSA
From practical point of view, the MRD reference handbook is not really useful, as
the road construction cost highly depends on the construction conditions, road
widthandnumberoflanes.ThatswhyinUSAandothercountriesallthefinancial
characters are calculated for one mile (kilometer) of traffic lane. The most
importantfactorsforthelaneconstructioncostare
23
:
a. Numberandlengthofengineeringconstruction,i.e.bridges,tunnels,
multilevelroadjunctionsetc.
b. Landacquisitioncost,whichmightreachfrom5%to30%ofthetotal
constructionexpenses
24
.
c. Climateoftheconstructionregion.
d. Soilconditionsfortheconstruction.
For Russian Federation, construction cost may rise up to 300% depending on the
climate zone. For example, MRD data for construction cost declares for Kostroma
area 144 mln rub/km (ca. 3,6 mio ), and 563 mln rub/km (ca. 14,1 mio ) at
Kamchatka
25
.
23
Source:(2009),p.15
24
Source:(WSDOT2005)
25
Source:(2009)
Figure3.HighwayconstructioncostsinUSA,2003-2005
26
Taking all these factors into consideration, construction cost might fluctuate a lot.
Thus, for the research conducted in USA in 2005, 39 road construction projects
showed cost of one kilometer of lane from 1,2 mio $ (flat rural landscape in the
stateofVirginia,withoutbridgesandjunctions)to117,5mio$forBigDigprojects
in Boston area, constructed in high density urban area, including overpasses and
longtunnels
27
.ThesedataarepresentedatFigure3,page17.
Correct comparison of project costs between Russian Federation and for example
GermanyorotherEuropeancountriesisveryhardtaskalsobecausecoststructure
and expenditures included are very different. Traditionally, in Russia road
constructionprojectcostsincludealltheexpensesrelatedtothepreliminarystage,
likerealestatepurchases(whenEmployerneedtobuyaprivatepropertyfroman
26
Source:(WSDOT2005),p.4
27
Source:(WSDOT2005),p.15
existing owner), all kinds of expertise, communication and traffic relocation,
constructionpermitsandprojectdocumentation.
Averageoperationandmaintenancecostsforonekilometeroftheroadnetworkin
Europeancountriesare
28
:
UnitedKingdom 16000
Norway 12000
Germany 9850
Finland 8000
MoredetailedexpenditureinformationpresentedinTable2.
Table2.Nationalexpendituresfornewroadconstruction,maintenanceand
operation
29
Country
Network
Capacity
Enlarge
ment
Investment
Maintenance
Routine
Maintenance
Operation,
management
&finance
Total
Euro(2005prices)perkmoftotalnetworklength
Austria
30
ASFINAG
network
331134 197917 108406 637456
Switzerland
31
Nationalroads
Cantonroads
Municipal
roads
783502
32035
7403
288239
9634
2325
78867
20902
14831
99053
17124
4589
1249661
79695
29148
Germany
32
Federal
motorways
Federaltrunk
roads
197528
23410
83826
21173
39383
11576
320737
56159
28
Source:IRFWorldRoadStatistics,2009citedby:(2009),p.18
29
Source:(DollandvanEssen2008),p.13
30
AnnualexpensesofASFINAGformotorwaysandexpressroads2006,citedby(Dollandvan
Essen2008)
31
Preliminaryvaluesfor2005,citedby(DollandvanEssen2008)
32
ExpensesofthefederalGovernment2005,generalroadnetworkexpensesareallocated
50/50%tomotorwaysandfederalroads,respectively;citedby(DollandvanEssen2008)
Within Europe there are also big differences across road classes and countries.
Even specialized researches (Doll and van Essen 2008) acknowledge that it is
impossible to compare new capacity provision costs between countries as all the
figures relate to the length of the existing network and are thus driven by unit
construction costs and the volume of new construction projects. Furthermore,
extension projects also contain elements of renewal in the case of traffic lanes
expansion.
3.4. RoadProcurementinGeneral
Thestandardmethodofroadprocurementinvolvestheclientauthorityemploying
an engineering consultant to design the scheme and assist in the statutory
planning process, develop the contract documents, and seek tenders. Once the
decision was made regarding to whom the contract should be awarded using this
approach, the standard contract would consist of the conditions of contract, the
specification, the priced bill of quantities, the design drawings, and a formal
exchangeoflettersbetweentheclientandthesuccessfulcontractor.
33
Iftherewas
any dispute, the conditions of contract were used to deal with any pricing
concerns
34
. Contractual variations, claims and disputes
35
are common with this
approach. FIDIC contract model for such construction is FIDIC Red Book
ConditionsofContractforConstruction.
A Variation or a change to the agreed design that occurs after the contract has
beenawardedincasethecontractorfindssomethingonsitethatwasnotallowed
for in the contracted tender price or which, if included in the contract, cannot be
built as intended for some reason
36
. Alternatively, the Engineer or the Employer
maychangesomethingintheoriginaldesigndocuments.
Claimsoccurwhentheauthorizedvariationaffectsthecontractortoconstructthe
scheme as defined by the contract, and is costing him money. Because of the
complex nature of the construction, costs of variations are not always agreed
and/ordocumentedattheonsetofchangeandalotoftimemayhavetobespent
onargumentsregardingtheirvalidity
37
.Veryoften,eitherpartytothecontract,or
both,mayresorttothearbitrationclausesintheconditionsofcontractinorderto
resolve a claim. Sometime these are not finally resolved and postponed until the
road has been completed and opened to traffic. One of the standard functions of
33
Source:(OFlaherty2007),p.62
34
35
ForFIDICdefinitionsoftheseterms,seeGlossary
36
37
the Engineer according to FIDIC contract is determination in such arguable cases
andmakingdecision(orarbitration)fortheclaimsbetweencontractparties.
Once all the claims are settled and the final measurement is made, the Client and
the Contractor settle the final accounts, and most of the remaining money is then
paidtotheContractor.Theonlypaymentthatnormallyremainsatthispointisthe
retentionmoney.
38
ThisisanamountkeptusuallybytheClientfor12monthsto
payforthecorrectionofpossibledefectsinthecompletedwork.Thisamountalso
warrantsthatthenecessaryworksarecarriedout.
In recent years there has been a great deal of interest to use other forms of
contractinsteadofthestandardcontract,forexampleDesignandBuildcontracts.
Withthistypeofacontractthesuccessfulcontractorischosenatanearlystageof
the development of a scheme, this is usually after the planning process has been
completed. The central concept of this contract form is to bring together the
partiesresponsibleforthedesignandtheconstructionoftheroadscheme.Thisis
seen as bringing the knowledge and skills of the contracting industry into the
design process to make the design more buildable and to reduce costs. An
opportunity for the minimization of disputes over the design and specification of
theworkisalsoimportantaspectforthistypeofcontract.Thecontractstillhasa
client side an engineering designer nominated by the client in addition to the
contractor (or group of contractors for a very large scheme). In this form of
contract,theclientsagentsupervisingtheimplementationofthecontractislikely
tohavearelativelyreducedrole.
39
Financial crisis of the last years and growing public pressure have led to an
increasingconsiderationoftheuseofprivatefinancingfortheprocurementofnew
road schemes instead of the governmental money. Many countries are now
seriously looking at involving non-governmental financial organizations in the
38
39
provision of road infrastructure improvements, which have been funded from the
publicfunds.Thismostusuallytakestheformofaconcessionagreementtodesign,
build, finance and operate (DBFO) a length of road, or a portion of the road
network for a fixed period, e.g. 20, 30 or 50 years
40
. The client road authority
retains the basic legal responsibility for the road. Throughout the period of the
concession the DBFO contractor agrees to design, build, maintain and operate the
roadtoagreedstandards
40
.
In return for its investment the DBFO contractor obtains the right to impose tolls
on vehicles using the road during the concession period. Alternatively, the client
authority may pay for the vehicle usage via shadow tolls whereby the DBFO
contractor is paid a variable rate, agreed at the onset of the contract
40
. A contract
similar to DBFO was first used in Russian Federation as the pilot project to build
the part of the federal highway Moscow St. Petersburg, from 15th to 58th km
(km:15-58). Another two road sections at km:58-149 and km:646-684 are also
plannedforDBFOconcession
41
.
40
41
Source:(2011)
3.5. SomeDifferencesBetweenFIDICandRussianContractModels
There is no standard universal construction code in Russian Federation and
standard conditions for construction contracts. Since 2007, Russian Construction
Union makes some effort to introduce standard FIDIC forms of contract into
construction practice
42
. In 2007 RAO UESR
43
introduced FIDIC forms of contract
(Red Book, Yellow Book and Siver Book) as a standard contract model for the
tenders on modernization, maintenance and construction of power plants owned
by the company
44
. Consulting company Trumpel and partners since 2010
publishes quarterly information and analytics magazine FIDIC in Russian
45
,
presentingarticlesandanalyticsregardingFIDICformsofcontract.
Unfortunately, there are a lot of dissimilarities between the FIDIC and Russian
public procurement contracting model, some of them are key important. Some
problems of the Russian public procurement law are discussed in Chapter 4.1 on
page27.Besidesofthatfundamentalthings,therearealsocontractualissues.For
example,riskallocationincaseofaccidentaldamageordeath.AccordingtoFIDIC,
this risk for certain part of the work handed over from Contractor to Employer
transfers to Employer at the moment of acceptance, in spite of the state of other
worksbeingperformedatthesitebyContractor
46
.AccordingtoRussianlaw,risks
ofaccidentaldamageordeathremainsatContractorssidetillthecompletionofall
works and final acceptance of the project. Subbotina in her work (
2010)hasfurtherdiscussionoftheissue.
Contract termination terms also have some issues. For example, contract
termination on Employers sole decision without Contractors breach, generates
Contractors right for compensation for damages and completed works. Under
Russian law, damages compensation amount cant succeed the remaining amount
42
Source:http://www.stroypuls.ru/vipusk/detail.php?article_id=28010,retrievedon21.11.2011
43
RAOUESR:UnifiedEnergySystemofRussia
44
CalledRedBookofRAOUESR,YellowBookofRAOUESRandSiverBookofRAOUESR
respectively,source:http://www.tenderenergo.ru/analytics/FIDIC_RAO/
45
InRussian:FIDIC,seemoreinfoathttp://www.trumpel.ru/journal/
46
Source:(2010),owntranslation
of works according to the contract, while FIDIC contract does not limit damages
compensation.
46
Another very important issue is the Engineers role. FIDIC treats the Engineer as
independent third party to the contract, deriving significant powers and
obligations towards the Employer and Contractor from the contract itself
47
.
RussianCivilCode treats the Engineer as the Employers subordinate and advisor,
acting in his interest as professional technician, supervising Contractors work
fromtechnicalpointofview.Engineer,holdingallthedetailsandkeepinginmind
general view of the project, fills the knowledge and experience gaps of both
Employer and Contractor. To successfully perform this function, the Engineer has
full access and control on the project documentation on all the stages of the
project.
3.6. ProjectDocumentation
To provide detailed and complete project documentation, the Employer hires
professional designers and engineers. However the Contractor very often start
construction without the detailed design, and its not unusual in Russia that the
projectdesigndocumentationdoesnotexactlymatchwhathadactuallybeenbuilt.
The final record drawings of the project become an integral part of project
documentation and replace the original shop drawings for the commissioned
constructions.Thequalitiesoftheoriginaldesignandengineeringdecisionstaken
at the design stage have strong influence on the resulting project and financial
results of it. It was shown in (Bunni 2005), p.77 that the project documentation,
which costs only about 2% of the total costs, has crucial influence on the costs of
construction and following operation, maintenance and reparability of the
infrastructure object, which is discussed in further details in chapter Residual
Risksonpage53.Therearelotsofreasonsfordeviationsinbuiltroadcomparing
47
FIDICRedBookdefinesEngineerspoweranddutiesindetails
to what was designed. Responsibility list for shop drawings presented in Table 3
gives a general idea on whos normally responsible for which part of shop
drawings.
Table3.RecommendedResponsibilityforShopDrawings
48
Task
ResponsibleParty
Owner
Design
Professional
Construction
Contractor
Provideadequatetimeandfundingforshop
drawingpreparationandreview
Prime
Arrangeforstructuraldesign Prime
Providestructuraldesign Prime
Establishoverallresponsibilityforconnection
design
Prime
Accomplishconnectiondesign(bydesign
professional)
Prime
Alternatively,provideloadingrequirement
andotherinformationnecessaryforshop
drawingpreparation
Prime
Alternatively,accomplishsomeorallof
connectiondesign(byconstructor)
Prime
Specifyshopdrawingrequirementsand
procedures
Review Prime
Approveproperscheduling Prime Assisting Assisting
Provideshopdrawingandsubmitthe
drawingonschedule
Prime
Maketimelyreviewsandapprovals Prime
Provideerectionprocedures,construction
bracing,shoring,means,methodsand
techniquesofconstruction,andconstruction
safety
Prime
48
Source:(HendricksonandAu2008)
Chapter4.ConstructionProcurementinRussianFederation 26
4. ConstructionProcurementinRussianFederation
So far FIDIC contracts are not used for the public procurement in Russian
Federation, though Russian Construction Union (RCU) and several legal experts
49
highly recommend its usage. Actually, before that could happen, a lot of legal and
administrative issues and collisions should be resolved, some examples could be
seen in the next chapter 4.1. Subbotina in her work
49
point that also since FIDIC
contains pre-defined set of recommendations and procedures on contract
negotiation and awarding, it is very important to determine limits of FIDIC
usability. There are two possible ways to use FIDIC system, both approaches are
equallylegalandbothcouldbeusedinRussianFederation.
1) Contractor and Employer might agree to use FIDIC as contract model and use
FIDIC-based interaction during contract negotiations. In this case some of the
documents, communications and actions will become obligatory for the parties
even before the final contract assignment. For example, offer documents, tender
proposal, work specifications etc. created using FIDIC rules at preliminary stage,
willbecomepartofthesignedcontractatthelaterstage
49
.
2) Otherwise, both Contractor and Employer are free to use any form of
communication. In this case their actions, communications and even signed
documentsarenotobligatoryuntilnegotiationsarecompletedandthecontractis
signed
49
.Thisisnotreallythecaseforpublicprocurementcontracts,thoughcould
beusedforsubcontractingsomepartsofsuchacontract.
49
Source:(2010),owntranslation
4.1. RussianPublicLegislation
4.1.1. TheFederalLaw94
Federal Law Ninety Four (94-FL) Placement of orders to supply goods, conduct
worksandprovideservicesforstateandmunicipalneeds
50
ofRussianFederation
regulates the general procedures of public and municipal procurement, including
public construction projects. The statute was ratified by Russian government on
July21,2005andcommencedonJanuary1,2006.
From the commencement of the law there were serious problems with public
purchases. According to monitoring of ISP SU-HSE
51
during 2006 FL-94
procedureswerenotfollowedcorrectlyinmorethan80%ofthetenders,whilein
2007 this figure lowered down to 60% and remained the same in the following
years.
52
4.1.2. CriticismoftheLaw
The most critical argument against the FL-94 is that the main criterion for tender
is decreasing of the initial price of the contract. The price drops at the time of
purchase and doesnt take into account possible losses due to low quality of the
supplied services and corresponding expenses (risks). As the result, the main and
very often the only criterion for awarding the contract is the price suggested in
50
InRussian94-,
,;
Source:(,94-,2005)
51
ISPSU-HSE:InstituteofStatePurchases,StateUniversityHighSchoolofEconomics(SU-HSU);
orinRussian:
.
52
Source:(etal.2010),p.6
the tender documentation and percentage of economy.
53
Another very
important points are the absence of standardized method for determining the
initial price of the contract and lack or very low importance weight of
prequalification for the tendering companies. As a result, the initial price of the
contract is set by subjective decision of the tender owner, often unreasonably
high or low
54
.
Talking about the life cycle cost, the picture is even worse. According to the RF
Government act 722, weight coefficients of the criteria operation cost,
technical maintenance, quality assurance might reach 10% maximum, or
20% maximum when used simultaneously. In other words, the company taking
part into public tender cant get more than 20 points out of 100, based on the
provided quality assurance, operation and maintenance cost. At the same time the
weight of contract price parameter cant be less than 35%, and in most cases of
standard purchase is between 60% and 80%. Thus, the main purpose of the
procedures of FL-94 is reaching minimal purchase (contract) price at the moment
of tender, ignoring running cost of the life cycle. If we need to take into account
economic model of the whole life cycle of the project, the actual law has <>
limited options for this purpose. Strictly following the law, its simply not
possible to obtain an effective solution.
55

Further, the problem is getting even worse, as the annual cycle of the state budget
does not allow awarding operation and maintenance agreements at the time of
contract awarding. After completing of the construction project, for example, the
53
Source:IrinaKuznetsova,directorofPurchasesandSalesManagementInstitute,HighSchoolof
Economics,Moscowcitedbyby(2010),p.1.
54
Source:OlgaAllilueva,advisorofFederalAgencyofTarification,citedby(2010),
p.1.
55
Source:YuriyUdaltsov,memberoftheboard,RussianNanotechnologyCorporation,citedby
(2010),p.2.
state agency will have to run another tender for operation and maintenance, and
in general case the winner is not the same company who built the project.
When the project owner needs technical consultations on the preliminary stages,
intending to create a correct and complete tender documentation, he cant turn to
the potential supplier for the advise, as this is explicitly prohibited by FL-94. He
only can declare his interest and wait for response into getting technical
parameters of the existing solutions from the market (SC 20, part 5 of FL-94).
Besides, the FL-94 allows no changes to the technical parameters, as well as no
changes to the signed contract once it is awarded, even when there is no
extension of time or change of the contract price.
56

Moreover,incaseofcontractorrisingclaimforcompensationoffinanciallossesor
extension of time, the only available mean to achieve his goal is via a long and
expensivelitigationprocessagainstthestateagency,theresultofwhichisinvast
major of cases not in contractors favor. Many clauses of the law are ambiguous,
the law application practice and court decisions often run into collisions with
actual Civil code. Even Federal Antimonopoly Service (FAS) and High Arbitration
Court have different opinions on the FL-94 law norms.
57
For example, arbitration
courts following the Civil Code of Russian Federation in several cases made
decisions to change the contract price based on the actual project circumstances,
makechangestotheconditionsofthecontractandtechnicalparametersnecessary
for quality assurance, or completely cancel the contract. Concerning construction
projects, these are the decision of Federal Arbitration Court of Moscow region
15.04.2009 -40/2789-09 on case 40-54718/08-92-458 to avoid the
contract; the decision of High Arbitration Court of Russian Federation 07.06.2008
3471/08 to change the parameters of the project; or the decision of Federal
Arbitration Court of North Caucas region 11.01.2209 08-7936/2008 to
56
Source:differentexpertscitedby(2010),pp.3-4
57
Source:(etal.2010),p.11
increase the final contract price. More examples of such cases could be found in
(etal.2010),appendix2.
4.1.3. TheFL-94Amendments
The law is still in constant development, with many updates and amendments
introduced since the original revision. The amendments list presented in Table 4
on page 31 illustrates controversial approach of the original statute, trying to
regulate all aspects of public procurement from trivial purchases like office
supplies to complex infrastructure and power plants construction projects. The
intention of the government was of course bringing the law back to reality,
developing the institution of state purchases. However the lawmakers didnt
separate types of purchases, converting a very simple idea of FL-94 into very
complex and controversial statute. Even the size of the law document grew up
threetimeslarger(147pagesinsteadof47inoriginalrelease).
Table4.AmendmentstoFederalLawFL-94
FederalLaw
Dateof
Commencement
218- 24.07.2007
257- 08.11.2007
160- 23.07.2008
225- 01.12.2008
308- 30.12.2008
323- 30.12.2008
68- 28.04.2009
93- 08.05.2009
144- 01.07.2009
147- 17.07.2009
155- 17.07.2009
164- 17.07.2009
261- 23.11.2009
273- 25.11.2009
316- 17.12.2009
365- 27.12.2009
78- 05.05.2010
83- 08.05.2010
240- 27.07.2010
290- 03.11.2010
56- 05.04.2011
79- 21.04.2011
4.2. ClassicalStepsforPreparingaProgrammeforaNewRoad
Figure4presentsinasimplifiedwaystepsofamajorroadconstructionprojectin
UK,otherEuropeancountriesgenerallycarryoutsimilarprocedures.
Figure4.Simplifiedstepsinthepreparationofaprogrammeforanewroad
58
58
Source:Adoptedfrom(OFlaherty,2007),page54
Scheme Identication Study
Feasibility Study Preferred Route Decision
Preliminary Design
Prepare draft orders, publish and
seek objections and support for
scheme
Hold public inquiry
Take decision on whether to
proceed with scheme and
make orders
Detailed design and
preparation of contract
documents
Tendering Process
Award tender and start
construction
Construction Period
Hand over to Client and
maintenance period.
Road opening
4.2.1. SchemeIdentification,FeasibilityandPreliminaryDesign
In case of any problem in the existing road network, a road network study would
normallybeeninitiatedbyroadauthorities,toquantifytheproblemandsuggesta
potentialimprovementtoresolveit.Solutiontotheproblemmightbeassimpleas
adding road signs or traffic lights, or as complex as expanding road network by
newmotorwayconstruction.
The international agreement on sustainable development reached in Rio in 1999
suggestsinsomecasesettinglimitsforroadusagebyprivatecars,i.e.usingpublic
transport. However, the governments of developing and East European countries,
including Russia, may take the decision to improve their road infrastructure, for
economicorenvironmentalreasons.InWesterncountries,includingUKandEU,a
fullriskanalysisshouldbecarriedout,followingbyriskmanagementprocess,and
ValueManagement/ValueEngineeringstudyforthelifespanoftheproject.
Then a feasibility study is requested based on the scheme or schemes, identified
through the scheme identification study. The main purpose of it is to identify the
possiblealternativesolutionstotheproblem,throughplanningconsultationswith
relevant planning authorities, government departments, public groups and others
interested in the decision. The resulting preferred route decision would be
published,andbecomeasubjecttoplanningcontrol.
Thenextstepwouldbetocommissionadesignertocarryoutdesignworkwhere
exactly the road will be located within the preferred route envelope. To provide
thedesignerswithenoughdetailsonthecontoursofthelandandthecomposition
of foundation soils, preliminary topographical and geotechnical surveys will have
tobecarriedout.Theimpactoftheproposedhorizontalandverticalalignmentson
sideroads,accesstoprivateproperty,etc.willneedtobeconsideredatthisstage
also. Additionally, land purchases needs can be made and assessed during the
preliminarydesignpreparation.
4.2.2. StatutoryGovernmentalProcesses
Planning permission could be obtained using preliminary (draft) design. Similar
procedure exists in other European countries, including Russia. This draft design
needs to pass state expertise and multilevel authorization process, strictly
regulatedbytheCivilCodeandConstructionCode.InUK,thisrequirespublication
of Orders for trunk roads or motorways, under different sections of the Highway
Act1980.FollowingtheOrderspublication,interestedpartiesaregivenaperiodof
timetoregistertheirobjectionstotheOrders,suggestalternativesorcommenton
them. If unresolved objections are statutory ones (i.e. involving someone who is
directly affected), a public inquiry must be held to consider these objections. The
LordChancellor,uponapublicinquiryrequest,mightappointaneminentperson,
to hear all the objections. These hearings could be complex and time consuming,
especiallyrelatedtoroadsinurbanareas.
59
In case of trunk road or motorway scheme, the state or local municipal

governments can take the decision regarding confirmation of Orders, either as
publishedorwithmodificationsagreedbetweenthepartiesatthepublicinquires.
Objectors then have a further opportunity to challenge the decision into the High
Court,theCourtofAppeal,andattheEuropeanCourtofHumanRights.Incaseof
local roads, the local authorities have the power to grant itself a planning
permission,whichalsocouldbeasubjecttoaPublicInquiry.
4.2.3. DesignandTenderProcesses
Oncearoadproposalhasgainedplanningpermissioninwhateverformisrequired
bythelawsandconventionsofthecountryconcerned,thepreparationofdetailed
design documentation can begin. Whilst some indication of the topography and
geological state of the route of the new road will have been obtained at the
59
preliminarydesignstageasindicatedabove,furthertopographical,geologicaland
geotechnical surveys will normally need to be carried out to confirm the earlier
surveysandprovidethegreaterlevelofdetailedinformationrequiredforthefinal
design. The detailed design of bridges and other structures in accordance with
known standards is normally initiated at this stage also, alongside the drainage
androadpavementdesigns.
60
Havingcompletedthestatutoryanddetaileddesignprocesses,theclientauthority
then seeks contractors to bid on the project via a tendering process. Typically the
number of contractors is limited to six or eight, who are judged to have the
capability to carry out the project. In the European Union, public sector clients
havetocomplywiththePublicProcurementDirectivesoftheEU;theserequireall
schemesoveraboutfivehundredthousandpoundssterlingtobeadvertisedinthe
OfficialJournaloftheEuropeanUnion.
Oncethetendershavebeenreceivedthetechnicaladviserstotheclientauthority
consider them, advise the client on the most appropriate one to accept and the
clientwillthenawardthecontracttothesuccessfulbidder.InRussianFederation,
followingtheFL-94,thesuccessfulbidderistheonewhoputinthelowestprice.
4.2.4. ConstructionContracts
Following the award of the contract to the successful tenderer, the construction
documents, amended as necessary after appropriate negotiations with the
tenderers, are issued in the form of Contract Documents. These documents form
thebasisoftheconstructionofthenewroad.
Theawardofthecontractdoesnotmeanthattheclientauthoritycanforgetabout
the project until construction is completed. Certainly, there will be variations
60
during the construction period, and it is in this area that most on-site disputes
arise. However, it has to be recognized that the variability of the soil conditions,
materials that are encountered on site, as well as those used in civil engineering
works in general, are such that the construction process will necessitate changes
that cannot be predicted in advance. The road designers should therefore seek to
do all that lies within their power to minimize these changes and disputes, using
the risk management procedures. It is also essential that the form of contract
chosen should be one that minimizes the areas for dispute and maximizes
opportunitiesfortheclientandthecontractortoworktogetherinpartnership.
Inmanyways,thekeytoasuccessfulconstructioncontractliesinthehandsofthe
senior staff employed to carry out the works. If the contractors senior staff and
thoseemployedtosupervisetheworksarehighlyexperienced,theprojectismore
likelytobecarriedouteconomically,efficiently,andsafely.
61
4.2.5. ContractualMaintenancePeriod
Oncethecontractiscompletedthenewroadishandedovertotheclientauthority
for use by traffic. Following the hand-over there is a maintenance period during
which the contractor remains responsible for the road structure. Almost
inevitably, there will be a list of minor problems identified at the final inspection
beforethehand-overoftheroadisaccepted,butwhichareinsufficientlyseriousto
warrant their rectification before the road is opened. These will need to be put
right at the contractors expense, along with anything else that comes to light
during the early life of the new road. This period is known as the maintenance
period, and is usually no longer than 12 months. The repair work carried out by
the contractor during the maintenance period is separate from the normal road
maintenanceactivitiescarriedoutbytheroadoperationworkers.
61
Chapter5.FIDICConditionsofContractforConstruction 37
5. FIDICConditionsofContractforConstruction
The acronym FIDIC stands for Fdration Internationale Des Ingnieurs-Conseils,
French name for the International Federation of Consulting Engineers. A French
title goes back to the foundation in 1913 by three francophone countries
Belgium, France and Switzerland. Located at the World Trade Center in Geneva,
Switzerland, FIDIC aims to represent globally the consulting engineering industry
by promoting the business interests of firms supplying technology-based
intellectual services for the built and natural environment. Run mostly by
volunteers,FIDICiswellknownintheconsultingengineeringindustryforitswork
indefiningConditionsofContractfortheConstructionIndustryworldwide.
62
FIDICpublisheddifferentstandardformsofcontractcustomtailoredforparticular
projectprocurementmodel
63
:
ConditionsofContractforConstruction,(FIDICRedBookcontract)which
arerecommendedforbuildingorengineeringworkswherethe
Contractorconstructstheworksinaccordancewithadesignprovidedby
theEmployer.However,theymayincludesomeelementsofContractor-
designedworks.
64
ConditionsofContractforPlantandDesign-Build(FIDICYellowBook),
recommendedfortheprovisionofelectricaland/ormechanicalplant,and
forthedesignandexecutionofbuildingorengineeringworks.Underthe
usualarrangementsforthistypeofcontract,theContractordesignsand
provides,inaccordancewiththeEmployersrequirements,plantand/or
otherworks;whichmayincludeanycombinationofcivil,mechanical,
electricaland/orconstructionworks.
65
62
Source:http://www.fidic.org,moredetailsonhistoryandmissionoftheorganizationare
availableatthewebsite.
63
Source:http://www.fidic.org
64
Source:FIDICConditionsofContractforConstruction
65
Source:FIDICConditionsofContractforPlantandDesign-Build
ConditionsofContractforEPC/TurnkeyProjects(FIDICSilverBook),
whicharerecommendedwhereoneentitytakestotalresponsibilityfor
thedesignandexecutionofanengineeringproject.Undertheusual
arrangementsforthistypeofcontract,theentitycarriesoutallthe
Engineering,ProcurementandConstruction:providingafullyequipped
facility,readyforoperation(atthe"turnofthekey").Thistypeofcontract
isusuallynegotiatedbetweentheparties.
66
ShortFormofContract,recommendedforbuildingorengineeringworks
ofrelativelysmallcapitalvalue.Dependingonthetypeofwork,thisform
mayalsobesuitableforcontractsofgreatervalue,particularlyfor
relativelysimple,shortorrepetitivework.Undertheusualarrangements
forthistypeofcontract,theContractorconstructstheworksin
accordancewithadesignprovidedbytheEmployerorbyhis
representative,butthisformmayalsobesuitableforacontractwhich
includessomeContractor-designedcivil,mechanical,electricalor
constructionworks.
67
ConditionsofContractforDesignBuildandOperateProjects(FIDICGold
Book),allconditionsofthegeneralnatureapplyingtothemajorityofDBO
contractswereincludedintoGeneralConditionsofthisContract.Atthe
sametimeitwasrecognizedthatmanyEmployersorgovernments,
particularlyiftheGeneralConditionsweretobeusedondomestic
contracts,mayrequirespecialconditionsofcontract,orindeedparticular
procedures,whichdifferfromthoseincludedintheGeneralConditions.
Forthisreason,thedocumentalsoallowsforParticularConditionsPartB
SpecialProvisions,whichincludesadvicetodraftersofcontract
documentswhomaywishtoaddSpecialProvisionstoreplaceor
supplementtheclausestobefoundintheGeneralConditions.
68
66
Source:FIDICConditionsofContractforEPC/TurnkeyProjects
67
Source:FIDICShortFormofContract
68
Source:FIDICConditionsofContractforDesignBuildandOperateProjects.
The forms are recommended for general use where tenders are invited on an
international basis. Modifications may be required in some jurisdictions,
particularlyiftheConditionsaretobeusedondomesticcontracts.FIDICconsiders
theofficialandauthentictextstobetheversionsintheEnglishlanguage.
DuringthepreparationoftheFIDICConditionsofContractforConstruction,itwas
recognizedthat,whiletherearemanysub-clausesthatwillbegenerallyapplicable,
there are some sub-clauses that must necessarily vary to take account of the
circumstances relevant to the particular contract
69
. The sub-clauses that were
applicable to most contracts comprise the GeneralConditions, which will facilitate
their incorporation into every contract. The GeneralConditions and the Particular
Conditions will together comprise the Conditions of Contract governing the rights
and obligations of the parties. It will be necessary to prepare the Particular
Conditions for each individual contract, and to amend the sub-clauses in the
GeneralConditions,mentioningtheParticularConditions.
In this work I will concentrate on FIDIC Conditions of Contract for Construction
(FIDICRedBook),asthismatchesthestandardformofGeneralContractoractivity
used in road construction. While other forms of contract could be used for
advanced private-public partnership projects, the decision to limit a scope of this
worktoGeneralContractoractivitieswasmadeattheearlystage.
69
Source:(FIDIC1999)
5.1. TheEngineer
Very often independent consulting engineer is invited to fill the role of
independent and educated professional to supervise design and construction,
accept completed work and certify payments, to make determinations and settle
disputes. The powers and obligations of the Engineer are set by the FIDIC
ConditionsofContractforConstructioncontractforthepurposesoftheproject.
5.1.1. TheEngineerinContractMatrix
In large projects contractors and employer create a type of organization,
sometimescalledacontractmatrix,liketheoneshownbelow.
Figure5.Projectmatrixorganization
70
70
Source:(Lock2007),p.146
In this example the project owner engages a managing contractor (general
contractor) to design the project, carry out purchasing, select and hire
subcontractors and manage all the construction site activities. Conditions of the
Contract between the Employer (Project Owner) and the Contractor (General
Contractor)aresetbyFIDIC.
In such contract matrix an independent consulting engineer (the Engineer) is
appointed by the Employer, with duties and powers set by Clause 3 of the FIDIC
ConditionsofContractforConstruction (in case of General Contractor agreement).
InthiscasetheEngineerisnotapartyofthecontract,whichisagreedbetweenthe
contractor (General Contractor) and the Employer. However his activities,
obligationsandauthoritiesareregulatedbythecontract.
The third edition of the Guide to the Use of Independent Consultants for
EngineeringServicespublishedbyFIDICin1980definedaconsultingengineeras
follows
71
:
The consulting engineer is a professional engineer in private
practice.Hemaintainshisownengineeringofficeeitheraloneorin
association with other engineers. He employs the necessary staff to
assist in carrying out the services which he provides. His
organizationmaybethatofasoleproprietorship,apartnershipor
a company. This depends on the type and magnitude of his
operations and the conditions of practice set by his national
association. He must carry out his practice on a highly ethical
professional basis. The technical knowledge, experience and ability
of the consultant, his associates and assistants must be fully
adequatefortheprojectsundertaken.
72
71
Source:(FIDIC1980),citedby(Bunni2005),p.74
72
Citedby:(Bunni2005),p.74
The 1999 Edition of FIDIC Conditions of Contract for Construction SC 3.1
emphasizesthenecessityofqualifiedengineer:
TheEmployershallappointtheEngineerwhoshallcarryoutthe
dutiesassignedtohimintheContract.TheEngineer'sstaffshall
includesuitablyqualifiedengineersandotherprofessionalswhoare
competenttocarryouttheseduties
73
FIDIC discourages owners or clients basing their selection of a consultant purely

onprice.FIDICrecommendationsclearlystate:
itisneitherinthebestinterestoftheclientnoroftheprojectitself
that consultants be selected on the basis of a procurement system
which includes a price comparison of their professional services.
Once a price is introduced the selection process becomes biased in
favouroflowestfeeratherthanquality.
74
FIDICrecommendsselectingoftheEngineerforthecontractbasedonsevenbasic
principles
75
:
(a) professionalcompetence;
(b) managerialability;
(c) availabilityofresources;
(d) impartiality;
(e) fairnessoffeestructure;
(f) professionalintegrity;and
(g) qualityassurancesystem.
73
Source:(FIDIC1999),p.10,SC3.1
74
Source:FIDICGuidelinesfortheSelectionofConsultants,FirstEdition,FIDIC,2003,page1of
Section4.Citedby(Bunni2005),p.78
75
Source:(Bunni2005),p.77
5.1.2. IndependenceandImpartiality
Bothpartiestothecontractagree,atthemomentofenteringthecontract,thatthe
Engineeristoperformcertaindeterminationandcertificationfunctionsunderthe
contract. The Engineer is thus a very powerful person making important contract
decisionsthatrequiresacertaindegreeofimpartialityandfairnessfromhim
76
.
To successfully perform his duties under the contract, the Engineer should act in
independent, unbiased and impartial manner, keeping balance of interests
betweenthecontractparties.
Thebuildingownerandthecontractormaketheircontractonthe
understandingthatinallsuchmatterstheEngineerwillactinafair
and unbiased manner and it must therefore be implicit in the
owners contract with the Engineer that he shall not only exercise
due care and skill but also reach such decisions fairly, holding
balancebetweenhisclientandthecontractor.
Sutcliffev.Thackrath
77
In Russia and other civil law countries, such a powerful person, who is a third
partytothecontractbutderiveshispowersfromthecontractsignedbetweenthe
parties, is not existed. It makes hard, or sometime almost impossible to directly
apply FIDIC contract model to public construction projects. In most cases, a role
similar to the Engineer is awarded to either in-house departments within the
employersorganization
78
,governmentagencies,researchinstitutesorcontracting
firms acting on behalf of Employer. None of them is impartial, independent nor
unbiased arbitrator for any dispute or conflict rising during the project
implementation. Also, there is no agreement on the powers and duties of this
person or organization. This is not the same as an Engineer under the FIDIC
76
Source:(JaegerandHk2010),p.221
77
Source:citedby(Jaeger&Hk,2010),p.222
78
SocalledclientservicesorinRussian,withcommondutiesprettywell
definedbytheRussianStatutesandconstructionregulations.
Contracts,wherethepartiesagreethattheEngineerderiveshisdutiesandpowers
fromtheContractitself.
5.1.3. ServicesoftheEngineer
The Engineers services could be in one or any combination of counseling, pre-
investment studies, design, supervision, development services and project
management.
Counselingservices
This services are very wide in scope and could include provisioning of advice to
the Employer and the Contractor on particular case or situation, project
identification and quantification if objectives. It may require the individual
consultingengineeroragroupofqualifiedpersonsworkingtogetheronparticular
taskorproblem.
79
Pre-investmentstudies
ThisisperhapsthemostcriticalamongtheEngineersservices,astheydetermine
the investment policy, feasibility, procurement and basic features of individual
projects,aswellastheprojectfinancialresultsandsustainability.Sincethescope
of these services is very wide, the team including engineers, planners, economists
andotherspecialistsnormallyprovidesit
80
.
Design,preparationofdocumentsandsupervision
Core engineering services by the Engineer include draft and detailed design,
preparationofcontractdocumentsandprojectimplementationsupervision.These
79
Source:(FIDIC1980),(Bunni2005),p.79
80
parts are highly interrelated, so normally its wise to have the same person
providing preparation of documents and project supervision to avoid doubts and
ambiguities.TheEngineertakesavitalpartinpreparationof
81
:
(a) Tenderdocuments
(b) Generalconditionsofcontract
(c) Specificationanddescriptionofthework
(d) Billofquantities
(e) Drawings
(f) Formofagreement
Specializeddesignanddevelopmentservices
Theconsultingengineerissometimesresponsiblefororiginaldesignofspecialized
items, machinery or equipment. It may extend to research and development of
innovativework
82
.
Determinations
The Engineer shall, in accordance with the contract, fairly determine any matter.
Sub-Clause3.5oftheFIDICConditionsofContractforConstructiondoesnotconfer
discretional or arbitrary powers to the Engineer
83
. The Engineer is authorized to
make determinations as to claims, variations and new rates. The Engineer is not
allowedtoamendtheContractortorelieveanyPartyofanyduties,obligationsor
responsibilities. Though a determination is binding on the Parties it does not
createnewdutiesorobligations.
84
81
82
83
84
AdministrationDuties
Besides these technical or semi-technical services, the Engineer also performs
administrationdutieswhichmightalterthetimeforcompletionoftheworksand
vary the cost of such works
85
. These duties include measuring and evaluation of
the completed work, determination of volume and prices of additional work
caused by the variations and changes, and resolving conflicts and disputes
betweenparties.
Quite often a separate agreement based on the FIDIC Client Consultant Model
ServicesAgreement(FIDICWhiteBook)betweentheEmployerandtheEngineeris
used as the agreement model for pre-investment phase and administration
services
86
.
Projectmanagement
A Project Management team created by the Engineers office in addition to
managing engineering, procurement, construction and commissioning will also
cover project financing, maintain public awareness and obtain government
approval
87
.
85
86
87
5.1.4. FunctionsoftheEngineer
The Engineer has a number of functions, based on the stipulation of General
ConditionsClause3ofFIDICConditionsofContractforConstruction.
Table5.FunctionsoftheEngineer
88
Function Sub-Clause
ContractInterpretation,ClarificationofAmbiguities 1.5
CheckingofContractorsDocumentsandDrawings 4.1
Kick-Off,CommencementoftheWorks 8.1
CheckingofContractorsProgramme 8.3
MonitoringProgress 8.6
Monitoringofrecordsofclaims 20.1
ConsultationwiththePartiesforresolutionofclaims 3.5
NoticestoCorrect 15.1
InspectionandMeasurementoftheWorks 7.3
TestingoftheWorks 7.5
IssueofTakingOverCertificate 10.1
IssueofPerformanceCertificate 11.9
EvaluationoftheWorks,Variations 12.1
IssueofInterimandFinalPaymentCertificates 14.6,14.13
Determinations:
Claims 3.5
NewRates 12.3
Instructions:
RemedialWorkandSafetyMeasures 7.6
Acceleration 8.6
SuspensionoftheWorks 8.7
Variations 13.3
It worth to repeat a very important point is that the Engineer derives his power
and obligation from the contract between parties itself. He operates within the
88
Sources:(FIDIC1999),(JaegerandHk2010),p.229,withadaptationfrom(Ebel2011),p.45
limits of the contract boundaries, so the Engineer has no authority to relieve
eitherPartyofanyduties,obligationsorresponsibilitiesundertheContract
89
and
cannotamendthemaincontract,aswellasshallnotrelievetheContractorfrom
anyresponsibilityhehasundertheContract
90
.
5.1.5. TheCodeofEthics
TheStatutesandBy-lawsofFIDICalsorefertoaCodeofEthics
91
,whichfocuseson
the fundamental principles of behavior of a consulting engineer. It is outlined on
thenextpage
scalesofprofessionalfeesfixedbytheprofessionsatlevelswhich
willenableexistingskillstobemaintainedandnewskillsdeveloped.
Theprofessionshavecometoregarditastheirrighttocontroltheir
workingenvironmentinthisway.Thepricetheprofessionalspayto
the community for this right is contained in the concept of
adherencetoCodesofEthics.Someofthesecodeshaveveryancient
roots. <> The common theme which runs through these codes is
the simple but extraordinarily demanding charge on the
professional that he must put the interests of his client and the
publicbeforehisown
Dr.PeterMiller
92
89
Source:(FIDIC1999),p.10,Sub-Clause3.1,point(b)
90
Source:(FIDIC1999),p.10,Sub-Clause3.1,point(c)
91
Includedinto:StatutesandBy-Laws,FIDIC,October1996
92
Citedby:(Bunni2003),p.20
From the ethical point of view, all the Engineers obligations fall into one of the
followingcategories:
ResponsibilitytoSocietyandtheConsultingIndustry
Competence
Integrity
Fairnesstoothers
Corruptioncounteraction
Table6.ConsultingEngineerCodeofEthics
93
ResponsibilitytoSocietyandtheConsultingIndustry
1. AccepttheResponsibilityoftheconsultingindustryto
society.
2. Seeksolutionsthatarecompatiblewiththeprinciplesof
sustainabledevelopment.
3. Atalltimesupholdthedignity,standingandreputationof
theconsultingindustry.
Competence 4. Maintainknowledgeandskillsatlevelsconsistentwith
developmentintechnology,legislationandmanagement,
andapplydueskill,careanddiligenceintheservices
renderedtotheclient.
5. Performservicesonlywhencompetenttoperformthem.
Integrity 6. Actatalltimesinthelegitimateinterestoftheclientand
provideallserviceswithintegrityandfaithfulness.
Impartiality 7. Beimpartialintheprovisionofprofessionaladvice,
judgmentordecision.
8. Informtheclientofanypotentialconflictofinterestthat
mightariseintheperformanceofservicestotheclient.
9. Notacceptremunerationthatprejudicesindependent
judgment.
93
Source:StatutesandBy-Laws,FIDIC,October1996,citedby:(Bunni2005),p.76
Fairnessto
others
10.PromotetheconceptofQuality-BasedSelection(QBS)
94
.
11.Neithercarelesslynorintentionallydoanythingtoinjure
thereputationorbusinessofothers.
12.Neitherdirectlynorindirectlyattempttotaketheplaceof
anotherconsultingengineer,alreadyappointedfora
specificwork.
13.Nottakeovertheworkofanotherconsultingengineer
beforenotifyingtheconsultingengineerinquestion,and
withoutbeingadvisedinwritingbytheclientofthe
terminationofthepriorappointmentforthatwork.
14.Intheeventofbeingaskedtoreviewtheworkofanother,
behaveinaccordancewithappropriateconductand
courtesy.
Corruption
counteraction
15.Neitheroffernoracceptremunerationofanykindwhichin
perceptionorineffecteithera)seekstoinfluencethe
processofselectionorcompensationofconsulting
engineersand/ortheirclientsorb)seekstoaffectthe
consultingengineersimpartialjudgment.Inthisconnection
itisworthmentioningthatFIDICpublishesaPolicy
StatementonBusinessIntegritythatprovidestheviewofthe
professiononthistopic.
16.Co-operatefullywithanylegitimatelyconstituted
investigativebodythatmakesinquiryintothe
administrationofanycontractforservicesorconstruction.
94
Originallypublishedin1997,thisdocumentwasreplacedin2003byamorethorough
statementinFIDICGuidelinesfortheSelectionofConsultants,FirstEdition,FIDIC,2003.
5.2. RisksinContract
Risksfacedbythecontractparties(eitheremployerorcontractors)amongothers
mayinclude:
95
thattheworkswillbecompletedlate,includingexposuretodamages,
penaltiesandcostsintheeventofdelaysincompletionoftheworks;
thattheworkswillbecompletedinadequately;
thattheworksbecomemoreonerousthanexpected;
landacquisitionrisk;
increasingcostinoperating,e.g.increasedlaborcosts;
designandconstructiondefectsimpactingupontheoperationofthe
completedproject;
deficienciesinotherinfrastructureorservicesuponwhichthesuccessful
operationoftheprojectdepends,e.g.feederroadsarenotconstructedor
urban;
developmentdoesnotproceedasanticipated;
politicalrisk,e.g.changeinprioritiesofgovernmentsandlackoffunding;
politicalsupportnecessarytopromotethesuccessoftheproject;
designrisk;
siteconditionsmightbeencounteredwhicharedifferenttothosewhich
wereexpected,andtheconsequencesofunanticipatedconditions
(includingcontaminationrisk,nativetitles);
latentdefects;
sitesupervisionandsitesuperintendence;
risksarisingfromSubcontractors,inparticulardirectclaimsof
Subcontractorsbasedonstatutelaw(suchasinPolandandFrance);
managementrisks;
continuityofcash-flow;
95
Source:(JaegerandHk2010),pp.335-336
specialrisksarisingfrombanksecurities;
damagesresultingfromthirdparties;
damagestothirdparties,e.g.neighbors;
consequencesofthedefault,orfailureofaconsortiumpartner;
abilitytorectifydefectsafterTaking-Over;
consequentiallosses;
litigationrisk;
currencyrateriskandcurrencyexportrestrictions.
5.2.1. ExamplesofUnforeseenConditions
Inmostcasesunforeseenconditionsarerelatedtothegroundphysicalconditions
of the soil. Normally, the subsurface information (via soil borings or test pits) is
given to the Contractor as part of the construction documents. The problem that
arises here is that the actual conditions may vary from what is presented in the
documents.ThisoccurswhentheContractorstartsthefoundationworkandfinds
a different condition then what was indicated on the drawings. All infrastructural
projects are very sensitive to the conditions of foundation, though different
countries treat these soil conditions risks in a different way. For example, under
Italian law, unforeseen subsurface conditions are the owner's responsibility, not
thecontractor'sone.ThisisadifferencefromU.S.orRussianconstructionpractice
where variations to the contract price caused by soil conditions, relevant clauses
and claims and the completeness of prebid site investigations are points of
contention,andmostcommonlybelongtotheContractorsresponsibilities.
5.2.2. ResidualRisks
In most cases external, environmental and strategic risks could be categorized as
so-calledresidualrisks.Theserisksarenoteasilyquantifiableandnormallydonot
fit into the existing risk assessment models. In most projects an error/risk in
design will have a ripple effect on construction and implementation. This causal
effectisimportantandshouldbereflectedintherisksassessmentmodel.Basedon
US Navys Naval Facilities Engineering Command data, presented by its Chief
Rear-Admiral D.C. Iselin, the design costs represent only 2%, construction costs
represent 42% and operating and maintenance costs represents 56% for the
typical project
96
. This ratio will be more or less correct for any infrastructure
project as well. This relatively modest 2% of the total project costs has critical
influenceonboththeconstructioncostsandespeciallytheoperation,maintenance
andrepaircosts.Thusitisvitaltogetthehighestpossibletechnicalqualityinthe
design effort, and using professional technical advisor at this stage might avoid a
greatdealofdesignerrorsrisks.
Inatypicalproject,wefindthatoutfitting,operating,maintenance,
and repair costs represent 56% of the life cycle cost, construction
costs represent 42%, and the design cost represents approximately
2%. This relatively modest cost, notwithstanding the AE design
effort,hascriticalinfluenceonboththe42%forconstructioncosts,
andespeciallythe56%foroperations,maintenance,andrepair.Itis
vitally important that we get the highest possible technical quality
inthedesigneffort.Inmyprofessionalopinion,anyproposalwhich
seeks to reap a near term saving by reduction in design costs, but
which increases the risk of diminished technical quality of the
design effort, is shortsighted in the extreme. We will live with the
cost of impacts of that diminished technical quality for the full
economic life of the facility: this concern is a cornerstone of my
oppositiontopricecompetition.
Rear-AdmiralD.C.Iselin,theCommander
oftheUSNavysNavalFacilitiesEngineeringCommand
97
96
Source:Thepiecereferredwastakenfromapaperreadatthe1983FIDICConferencein
FlorencebyMrNormanWestberg,aFinnishConsultingEngineer.Citedby:(Bunni2005),p.77
97
Thepiecequotedwastakenfromapaperreadatthe1983FIDICConferenceinFlorenceby
MrNormanWestberg,aFinnishConsultingEngineer.Citedby:(Bunni2005),p.77
5.2.3. RiskAllocation
For the public procurement contracts In Russian Federation, the government
agencyusuallytendstoallocatealltherisksincludingtheabovetothecontractor
orsupplierofthepubliccontract.Furthermore,thereisnoestablishedmechanism
for contract price changes once the public contract is signed. Even during the
tendering phase, only price decreasing changes could be supplied and integrated
into project documentation
98
. Practically even predictable risks are not
compensated, due to the all-inclusive nature of the supplied price offer that
causesinstanterrorsandoverpricingofthegovernmentcontracts.
Proper risk allocation scheme would benefit to the total construction cost,
covering risks through appropriate risk management and mitigation instruments.
Riskmustbeadequatelymanagedwhichmeansidentificationandproceduresthe
Contractorwillusetomanageandcontroltheconstructionprocess,takingcareof
alltherequirementsoftheContractandalsowithregardtocurrentacceptedbest
practice.FIDICcontractshaveeverythinginplacetotakecareofthis.
Proper Project Risk Analysis and Management (PRAM) is essential to lead the
project successfully from early stage of decision making to completion, and to
protectitfromfailureortimeandcostoverrunsduetovariousmultidimensional
risk factors. To control all the risks surrounding projects one form or another of
PRAM should be used, otherwise the project is at risk. PRAM allows using the
advantageofthefollowingbenefits:
99
Analysisandevaluationofrisks,
Variousriskreactionsandstrategiescomparison,
Optimizationsandbeststrategydecisions,
98
ThisisthepracticalresultoftheabsurdbaseprincipleintroducedbyFL94,whichisthatthe
tenderingprocessshoulddecreasetheresultingpriceofthecontract.InRussianitscalled
ordecreasingthecontractprice.Formoredetailssee(,
94-2005)withaddendums.
99
Source:(Khamooshi2004)
Earlywarningsystem,
Flexibilityandresponsivenesstochanges.
Riskscanbetreatedinavarietyofways.Thekeyisthatthosebestabletomanage
the risk should do so. That may, and should, result in a transfer of funds and/or
resources to facilitate management of the risk. Figure 6 on page 55 illustrates
availableoptions:toretaintherisk,reducetherisk,transfertherisk,oravoidthe
risk.
100
Figure6.Riskresponseoptions
101
Retainingtheriskmeansabsorbingtheriskintotheprojectplansanddevelopinga
probablebudgetthatismonitoredandcontrolledjustlikeanyotherbudget.
Reducingtheimpactofriskcanbeachievedbyacombinationofactionsnotlimited
to: spreading risks across groups of team members; minimizing the impact
through developing risk contingency plans; seeking expert advice; investing in
100
Source:(Fwa2006),p.15-30
101
Source:(Fwa2006),p.15-31
education and training about the risk (typically for environmental risks); and
mitigatingtheriskthroughdesignmodification.
Transferringriskincludes:insuringagainsttherisk;outsourcingorsubcontracting
toothersthatcanbettermanagethatrisk;developingastrategytobeabletoclaim
against those risks as part of the contractual arrangements or through other
litigation;andfindingajointventurepartnerwillingtobeartheserisks.
The final response is to simply avoidtherisk through refusing it as a condition of
contractorifthatisnotfeasible,decliningthecontractasthewhole.
For successfully dealing with risks, it is very important to accept that there are
uncertaintiesassociatedwithanyrisk.Anythingthatwillhappeninthefutureisby
definition not known in detail now, so it is extremely important to document or
ensurethatassumptionsmadeatthetimeofidentifying,assessing,andevaluating
risksareasexplicitaspossible.
5.2.4. IndemnityandInsuranceofRisks
Not all risks are insurable in theory and while the principle of the equitable
contribution of many for the benefit of an individual suffering a loss is the corner
stoneofinsurancephilosophy,certainlimitationsmust,ofnecessity,beputonthat
principle to make the insurance transaction viable. Bunni (2003) has shown
general principles of insurability, which are applicable to standard construction
contracts.
Bunni (2005) shows that liabilities arising from the duties and obligations of the
partiestotheconstructioncontractshouldbecoveredbyindemnitiesgivenbyone
party to the other, or provided in the form of construction insurance policies
102
.
Fromthispointofview,theriskscouldbeseparatedintotwomaincategories:
a) Risksofloss,injuryordamage.Iftheyeventuate,theseriskscouldleadto
loss,injuryordamage.
b) Economicandtimerisks.Resultingfromdefaultintheobligationsspecified
inthecontractdocumentsandaugmentedbytherulesoftheapplicablelaw
ofthecontract.
Theinsurancelimitationsare:
a) Theprincipleofinsuranceisbasedontheprobability,thustheremustbe
anuncertaintyrelatingtothemattertobeinsured,i.e.accidentalin
character.
b) Aninsurableriskshouldpreferablybemeasurableinquantitativeterms
andinsuchawaythatthetheoriesofprobabilityandthelawoflarge
numbersmaybeused.Withoutthisstipulation,thepremiumrequiredto
insuretheriskcouldnotbescientificallycalculated.Itis,importanttonote
that,incaseofunquantifiablerisk,itistheassessmentofthepremiumand
nottheinsurabilitythatisinquestion.
c) Aninsurableriskshouldbeacceptabletotheinsurancemarketthrough
appropriateriskselectionmethods.Theobjectsinsuredmustbe
numerousenoughandhomogeneousenoughtoallowsufficientselection.
d) Aninsurableriskshouldbesuchthatonecandeterminethelossoccurred
andthecauseoftheresultantdamage.Theextentofthedamageshould
alsobecapableofassessment.
102
Figure7.PossibleCoverageforRisksofLoss,InjuryorDamage
103
103
Source:adoptedfrom(Bunni2005),p.110
Contractors Risks
(all others)
Employers Risks
(specied)
Requited to be insured
under the contract
Special risks Normal risks
CAR
(Contractors
All Risks)
Insurable risks
but not required to be
insured under the contract
By self insurance
Professional
Indemnity
for Engineer
& Contractor
Uninsurable by the
insurance market
Liability of the
Employer
Risks of loss, injury or damage
Risks which could lead
to injury or damage
if they eventuate
By an insurer
PL
(Public
Liability)
EL
(Employer
Liability)
Liability of the
Contractor
Employers
Liability
for
Employer
Public
Liability
for
Employer
DC
Dierence
in
Conditions
Figure8.PossibleEconomicandTimeRisksInsuranceCoverage
104
Fortunately, most risks in construction contracts fall within the specified limits
andareinsurable.
105
5.2.5. InsuranceOverlapsandGaps
When the risks in a construction project are insured through the provision of a
number of different policies issued for each of the parties involved including
104
Source:adoptedfrom(Bunni2005),p.111
105
Source:(Bunni2003),pp.189-200
Economic and Time Risks
Emanating from default in the duties
and obligations as specied in the contract
documents and augmented by the legal
rules of the applicable law of contract
Contractors Risks Employers Risks
Defective design
by engineer
Delay in
performance and
cost over-run
Completion risk
insurance
Non
performance
Non-performance
security
Project insurance
(limited in time)
Professional
idemnity insurance
(limited in amount)
Decennial insurance
10 years, but
limited in scope
Non
performance
Performance
security
Defects
Delay
in time
Additional Costs
Uninsurable
Patent defects
Latent defects
Public liability
policy cover
for design
Defective material
and workmanship cover
(sometimes uninsurable)
Decennial
insurance
owner, design professionals, contractors and subcontractors, the number of
policies issued is extremely high. Besides the difficulty in checking these policies
forerrorsandomissions,thereremainstheproblemoftheoverlapsandrepetition
in parts of the insurance cover. These develop because of the use of standard
insurancepolicies,eachdesignedtogivepartialcoverandprotectionagainstafew
oftherisks.
Aswellasoverlaps,gapsintheinsurancecoveralsoemergeespeciallywherenone
of the insurance policies takes over a specific risk. Figure 9 on page 60 shows a
situation where multiplicity of policies leads to overlaps and gaps. The two main
problemsinoverlappinginsurancecoversare
106
:
a) Wherethereisanoverlap,apremiumhasbeenpaidmorethanonce.
b) Thereispotentialforadisputebetweenthevariousinsurerswhohave
providedthecoverinthecaseofalossresultinginademandfromthe
insuredforindemnity.
Figure9.Retainedandinsuredrisks
107
106
107
Source:basedon(Bunni2003),p.199
Risks retained by the Contractor
R
i
s
k
s

r
e
t
a
i
n
e
d

b
y

t
h
e

P
r
o
f
e
s
s
i
o
n
a
l
R
i
s
k
s

r
e
t
a
i
n
e
d

b
y

t
h
e

O
w
n
e
r
gaps
P
r
o
f
e
s
s
i
o
n
a
l
s

R
i
s
k
s

I
n
s
u
r
e
d
O
w
n
e
r
s

R
i
s
k
s

I
n
s
u
r
e
d
Contractors
Risks Insured
O
v
e
r
la
p
O
v
e
r
la
p
O
v
e
r
l
a
p
Thereistheproblemwithagapintheinsurancecover,sincethereisnoinsurance
inrespectoftherisksrepresentedbythatgap.Thesituationbecomescriticalwhen
theinsuredpartiesdonotrecognizethegap,whethertheinsurancecoveristaken
outorisinoperation.
Insurancegapsmightbearesultof
108
:
a) gapsthroughuninsurablerisks;
b) gapsduetolackofcover,eitherintheinsurancepracticeorthroughthe
wishoftheinsured;
c) gapsduetotheuseoftheconventionalmethodofprovidinginsurance.
5.2.6. RiskMitigationInstruments
Risk mitigation instruments are financial instruments that transfer certain
defined risks from project financiers (lenders and equity investors) to
creditworthythirdparties(guarantorsandinsurers)thathaveabettercapacityto
accept such risks. These instruments are especially useful for developing country
governmentsandlocalinfrastructureentitiesthatarenotsufficientlycreditworthy
ordonothaveaproventrackrecordintheeyesofprivatefinancierstobeableto
borrowdebtorattractprivateinvestmentswithoutsupport.
109
Guarantees typically refer to financial guarantees of debt that

coverthetimelypaymentofdebtservice.Procedurestocallonthese
guarantees in the event of a debt service default are usually
relatively straightforward. In contrast, insurance typically requires
aspecifiedperiodduringwhichclaimsfiledbytheinsuredaretobe
evaluated,beforepaymentbytheinsurer.
Guaranteesvs.Insurance(MatsukawaandHabeck2007)
108
109
Source:(MatsukawaandHabeck2007)
5.3. ConflictsResolution
Normally among people working together some conflict is bound to arise. This
happenswithintheproject,withclientsorcontractors.Promptconflictresolution
is an effective mean to prevent conflict development into more dangerous
direction,providesettlementmechanismandresolvetheraisingissuesbeforethey
turnedintodisputes.Moore(1996)hasdescribedthatconflictsarefallingintothe
followingcategories:
110
RelationshipConflicts
Dataconflicts
Interestconflicts
Structuralconflictsand
ValueConflicts
Relationship conflicts could be due to poor communication or misunderstanding,
repetitivenegativebehavior,orstrongemotions.Thesituationcouldbeimproved
by better communication, positive problem solving attitude, clarification of
perceptionsandclearprocedures,andgroundrules.
111
Dataconflicts could be caused due to lack of information, different views on what

is relevant, different interpretation, or different assessment procedures.
Resolution can be reached by agreeing to what data is important, process of
collection,itsanalysis,orbygettingthirdpartyexpertopinion.
112
Interest conflicts are due to actual or perceived competition over substantive

interests, procedural, and psychological interests. To resolve one must focus on
interests and not positions, and develop integrative solutions that address the
110
Source:(Moore,1996),pp.60-61
111
Source:(Moore,1996),p.60
112
needs of all parties, search for ways to expand options or resources, develop
tradeoffstosatisfyinterestsofdifferentinterests.
113
Structuralconflicts could be due to unequal control, ownership, or distribution of

resources, unequal power and authority, time constraints, destructive pattern of
behaviororinteraction.Thesecouldbeaddressedbydefiningandchangingroles,
relocatingownershiporcontrolofresources,developmentofafairandacceptable
decision making process, change time constraints, and replacing destructive
behaviorpatterns.
114
Value conflicts could be due to different criteria for evaluating ideas, intrinsically
valuable goals or different ways of life. These could be addressed by defining
problemsintermsofvalue,allowpartiestoagreeordisagree,searchforgoalsthat
allpartiesshare.
115
113
Source:(Moore,1996),pp.60-61
114
115
5.4. Claims
Claim in legal terms is defined as a general term for the assertion of a right to
money,property,ortoaremedy
116
.Inconstructioncontracts,aclaimisgenerally
taken in practice to be an assertion for additional monies due to a party or for
ExtensionoftheTimeforCompletion(EOT)
117
.
BoththeEmployerandtheContractormightfindthemselvesintosituationwhere
they need to claim the monetary compensation or extension of Time for
Completion, or Defects Notification Period according to FIDIC Conditions of
ContractforConstruction.
If the Employer considers himself to be entitled to any payment
under any Clause of these Conditions or otherwise in connection
with the Contract, and/or to any extension of the Defects
Notification Period, the Employer or the Engineer shall give notice
and . . . The notice shall be given as soon as practicable after the
Employerbecameawareoftheeventorcircumstancegivingriseto
theclaim.
118
TheContractorshouldonlyclaimforcompensationofadditionalcostorprofitloss
if there is a breach of contract by the Employer or his representatives, by giving
thenoticetotheEngineer.
If the Contractor considers himself to be entitled to any extension
of the Time for Completion and/or any additional payment . . . the
ContractorshallgivenoticetotheEngineer,describingtheeventor
circumstancegivingrisetotheclaim.
119
116
Source:TheOxfordCompaniontoLaw,DavidM.Walker,ClarendonPress,Oxford,1980,p.227;
citedby(Bunni2005),p.293
117
118
Source:(FIDIC1999),Sub-Clause2.5
119
Source:(FIDIC1999),Sub-Clause20.1
5.4.1. ClaimsCategories
Bunny(2005)categorizesclaimsinconstructioncontractsbasedonfourlegaland
one non-legal concept. These five categories are briefly outlined in Table 7
120
.
FIDIC Red Book Contract only deals with first two categories, i.e. claimsunderthe
contractorclaimsarisingoutoforinconnectionwiththecontract.
Table7.ClaimsCategoriesandConditions
ClaimCategory Conditions
a) Aclaimunderthe
contract
Relatestoaclaimbetweentheparties,basedonthe
occurrenceofacertainevent,thentheclaimantwould
beentitledtoaremedyunderaparticularprovisionof
thecontract.Forexample,failurebytheContractorto
completetheworkbythespecifieddatewouldentitle
theEmployertodeductliquidateddamagesata
specifiedrateundertheFIDICRedBookcontract.
120
b) Aclaimarisingout
oforinconnection
withthecontract
Thisclaimarisenotunder,butoutoforinconnection
withthecontract.Inthiscase,toobtainaremedythe
claimantneedstoinvokeaprovisionofapplicablelaw.
Iftheclaimisvalid,theremedyliesundertheprovision
ofapplicablelaw.Forexampleaclaimforabreachof
contract.
121
c) Aclaimunderthe
principlesofthe
applicablelaw
Thiscoverstheclaimsraisingbythepartiestothe
contractoragainstthirdparties.Forexample,bringing
aclaimbythepartyintort/delictratherthanin
contractorwherethereisaninsurancepolicycovering
particularclaims.
122
d) Aclaimarisingout
oftheprincipleof
quantummeruit
Coversclaimswherethereisnocontractexistbetween
parties,orithasbeenvoid.Forexample,theprinciple
ofquantummeruithavealsobeenappliedtocases
wherethereisacontractbetweenparties,buttheprice
isnotstipulated.
122
e) Aclaimforexgratia
payment
123
TheEmployerandtheEngineersometimesusethis
kindofclaimstoavoidarbitrationorlitigationandto
maintaingoodwilltocompletetheprojectsuccessfully.
Thereisnolegalbasisforsuchpayments,rather
benefitinreachingsettlementwithoutacceptanceof
liability.
124
120
121
122
123
Latinphraseexgratiameansoutofkindness
124
Some restrictions will apply according to FIDIC contract model. Besides the
presentedcauses,theContractormightraisesomeadditionalclaimsdependingon
the applicable law of the contract. For example, gaps in tender documentation,
lacking or incompletion of soil investigation etc. might be a valid claim reason.
Analysis of the claims based on the provisions of FIDIC Conditions of Contract for
ConstructionisgraphicallypresentedinFigure10.
Figure10.ClaimsCategories
125
125
Source:(Bunni2005),p.297,withchanges
Risks in delay in performance, cost overrun and additional costs
Claims and
counterclaims
Arising out of the
contract based on
Under the contract
Under the law
of torts
Where no
contract exist
Ex gratia
payment
A specied remedy as a result
of a specied event, which may
or may not be a breach
A breach of contract
or misrepresentation
Other benet
Extension of
the time for
completion
Financial claims
Resulting in termination
or rescission of the contract
before completion
Breaches aecting
the performance of
the contract which
nevertherless proceeds
to completion
Variations
Cl. 13
Compliance with statutes,
price uctuations,
currency etc.
Adverse physical
conditions
SC 4.12
Measurement
changes
SC 13.8
Employers
risks
SC 17.3 & 17.4
Defects and
unfulllled
obligations
Suspension, commencement and
delays, release from performance,
default and termination
5.4.2. ClaimsTimeFrames
According to the FIDIC Conditions of Contract for Construction (Red Book) the
Contractorhas28daystopresentaclaimnoticetotheEngineer,startingfromthe
date when he becomes (or should become) aware of the claim event. Then the
Engineer should impartially determine the entitlement of the claimant in
principleandinquantum
126
andgivehisapprovalordisapprovalwithinthenext
42 days from the date of the claim notice. At the same time, the Contractor shall
provide all the contemporary records to substantiate the claim, within 42 days
fromthedatewhenhebecomes(orshouldbecome)awareoftheclaimevent.The
graphicalpresentationofthesetimelimitsisonFigure11.
Figure11.FIDICClaimProcedure
127
Thiskindofclaimscouldbefurtherseparatedintotwosubcategories:
a) claimsasaresultofcertainanticipatedandspecifiedeventsandforwhicha
remedyisdesignatedinthecontract
126
;and
b) claimsasaresultofaneventwhereacertaintermofthecontractis
breachedandforwhicharemedyisdesignatedinthecontract
126
.
126
127
Source:(FIDIC1999),withadaptationfrom(Ebel2011),p.39
Contractor
becomes aware or
should become
aware of event
28 d
Claim
Notice
to the
Engineer
Approval /
Disaproval by
Engineer
42 d
42 d
Contractor shall keep contemporary records to substantiate the claim
Fully detailed
Claim with
particulars
5.4.3. CauseandCompensation
Table8.ContractorsClaimsCauseandCompensation
128
CauseofContractorsclaims
Sub-
Clause
Compensation
ErrorsinEmployer'sRequirements 1.9 EOT/cost/profit
EmployersFailuretogiveRightofAccesstothe
Site
2.1 EOT/cost/profit
ErrorinSettingOutData 4.7 EOT/cost/profit
UnforeseeablePhysicalConditions 4.12 EOT/cost
DiscoveryofFossilsonSite 4.24 EOT/cost
TestingdelayedbyEmployer 7.4 EOT/cost/profit
ExtensionofTimeforCompletion 8.4 EOT
DelayscausedbyAuthorities 8.5 EOT
ConsequencesofSuspension 8.9 EOT/cost
Takingover/usingofpartoftheWorksbythe
Employer
10.2 cost/profit
InterferencewithTestsonCompletion 10.3 EOT/cost/profit
VariationInstructionbytheEngineer 13.3 EOT/cost
AdjustmentsforChangesinLegislation 13.7 EOT/cost
ConsequencesofEmployersRisks
129
17.4 EOT/cost/profit
ConsequencesofForceMajeure 19.4 EOT/cost
The remedy for both types of claims is defined in the contract and the claim may
include an assertion for financial compensation, an extension of Time for
Completion (EOT) or an assertion for other benefit. Claims and the Engineers
decision time frames are presented at Figure 11, page 67. The claims causes, the
correspondingFIDICRedBookSub-ClausesandassertionpresentedintheTable8.
128
Source:(FIDIC1999),partiallyadoptedfrom(Ebel2011),p.38
129
StipulatedatSC17.4.TheEmployersrisksmightincluderiskeventssuchaswar,rebellion,
terrorism,munitionsofwar,explosives,pressurewaves,designerrorsbyemployersdesigners
oragents,forcesofnature.
5.5. DisputeResolution
Throughout the project the General Contractor is in constant struggle with his
client and his subcontractors to achieve a successful project execution. His team
naturally commits mistakes, as do the managers on the clients side as well as on
the subcontractors side. Such mistakes or omissions in the contract lead to
disputes and might eventually lead to litigation. Two main ground areas for
disputesinconstructionprojectsaretimeandcostoverrun.
Adisputecanonlyariseoncethesubjectmatteroftheclaim,issue
or other matter has been brought to the attention of the opposing
party and that party has had an opportunity of considering and
admitting,modifyingorrejectingtheclaimorassertion.Inorderto
constitute a dispute, a claim must have been made which has been
rejected
FastrackContractorsLtdv.MorrisonConstructionLtd
130
5.5.1. DisputeAdjudicationBoard
All FIDIC Books recommend Dispute Adjudication as a regular means of dispute
resolution. According to 1999 Edition of FIDIC Conditions of Contract for
Construction,therearetwothirdpartiestothecontractplayinganimportantrole
in project execution, namely Engineer and Dispute Adjudication Board (DAB),
whichcouldbepermanentoradhoc,beingabletomakeadecisiononallkindsof
disputes arising between the contract parties. The Engineer role and
responsibilitieswasdiscussedinchapter5.1.TheEngineer.
FIDICConditionsofContractforConstructionstatesthatDABcompriseseitherone
or three suitably qualified persons
131
(DAB Members), each of which is impartial
and independent form the Employer, the Contractor and the Engineer
132
. The
130
Source:citedby(JaegerandHk2010),p.403
131
Source:(FIDIC1999),p.59,Subclause20.2AppointmentoftheDisputeAdjudicationBoard
132
Source:(FIDIC1999),p.63APPENDIX,GeneralConditionsofDisputeAdjudicationAgreement
contract parties rely upon the Members representation that he is experienced in
the type of work performed by the Contractor, as well as in the contract
documentation and language for communication. The Member shall have no
financial or other interest in the Employer, the Contractor or the Engineer, nor
previously have been employed by them as consultant, and have no any
professional or personal relationship with any one of them. The Member should
not give advise to the Employers, the Contractors or the Engineers personnel
concerning the execution of the Contract, except for than in accordance with his
dutiesasDABMember
133
.
During the whole decision-making process the DAB is bound to the construction
contract and the appended Procedural Rules for Dispute Adjudication, thus the
DAB shall comply with rules of natural justice and fairness
134
. To resolve dispute,
theEmployerandtheContractorwilljointlyrefertoDABasanarbitrator,obeying
theDABdecision.ItsworthnotingthattheContractorortheEmployermightturn
toDABonlyupontheagreementbytheotherparty
135
.DABMembermightalsobe
called as a witness in case of any dispute presented for any arbitration authority
undertheContract.Asaresultofhiswork,theDABMembershallnotbeliablefor
anyclaimsforanythingdoneoromittedinthedischargeorpurporteddischargeof
the Member's functions
136
. To ensure impartiality and independence of the DAB
Members,theContractorandtheEmployershareDABfeesandexpensesonequal
basis
137
.
133
forfulllistofconditionssee(FIDIC1999),p.63-64,Section3WarrantiesofGeneralConditions
ofDisputeAdjudicationBoard
134
135
Source:(FIDIC1999),p.60,Subclause20.2AppointmentoftheDisputeAdjudicationBoard
136
Source:(FIDIC1999),p.64,Section5GeneralObligationsoftheEmployerandtheContractor
ofGeneralConditionsofDisputeAdjudicationBoard,clauses(a)-(c)
137
formoredetailsoffeesbelongingtoDABsee(FIDIC1999),p.65,Section6PaymentofGeneral
ConditionsofDisputeAdjudicationBoard
5.5.2. DisputeAdjudicationProcedure
FIDIC Dispute Adjudication Procedure is outlined on Figure 12, page 72. If the
dispute of any kind arises between the parties in connection with the Contract or
anykindofworkrelatedtothecontract,includinganyactionbytheEngineer,any
party may refer the dispute to DAB seeking for its decision. Other parties of the
contract should be immediately notified by sending them a copy of the original
paperwork. Both parties should make their best to provide DAB with all the
availableinformation,siteaccessandrequiredfacilitiestomakeitsdecisionwithin
84 days
138
. The decision shall be binding on the Parties, who shall give effect to it
unlessitshallberevisedinanamicablesettlementorinarbitration.
5.5.3. DisputeAdjudicationTimeframes
IncaseofPartiesarenotsatisfiedwiththeDABdecision,theyhave28daystogive
DAB a notice of dissatisfaction. Neither Party shall be entitled to commence
arbitrationofadisputeunlessanoticeofdissatisfactionhasbeengiven.Thenboth
partiesshallattempttosettlethedisputeinamicablewayin56daysfollowingthe
dayonwhichdissatisfactionnoticewasgiven
139
.Anydispute,inrespectofwhich
theDABdecisionhasnotbecomefinal,shallbesettledbyarbitration
140
.Incasethe
DAB decision has become final, and neither party has given dissatisfaction notice,
howeveraPartyfailstocomplywiththisdecision,thentheotherPartymayrefer
thefailureitselftoarbitration
141
.
138
See:(FIDIC1999),pp.60-61,Subclause20.4ObtainingDisputeAdjudicationBoard`sDecision
139
See:(FIDIC1999),p.61,Subclause20.5AmicableSettlement
140
See:(FIDIC1999),p.61,Subclause20.6Arbitration
141
See:(FIDIC1999),pp.62,Subclause20.7FailuretoComplywithDisputeAdjudicationBoard
Decision
Figure12.FIDICDisputeAdjudicationProcedureTimeframes
142
However, the DABs function is not only to decide disputes. In any case a
permanent DAB shall also attempt to avoid disputes or to settle them at an early
stage. The DAB is allowed to give opinions and recommendations, if both of the
partiesjointlyrequiretheDABtodoso.Quiteoftenthedisputeavoidanceservices
isamainserviceofpermanentDAB.
143
ItstruethatinmostcasesDABservesasabackupsystemfortheEngineer,ableto
solve potential errors or injustices unpremeditatedly created by the Engineer in
effectiveandtimelymanner.
142
Source:(FIDIC1999)withadaptationsfrom(Ebel2011),p.52
143
8.1
Commencement
Date
28 d < 84 d > 56 d
20.2 Parties
appoint
DAB
3.5 Engineer
issues
determination
Parties present
submissions to the DAB
< 28 d
DAB gives its
decision
20.4 A Party refers
a dispute to the
DAB
20.4 A Party may
issue a notice of
dissatisfaction
20.6 A Party
may initiate
arbitration
Amicable
settlement
Arbitrator/s
appointed
5.6. Arbitration
For international projects arbitration on the basis of the rules of one of the well-
known Chambers of Commerce has become the most useful way of excluding the
courtsoftheclientorthecontractor,takingthustheChamberofCommerceorany
otherneutralbodyastheimpartialarbitratoracceptabletobothparties.
144
The International Chamber of Commerce in Paris, the Chambers of Commerce in

Stockholm, Vienna, Geneva (lately combined with other Swiss Chambers of
Commerce in their arbitration rules), the London Court of International
Arbitration (LCIA), The International Commercial Arbitration Court in Russia
(ICAC), The China International Economic and Trade Arbitration Commission etc.
are such institutions who have established rules for international courts of
arbitrationwhichcanbeusedforresolvingconflicts.
145
Alldisputesarisinginconnectionwiththepresentcontractshallbe
finallysettledundertheRulesofConciliationandArbitrationofthe
International Chamber of Commerce (ICC) by one or more
arbitratorsappointedinaccordancewiththesaidrules.
ArbitrationClauseoftheICCinParis,France
146
All the arbitration authorities have proposed similar clauses for contract
arbitrationpurposes,liketheICConequotedabove.
For example, Russian International Commercial Arbitration Court (ICAC) has the
verysimilardefinitiontotheICCclause,exceptforthemissingwordfinalforthe
settlement, which leaves the door opened for further appellations and continued
delaysforthedisputeresolution(seequotebelow).
144
Source:(SpiessandFelding2008),p.110
145
Source:(SpiessandFelding2008),p.110
146
Source:citedby(Spiess&Felding,2008),p.110
Any dispute, controversy or claim which may arise out of or in
connectionwiththepresentcontract(agreement),ortheexecution,
breach, termination or invalidity thereof, shall be settled by the
International Commercial Arbitration Court at the Chamber of
Commerce and Industry Of the Russian Federation in accordance
withitsRules.
ICACArbitrationClause
147
FIDIC Conditions of Contract for Construction Sub-clause 20.6 set that unless
otherwiseagreedbybothParties:
(a) thedisputeshallbefinallysettledundertheRulesofArbitrationofthe
InternationalChamberofCommerce.
(b) thedisputeshallbesettledbythreearbitratorsappointedinaccordance
withtheRules
148
Arbitration may be commenced during the work or after the completion of the
work, which shall not alter the obligations of the parties, the Engineer and the
DAB
149
.
147
Source:citedby(Spiess&Felding,2008),p.111
148
149
Chapter6.Discussion 75
6. Discussion
6.1. FIDICFormsinRussia
The FIDIC Conditions of Contract are well-structured, thoroughly developed and
widely accepted construction contract models. There was always certain interest
at the Russian construction market for adaptation of FIDIC standard forms of
contract. Even in USSR time Soviet companies working on foreign markets were
usingFIDICConditionsofContractastheirstandardcontractform.In1990Russia
have started integration into international construction market, opening internal
marketforforeigncompanies.Greatinterestwithinthecountryanddemandfrom
foreign companies working in Russia caused FIDIC to prepare and publish official
RussianversionsofFIDICConditionsofContract.Currentlythefollowingformsare
available in Russian: ShortFormofContract 1st Ed (1999 Green Book), Plantand
Design-BuildContract1stEd(1999YellowBook),Design-BuildandTurnkey1stEd
(1995 Orange Book), EPC/Turnkey Contract 1st Ed (1999 Silver Book),
Construction Contract 1st Ed (1999 Red Book), Electrical and Mechanical Works
3rd Ed (1987 Yellow Book) and Works of Civil Engineering Construction 4th Ed
(1987Reprinted;1992RedBook)
150
.
In last decade construction industry of Russia passed several reorganizations, the
lastonein2009.Everyconstructioncompanynowhastobeamemberofatleast
oneSelf-RegulatingOrganization(SRO)ofconstructionworkers,dependingonthe
profile of the company. Since January 1, 2010 responsibility for certification in
constructionindustrywasremovedfromfederallicensingandcertificationagency
anddelegatedtothecorrespondingSROs.Regulationswerechanging,andinterest
forintroductionofinternationalformsofcontractwasnoticedbytheconstruction
marketandstateagencies.InApril2011VicePrimeMinisterofRussianFederation
150
Source:http://www1.fidic.org/bookshop/;theseareofficialFIDICversionsavailablefor
purchaseviaFIDICbookstore.
gave an assignment
151
to the National Associations of Exploration, Design and
Construction Companies
152
to create standard conditions of contract for
exploration, design and construction works. The assignment states that FIDIC
Conditions of Contract should be used as model for the work. According to the
assignment, this work had to be finished by September 1 2011.
153
The resulting
conditions of contract should be distributed among member of SROs and used as
standard contract model in Russian construction industry. Unfortunately, there
was no indication whether the government itself is going to use them for publicly
awarded projects. Currently they are not used for government contracts, due to
numerous collisions with the actual public legislation, as shown in section 4.1,
page27.
6.2. CurrentPracticeandFIDIC
Thisresearchwasconductedintheformofsurvey,which,combinedwiththeown
experience of the author, allowed drawing of some conclusions. The conclusions
producedduringthesurveyandliteraturereviewweretestedagainsttheindustry
experts opinion (in particular construction experts of MRD) and were found
suitable for further investigation. The most important note from the experts was
that some (quite numerous) legal changes in current law and statutes regulating
both the construction industry and public procurement should be introduced
beforeacceptingFIDICmodelforpublicprojects.Evenwithoutthatvastlegalwork
in place, some parts of FIDIC contract model could be brought into action. For
example,theexistingtechnicalservicegroupsattheEmployersorganizationcould
be acting more like the FIDIC Engineer. DAB is another standard FIDIC feature,
151
CouldbefoundinMinutesofMeeting:21.04.2001-9-70
152
InRussian:,
153
Source:InternetportalSelfRegulationinConstruction(www.sro-s.ru)articleStandard
internationalcontractsbyFIDICandtheiruseinconstructionanddevelopmentprojectsinRussia
(originaltitleinRussian
-)publishedon18.05.2011,retrievedon
22.11.2011fromhttp://www.sro-s.ru/news.do?id=4140
which might be implemented with certain limitations in the current legal
framework. The only things needed for it are the Employers intention and the
Contractorscooperation.
The existing procurement model based on the FL-94 demonstrated
154
numerous
drawbacks,mostimportantofwhichare:
HighlevelofContractorsrisks
Verycomplicatedandtimeconsumingclaimprocedures
Enormoustimerequiredtoresolveconflictsanddisputes
Toaddtotherecentpoint,itsimportanttomentionthatmostofdisputesendup
with contractors give up. This happens because the Employers position is quite
inflexible and completely backed up by the FL-94 procurement, supported by the
arbitration courts practice. Moreover, since the only actually available way of
disputeresolutionislitigation,thearbitrationcourtsjudgingthiskindofdisputes
areoverflowedbynumerouscaseswaitingforthecourtdecision.Insomecasesa
waitingtimeforthecourthearingmightbeaslongasthirtymonthorevenlonger.
There is no clear and obvious way to implement FIDIC contract as a procurement
model for implementing public projects. Huge efforts both from the government
agenciesandthecontractorsshouldbetakentobringtheopportunityofaccepting
FIDIC contract model. Nevertheless, I believe that using FIDIC Conditions of
ContractforConstruction might create a win-win situation, allowing allocating the
Contractors risks in more acceptable way, while decreasing the project costs and
keepingthemunderthecontrol.
154
Seeformoredetailsp.26
6.3. ClaimsandDAB
FIDIC claims procedures would be much more hard to introduce, taking into
accountstipulationsofFL-94andimpossibilityofthetenderpricechanges.Evenin
this situation, some positive changes might happen, allowing some of the
Engineers roles to be performed by the Employers technical service, acting in
unbiased and impartial manner. Its clear that such introduction of the Engineers
determinationandinstructionservicewillneedaseverechangeoftheEmployers
mind, to accept impartiality and independence of the employed (and paid for)
party.ThequalityoftheEmployerstechnicalserviceshouldalsoimprovealotto
alloweducatedandresponsibledecisionsmaking.
In case of public procurement in RF, the Employer is usually state agency or
ministry, so the court resolution will be unlikely in Contractors favor. This is
probably a main reason why the most of the disputes even dont go as far as
litigation, making pre-arbitration dispute resolution even more important. Thus,
disputesarethepropertyoftheconstructioncontract,andreliableandpredictable
dispute resolution mechanism becomes one of the key factors in successful
contractmanagement.Takingthisintoaccount,DisputeAdjudicationBoardsmight
beanotherFIDICmechanismthatcouldbeimplementedwithoutseverechangesin
legalbaseandbringtheimmediatebenefitstothecontractsparties.
6.4. FIDICperspectives
Takingalltheaboveintoaccount,thefutureofFIDICinRussiaisquiteprospective.
President of Russian National Organization of Construction Industry ()
recently held a meeting with FIDIC coordinators and signed an agreement of
intentions. They stated that FIDIC forms have good outlook for acceptance as
standardcontractformintheRussianconstructionindustry.Thestandardformof
contractwillhelpallthepartiesoftheconstructionprocess,allowingthemtosave
timeandresources.StandardFIDICformsofcontractwillbepromotedinRussian
Federation via creation of education system on FIDIC standards, construction
environment,actualnormsandrules.
155
155
Source:http://stolica-sros.ru/news/sronews/nostroheldtalkswithfidic/,retirievedon
15.11.2011.
Chapter7.Conclusion 80
7. Conclusion
PubliclyprocuredroadconstructioncontractsinRussianFederationareconcluded
between the commercial contractor and state agency as the employer. The
contractor in this situation bears all the risks related to the project and have to
deal with the resulting damages according to the practice of Russian public
procurement law
156
. This is one of the reasons of the high initial price of
construction project
157
. Further, practically the only way to resolve any dispute
arising during the construction period is through costly and time-consuming
litigationprocessagainstthegovernmentagency,whichisrarelyresultinginfavor
of contractor
158
. In the last few years a lot of efforts were taken to introduce
alternativeformsofcontract,likewell-establishedFIDICConditionsofContractfor
Construction.
FIDIC Conditions of Contract for Construction has well-defined risks allocation
approach and determined risk management procedures
159
. This allows the party
best able to manage the risk to do so and helps to control the financial
effectiveness of the project. The FIDIC contract provides the contractor with
necessarymeansofclaimingthecompensationincasetheriskeventoccurs.Ifthe
claimhasnotbeensatisfiedbytheproceduresetinthecontract,thereareseveral
alternativemethodsofdisputeresolutiondefinedintheFIDICcontract.Allofthem
couldbeusedundertheFIDICcontracttoeffectivelyresolveanydisputebetween
thecontractorandtheemployerintimelymanner
160
.
UsingFIDICConditionsofContractforConstructionasastandardcontractformfor
public road construction projects will allow effective risks management at the
early stages of the project, beneficial dispute resolution and higher technical
quality of the resulting project. This is essential to determine fair initial contract
156
See:sec.5.2.3,p.50;sec.4.1,p.26
157
See:sec.3.3,p.13;sec.4.1,p.26
158
See:sec.4.1,p.26
159
See:sec.5.2.4,p.53
160
See:sec.5.5.3,p.67
Chapter7.Conclusion 81
price, complete the project in timely fashion and will finally provide financial
benefits both to the contractor and the employer. Unfortunately, the FIDIC
Conditions of Contract for Construction at certain aspects come into collision with
the current Russian public procurement law and cant be successfully
implementeduntilthelawhasbeenchanged.
At the same time, wide acceptance of FIDIC forms seems to be only a question of
time, as there is a strong general interest in them among Russian construction
industry.
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Glossary 87
Glossary
Definitions are given according to Architecture and Construction Dictionaries
(Christensen 2005), and Definitions for FIDIC Contract Forms given by Dr. Hk in
hislecturesatHTWConREMcourse(Hk2009).
abandonment
Awordoftenusedincontractlawtodescribethefailureofbothpartiestoabide
bythetermsofacontract.
ActofGod
Anunexpectedeventnotcontrollablebyhumaninfluence.
adaptiveuse
Theextensivealteration,restoration,and/orrenovationofanexistingstructure
orbuildingsothatitwillserveanewpurpose.
addendum
Achangeorrevisiontodrawings,specifications,orotherinformationona
projectoutforbid,whichhasaneffectonbids.Itoccursbeforereceiptofbids,
andisusuallystatedinletterformthatethicallyshouldbedeliveredtoall
bidders(infairness)withthedrawingsorpapersindicatingthechangesoasto
allowunderstandingincomparisonofbids.Thesechangesbecomeapartof
constructiondocumentsforcontractpurposes.
addition
1.Constructionthatincreasestheheightorfloorareaofanexistingbuildingor
addssuchitemsasaporchorattachedgarage.
2.Theincreasetoanexistingcontractamount.Theprofessionalprocedurefor
accommodatingsuchachangeisachangeorder.
advertisementforbids
Arequestmadeforbidsforpublicentities.Thereisusuallyalegalrequirement
thatthismustbeapublicsolicitationwithnoticeseasilyavailabletothepublic
(usuallyinnewspapers)intheareaofjurisdiction.
Glossary 88
approvedequal
Materials,equipment,ormethodsapprovedforuseinconstructionasan
acceptableequivalentinessentialattributestothatwhichwasspecified.
arbitrary
bymereopinion;notaccordingtoreasonedjudgmentorrules;adecisionmade
atthediscretionofthejudge,notalaw.
arbitration
methodofdisputeresolutionpresupposinganexpressagreementbywhichthe
partiesofadisputederogatethegivenjurisdictionofanotherwisecompetent
statecourt.Itisquitecommontorefertoanexistingsetofprocedurerules,such
astherulesofICCinParis.
backcharge
Amonetarychargefordamage,noncompliancewithcontractedconstruction
design,orfaultyconstructionbyanowner,contractor,orsubcontractoragainst
anyentitysupplyingorconstructingaproject.
basicservices
forconstructionofaproject,services,usuallyofadesigner(engineer,architect,
etc.),includingschematicdesign,designdevelopment,constructiondocuments,
biddingadvertisementandevaluations,negotiation,andcontractadministration.
benchmark
Insurveying,aknownreference,orpermanentobject(ifsurveyedin,usuallya
steelmarkerplacedinconcrete)havingitselevationand/orexactlocation
verifiedandusableasapointofreference.Thisisapointfromwhichotherareas
canbesurveyedforelevationand/orlocation.
bid
Aproposalmadeinexchangeforcompletionofworkorforanitem.Most
proposalsinvolveastipulatedsumofmoneyortradeitems.
Glossary 89
biddingdocuments
Documentsgivenatthetimeofbiddingincludingsuchitemsasinstructionsto
bidders,abidform,contractdocumentsproposed,and/oranyaddendum
issued.
bidbond
Abondsecuredbyabidderguaranteeingthatthebidderwillaccepttheprojectif
offeredbytheowner,and/orthatthebidderwillcompletetheprojectforthe
stipulatedbidamount.
bidform
Aformoftenprovidedtobidderstobefilledoutanddelivered,asabid.
bidopening
Atimeofopeningallbidssubmitted.Withlargeprojectsthetimeofopeningbids
isusuallyspecifiedintheinvitationtobid.Theopeningandreadingand/or
listingofbidssubmittedthatconformtoprescribedprocedures.
bidprice
Theamountinmonetaryvalueortradethatabidderrequestsaspaymentfor
accomplishingwork.
bidsecurity
Acertifiedcheck,adepositedamountofcash,amoneyorder,orabidbond
submittedwithabidguaranteeingtheownerthatthebidder,ifawardedthe
contract,willcompletetheworkinaccordancewiththebiddocumentsforthe
bidprice(amountrequested).
bidshopping
Requestingbidsfromsubcontractorsorothersafterthedateallbidswere
acceptedand/ornegotiatingapricelowerthanthelowestbidreceivedontime
formaterialsand/orwork.
Glossary 90
bidtime
Thetimeanddatedeterminedbytheownerand/oragentoftheowner(usually
thedesigner)forreceiptofbids.
billofmaterials
Thecompilationofmaterialsneededtoaccomplishaparticularwork.
billofquantities
Alistofthequantitiesofitemsneededtocompleteaparticularwork.
bonusandpenaltyclause
Theportionofacontractthatestablishesanextraamountofmoneytobe
awardedforcompletionofaprojectpriortotheagreeddayofcompletionora
penaltyforcompletionaftertheagreedupondate.
breach(ofacontract)
violationofaright,dutyorobligationarisingfromacontractbyanactor
omission,e.g.failuretoperformaccordingtoacontract(delayedperformance,
defectiveworketc.)
buildingcode
Aconstructiondocumentusuallyreferredtoafteradoptionbyagovernment
agency.Itdescribesandidentifiesmaterials,methods,and/orproceduresfor
buildingand/orconstructionpractices.
buildingpermit
Awrittendocumentauthorizingconstructionthatisgivenbyanofficialhaving
jurisdictionovertheareabuiltupon.
buildingregulations
Atermsometimesusedforbuildingcode.
Glossary 91
certificateofinsurance
Acertificationobtainedasevidencetoanowner,generalcontractor,etc.thata
providerofconstructionservicesiscoveredbyaparticulartypeofinsurancefor
aparticularmaximumamount.
changeorder
Adocumentshowingchangeintheworkorcostofacontract.
code
Thistermissometimeusedintheconstructionindustrytoreferenceany
regulationsimposedondesignandworkbygoverningagencies.
codeofpractice
Adocumentofstandardsoutliningacceptableconstructionwithvarious
materialsandworkmanship.
completionbond
Abondthatguaranteesacontractorwillpayhisobligationsassociatedwitha
project,leavingitcompletelyfreeofallliensorfinancialencumbrances.
completiondate
Thedateworkistobecomplete.Inthecontractdocuments,thedateof
completionisusuallyspecified,otherwisetheremaybeanagreementwiththe
owner,usuallyinwriting,aspartofthecontract.
comprehensiveplanormasterplanorgeneralplan
Aregional,county,ormunicipaldocumentthatcontainsaprojectionofland
planningintothefuturedetermininghowthecommunitywillgrowandchange
alongwithasetofplansandpoliciestoguidethatvisionofthefuture.
constructionenvelope
Oneormorespecifiedareasonalotorparcelwithinwhichalldisturbanceof
landsuchasconstructionofstructures,driveways,parking,roads,landscaping,
watersurfaces,decks,utilities,walks,andimprovedrecreationfacilitiesaretobe
located.
Glossary 92
contingencyallowance
Anamountofmoneysetasideforunforeseenitemsinconstructionwork.
contractdocuments
Allpapersassociatedwithacontractincludingthelegallybindingagreement
itselfaswellasspecifications,drawings,addenda,etc.
cost
allexpenditurereasonablyincurred(ortobeincurred)bytheContractor,
whetheronorofftheSite,includingoverheadandsimilarcharges,butdoesnot
includeprofit.
costestimate
Anapproximatedecipheringofcostofconstructionormaterialspriortobids,
purchases,orconstructioncommencement.
dateofsubstantialcompletion
Thedatewhenaconstructionjobisfinishedenoughfortheuseforwhichitwas
intendedasagreeduponbythepartiesinvolved.
DB(Design&Build)
D&BContractsareusedinordertocommitacontractorwithboththedesignand
theexecutionofworks.
DBO(DesignBuildOperate)
DBOisaninnovativecontractingmethodthatreducesthetimeandownerrisk
associatedwithdeliveringmajorprojects.
developer
thelegalorbeneficialownerorownersofanylandincludedinaland
development.
development
alandplanningorconstructionprojectinvolvingsubstantialproperty
improvementandoftenachangeofland-usecharacterwithinsite.
Glossary 93
developmentregulation
Governmentalregulationofauseanddevelopmentoflandthroughzoning,
subdivisionregulations,siteplanrequirements,officialmaps,cityplanning,flood
plainregulation,orothermethods.
developmentrights
entitlementofpropertyownerstodeveloplandinaccordancewithlocallanduse
zoningandotherregulations.Theserightsmaysometimesbesoldtopublic
agencies,qualifiednonprofitorganizations,orothercitizens.Seetransferof
developmentrights.
discharge
release,dismiss,free,orrelievefromobligationsunderacontract.
disputeadjudication
aninnovativeformofdisputeresolutionnotaimedtoreplacecourtproceedings
orarbitrationbuttoprovideacomplimentaryfeatureofdisputeresolution.
Usuallythedecisiongivenbyanadjudicatorordisputeadjudicationboard
becometemporarilybindinguntilrevisedbyanarbitralaward.
easement
Adesignatedpartofapropertyownerslandauthorizedbythepropertyowner
forusebyanotherforaspecifiedpurpose.Theseareasofeasementmaybefor
rightoftravel,accesstofacilitateinstallation,maintenanceofutilities,drainage
facilities,conservation,agriculture,etc.
errorsandomissionsinsurance
Insurancecoveringmistakesbyadesignerwhenpreparingthecontract
documents.
Glossary 94
EPCcontract
Engineering,Procurement,andConstructionaformofdesignandconstruct
contractwhereasinglecontractortakesresponsibilityforallelementsofdesign,
engineering,constructionandprocurement.Contractorreceivesafixedprice,
lumpsumcompensation.
EPCMcontract
Engineering,Procurement,ConstructionManagementaformofcontractwhen
thecontractordoesnobuildingorconstruction,ratherhedevelopsthedesign
andmanagestheconstructionontheOwnersbehalf.
engineer
aqualifiedprofessionalwhodesignsstructures,technicalservicesorpublic
utilitiesandsupervisestheirconstructionandmaintenance.Insomestandard
contractforms(e.g.FIDICforms)thistermisusedinlegalsenseexplainedin
Sutcliffev.Thackrah
161
.TheEngineeristhirdparttoaconstructioncontractwho
owesdutiesundertheconstructioncontract,includingtasksofdeterminationof
claims,certificationofpaymentsetc.Thewordingmayvaryandsomecontracts
refertoanarchitect,supervisor,contractmanagerbuttheroleandfunctionof
thisthirdpartyisalwaysnearlythesame.
fasttrack
constructionbeingundertakenwhiledesignisstillbeingfinalized.
feesimple
Landownershipencompassingallpropertyrights,includingtherighttodevelop
theland.
161
Explainedin(JaegerandHk2010),p.222
Glossary 95
FIDIC
FdrationInternationaledesIngnieurs-Conseils,sittinginGeneva,represents
interestsofEngineersworldwide.FIDIChaspublishedarangeofinternationally
recognizedconstructioncontractformswhicharealsorecommendedtouseby
theWorldBank.AmongthosecontractformstheFIDICRedBook,YellowBook
andSilverBookarethemostimportantones.
forcemajeure
legaltermusedtodescribeasituationunderwhichnonperformanceofa
contractisexcused,oftenreferredtoasactofgodoractwhichisbeyondthe
controlofbothpartiesofthecontractbutsubjecttolocallegislationincluding
elementsoffrustrationorimpossibilitytoperform.Insomejurisdictionsforce
majeureisruledbylaw,thushavingaprecisemeaning.
generalcontractor
Thecontractordirectingandresponsibleforaconstructionproject.Theyoften
employsubcontractors.
guarantee
Inconstructionwork,alegallybindingcommitmentbyacompanyorindividual
fortheirfinishedwork,orinstalledordeliveredmaterials,tobeofgoodquality,
andiffoundinferiorstatingthattheywillbereplacedorreconciledwiththe
owneratnoextracost.Aguaranteecanbeconditionalorondemand.Depending
onitsnatureitisonlyenforceable,ifaconditionisfulfillede.g.undertakingto
paymoneybackifthemaindebtorfailstodoso.Incivillawjurisdictions
conditionalguaranteesareruledbylawandreferredtoasBrgschaft(Germany)
orCautionnement(France),bothbeingaccessory.
impact
1.Inecologyorenvironmentalterms,tohaveasignificantormajorinfluenceor
effectforchange.
2.Inconstructionterms,tostrikeforcefully.
Glossary 96
impactfee
Apaymentofmoneyimposedbyagovernmentagencyondevelopmentactivity
asaconditionofgrantingdevelopmentapprovalorabuildingpermittoassistin
paymentfortheplannedfacilitiesneededtoservenewdependentgrowthand
developmentactivity.Impactfeesgenerallydonotincludeareasonablepermit
fee,applicationfees,administrativefeesforcollectingandhandlingimpactfees,
thecostofreviewingcalculations,ortheadministrativefeesrequiredforappeal.
invitationtobid
Awrittenorverbalrequestorinvitationfromanowner,generalcontractor,etc.
foraproposedprice,bid,work,ormaterials.
letterofintent
Awritten,preliminaryunderstandingbetweenpartiesofhowtheyintendto
proceedinaparticularmatter.LOIwasnottraditionallyacontract,butrathera
tentativeexpressionofintentions.However,todaysomepartsofLOImayinclude
contractualduties(e.g.confidentiality)andifwordedinbindingtermsthecourt
mayholdanLOItobecontractuallybinding,inpartorwhole.
lexcausae
Thelaworlawschosenbytheforumcourtfromamongtherelevantlegal
systemstoarriveatitsjudgmentofaninternationalcase.
lexfori
Thelawoftheforumcourtbeforewhichacaseispending.Moreparticularlythe
lawrelatingtoprocedureortheformalitiesinforce(adjectivelaw)inagiven
place.
lexreicitae
Thelawofthesituationofthething.
liabilityinsurance
Insurancethatprotectstheinsuredagainstphysicalorfinancialinjurytothe
personorpropertyofsomeoneelse.
Glossary 97
license
Awrittenpermissiongiventoengageinanactivity,asrequiredbylaworagency
rule.
life-cyclecost
Thecostofamaterial,orpieceofequipment,structure,etc.,includingitsinitial
costandmaintenancecostsduringitslifetime.
liquidateddamages
apre-estimatedamountofmoneyspecifiedinacontracttocompensateaparty
fordamagessufferedbecauseofabreachofcontractbytheotherpartytothe
agreement.Itisalsoalimitationonliabilityfordamages.Liquidateddamages
shouldnotbeconfusedwithpenalties.
lowbid
Inanalyzinganumberofbidssubmitted,thisistheonethatproposestoperform
therequiredworkorprovidethematerialsatthelowestpricecomparedtothe
otherbids.
lowestresponsiblebidderorlowestresponsivebidorlowestqualified
bidder
Thebidderwiththelowestpricethatmeetsallrequirementsofthebid,which
mayincludelicensing,bonding,experience,properforms,correctlyfillingout
forms,andsoon.
mitigation
Anyoptionthatwilldecreasetheimpact(negativeorpositive)ofanactionor
occurrenceonthenaturalorhumanenvironment.Thisisapracticethat
amelioratesenvironmentalimpactbyreplacement,restoration,orenhancement
offunctionalvalues.Inchangesontheland,thisreferstoeffortstoprevent,
avoid,minimize,compensatefor,orreplacedamagedland,water,air,plants,
wildlife,economicimpacts,socialimpacts,etc.
Glossary 98
NEC
NECisafamilyofcontractsthatfacilitatestheimplementationofsoundproject
managementprinciplesandpracticesaswellasdefininglegalrelationships.Itis
suitableforprocuringadiverserangeofworks,servicesandsupply,spanning
majorframeworkprojectsthroughtominorworksandpurchasingofsupplies
andgoods.TheimplementationofNEC3contractshasresultedinmajor
benefitsforprojectsbothnationallyandinternationallyintermsoftime,cost
savingsandimprovedquality.
negligence
asatort,negligenceisthebreachbythedefendantofalegaldutytotakecare
anddiligence,whichresultsindamagetotheclaimant.
noticetoproceed
Anoticegiven(usuallyawrittendirective)byanowner,generalcontractor,etc.
toacontractor,subcontractor,etc.toproceedwiththebeginningofworkofa
contract.
penalty
apunishment,usuallyreferredtoasapenaltyclausebywhichonepartyofa
contractpromisestopayapredeterminedamountofmoneyforbreachof
contractinordertoensurestrictcompliancewiththecontract;avoidcontract
termaccordingtoequityrulesundercommonlaw,butusuallybindingunder
civillaw.
performance
fulfillmentofonesobligationsaccordingtoacontract.
performancebond
Alegaldocumentinwhichasuretyguaranteestotheownerofaprojectthatthe
worktobeperformedbyacontractorsocoveredwillcompletetheworkasper
thecontractdocuments.
Glossary 99
performanceguarantee
Asecuritygiventoamunicipalityasaguaranteethatimprovementsrequiredas
partofanapplicationfordevelopmentorconstructionaresatisfactorily
completed.
planningandzoningcommission
Withinagovernmentsjurisdictionalarea,agroupofpeople(electedor
appointed)thatrecommendboundariesofzoningdistrictsanddetermine
appropriaterequirementsrelativetositeplanreview,includinglandscape
requirements.
primecontractor
Acontractoronaconstructionprojectthathasacontractdirectlywiththe
owner.
primeprofessional
Apersonorcompanyhavingaprofessionalservicescontractdirectlywiththe
owner.
privilege
termdescribinganumberofrulesexcludingevidencethatwouldbeadversetoa
fundamentalprincipleorrelationshipifitweredisclosed;underFrenchlawa
paymentsecurity,forexamplethecontractorsorarchitectsprivilegerelatedto
anypaymentclaimagainsttheemployer.
progresspayment
Apaymentmadebyaclientforworkinprogressbutnotyetcomplete.
projectmanual
Thespecifications,bidrequirements,contractconditions,etc.
proposal
Atermoftenusedinterchangeablywithbid.
Glossary 100
proposalform
Aformtobefilledinwhensubmittingabidforwork.
punitivedamages
awardofdamagesintendedtopunishthedefendantanddeterfuture
wrongdoings.Usuallyawardedwhenanactionisaggravatedbyevilmotives,
grossnegligence,ordeliberateviolenceoroppression.Alsocalledexemplary
damages.Availableundertortsbutgenerallynotundercontractlaw.
quantitysurvey
Alistingofthedetailsofallmaterialsandequipmentneededforconstruction
depictedonadrawing(s).
realproperty
landandbuildings(orotherpermanentattachmentstotheland)aswellasthe
rightsarisingoutofland.Realpropertyisdifferentfrompersonalproperty,
whichisanymovableproperty.
reasonable
usedinlegaltextsinordertoexpressastandardofdutyorthewayinwhicha
powerorauthorizationcanormaybeused.Areasonablemanisahypothetical
individualwhoisintendedtorepresentasortofaveragecitizenorprofessional.
Withinreasonabletimemeanswithinappropriateandpertinenttime,withinthe
timewhichisneeded.Reasonabletimemeansatanytime,whichisacceptable.
Reasonablypracticalmeansalevelofprecautiontakinginaccountofthebalance
betweentheriskinvolvedinaparticularhazardandthecostinvolvedin
remedyingit.Reasonableskillandcarehasbeenjudgedasthestandardofan
ordinarymanexercisingandprofessingtohavethatskill,whichisappropriate
forthetask,committedtohim.
recorddrawings
Thedrawingspreparedbyacontractorbefore,during,andaftercompletionofa
project,showingtheprojectasitwasactuallyconstructedwithanychangesfrom
theoriginaldesigndrawings.
Glossary 101
requestforinformation
Aninquirymadebyaparticipantincontractualobligationsusuallyinthe
constructionindustry.
requestforproposal
Asolicitationnormallyfrompublicagenciesdistributedtoconsulting,
manufacturing,ordevelopmentfirmsaskingforaproposalforservicesor
products.Theyareencouragedtocontainadescriptionoftheproject,program,
oritems,theamountbudgeted,thetypeofcontract(fixedpriceortime-and
expense,etc.),qualificationsrequired,evaluationcriteria,andadescriptionof
thematerialstosubmit.
requestforqualifications
Asolicitationusuallypreparedbyapublicagencydistributedtoconsultingand
developmentfirmsrequestingastatementofcredentialsassociatedwiththe
firm.Itusuallyrequestscontactinformation,adescriptionoftheorganization,
resumesofkeypersonnel,astatementdescribingworkcompletedonsimilar
projects,availabilityforthework,alistofprojectscompleted,andreferences.
responsiblebidder
Seelowestresponsiblebidder.
retainage
Moneywithheld(usuallyapercentage)fromprogresspaymentstoacontractor
untilcompletion.
right-of-way
Anystriporareaoflandgrantedbydeed,easement,reservation,dedication,
prescription,orcondemnationforanyuseotherthantheownerspersonaluse.
Theyareoftenforutilities(usuallylinear)suchasforpowerlines,telephone
lines,roadways,gaslines,oilpipes,waterlines,sewers,vehicularorpedestrian
accessoregress,etc.
Glossary 102
riskmanagement
theprocesswherebydecisionsaremadetoacceptaknownorassessedrisk
and/ortheimplementationofactionstoreducetheconsequencesorprobability
ofoccurrence.
scheduleofvalues
Alistfurnishedbythecontractorshowingportionsofthecontractsumallotted
forvariousportionsofwork.Itisoftenusedasthebasiswhenreviewingthe
contractorsapplicationsforprogresspayments.
selectedbidder
Thebidderchosenbytheownerforpossibleawardofacontractforaproject.
specificperformance
undercommonlawanequitableremedygrantedbyacourtwherebythecourt
requiresthebreachingpartytofulfillitsobligationsunderacontract.Incivillaw
jurisdictionsspecificperformanceistherulewhereasundercommonlawitisan
exceptionalremedy,whichcanbegrantedbycourt.
subcontractor
Apersonororganizationhavingadirectcontractwithaprimecontractorto
completeandperformaportionoftheworkatasite.
subcontractorbond
Aperformancebondgivenbyasubcontractortoageneralcontractor
guaranteeingperformanceofacontractandthepaymentofbillsforlaborand
materialusedontheproject.
successfulbidder
Thebidderselectedtosignacontractforconstructionorsupplyofmaterial.
superintendent
Thegeneralcontractorsrepresentativeresponsibleforfieldsupervision,
coordination,andprojectcompletion.
Glossary 103
supplementaryconditions
Aportionofthecontractdocumentssupplementingandsometimesmodifying
provisionsofthegeneralconditions.
supplier
Apersonorfirmthatsuppliesequipment,plants,components,fixtures,
materials,orpartsforconstructionwork.
supplybond
Abondguaranteeingthatmaterialsdeliveredcomplywithcontractdocuments.
StandardContractTerms
termsofcontractwhichhavebeendraftedformultipleuse.Insomecountries
standardcontracttermsaresubjecttolegalcontrol.InGermanyeven
commercialcontractsfallundertheparticularrulesofcourtcontrol(sect.305et
seq.GermanCivilCode),whichissometimesreferredtoasthemainrouge
principle.
substantialcompletion
amatteroffactwhichisrequiredtodischargecontractualobligations.Theword
substantialisnotintendedtoconveythemeaningofabsoluteexactnessbutto
conveytheconceptofalmostbeingcomplete,andthatthestateofcompletionis
materiallysototheextentthatthebuildingcanservetheintendeduse.Usually
constructioncontractsdefinewhatismeantandprovideatthisstagethatwither
theengineerorthearchitectshallissueacompletioncertificate.Bitinprinciple
completiondoesnotmeanautomaticallyacceptanceoftheworksorreleasefrom
liability.Completionmeansinfacttopermittheemployertotakepossessionof
theworkandtoallowthecontractortoleavethesite.
Glossary 104
taking
Anillegalgovernmentappropriation,restriction,oruseofprivatepropertyor
propertyrights.Thisisagovernmentactionthatdisturbsorinterfereswithan
ownersuseandenjoymentofrealpropertywithouthavingaproportionate
nexusbetweenthereasonforinterferenceordisturbanceandtheownerorthe
realproperty.
termination
theendingorfinishingofacontractforconvenience(orsometimesalsofor
breach).
timeextension
constructioncontractformswhichoriginatefromcommonlawjurisdictions
usuallyprovideclaimsforextensionoftimeinordertoensurethattheemployer
maysueforliquidateddamagesifthecontractorfailstocomplywiththeagreed
timeforcompletion.Ifandwhentheemployerpreventsthecontractorto
progresswiththeworksthecontractorisentitledtoclaimfortimeextension.
tort
wrongfulbehaviorrecognizedbylawsufferedbysomebodyresultinginan
injuryorharmconstitutingthebasisforaclaimbythevictimagainstthe
responsibleperson.
transferofdevelopmentrights
Aprocessprovidingforrelocationofpotentialdevelopment.Usuallythis
relocationisfromlandareaswhereproposedlanduseorenvironmentalimpacts
areconsideredundesirable(thedonorsiteorsendingsite)toanother
(receiving)sitechosenonthebasisforitsabilitytoaccommodateadditional
unitsofdevelopmentinexcessofthatforwhichitiszoned.
transferofdevelopmentrightseasement
Alegalcovenantthatprotectsthesubjectlandinperpetuityfromdevelopment
beyondanydevelopmentrightsreservedsubjecttotheunderlyingzoneatthe
Glossary 105
timethecovenantissignedandprovidesforenforcementofthecovenantin
exchangefortransferringdevelopmentrightstoanothersite.
uniformbuildingcode
AreferencetothepublishedUniformBuildingCode(NationalBuildingCodein
theUnitedStates).ThisispreparedbytheUSBuildingOfficialsandCode
AdministratorsInternational.
variation
achangetotheagreeddesignthatoccursafterthecontracthasbeenawardedin
casethecontractorfindssomethingonsitethatwasnotallowedforinthe
contractedtenderpriceorwhich,ifincludedinthecontract,cannotbebuiltas
intendedforsomereason.InFIDICcontract,anychangetotheworks,whichis
instructedorapprovedbytheEngineerasavariationunderClause13ofFIDIC
RedBookcontract.
warranty
apromiseorassurance.Anagreement,e.g.withreferencetogoodswhicharethe
subjectofacontractorsale,butcollateraltothemainpurposeofsuchcontract,
thebreachofwhichgivesrisetoaclaimfordamages,butnottoarighttoreject
thegoodsandtreatthecontractasvoid.Acommonusageofthetermistorefer
toamanufacturerswrittenpromiseorguaranteeastotheextenttowhichhe
willrepair,replaceorotherwisecompensatefordefectivegoods.

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Guarantees typically refer to financial guarantees of debt that

Dataconflicts could be caused due to lack of information, different views on what

Interest conflicts are due to actual or perceived competition over substantive

Structuralconflicts could be due to unequal control, ownership, or distribution of

The International Chamber of Commerce in Paris, the Chambers of Commerce in

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