The International Federation of Consulting Engineers (FIDIC) has for many years produced standard forms for international engineering contracts. It has recently enlarged its range by producing a new form of contract for design build and operate (DBO) projects. At present this has been issued in a pre-press edition but it is intended to lead to publication of a First Edition in 2008. FIDIC is the first major standard form producing body to bring out a form of DBO contract.
FIDIC has indicated that the main use of this contract is likely to be in a "green field" scenario with a 20-year operation period. The contractor will be responsible for designing and building the works during a Design-Build Period. He will then operate and maintain them for a 20 year Operation Service Period. He has no responsibility for financing the project or its ultimate commercial success.
Many of the provisions in this contract are adapted from FIDIC's existing suite of contracts, in particular the Yellow Book for plant and design-build work. However, in order to cater for the extended operation and maintenance period, FIDIC has introduced the concept of two contract periods, being respectively Design-Build and Operation Service. These periods will be separated by a Commissioning Certificate issued by the Employer's Representative.
Some significant features of this contract are as follows:
- Whilst there is a conventional Time for Completion for the Design-Build period, the contractor's employment may be terminated if he does not complete by a specified Cut Off Date, which if not stated in the Contract Data will be a period of 182 days after the expiry of the contractual Time for Completion.
- The employer must produce a Financial Memorandum showing his arrangements for financing the works.
- During the Operation Service Period the contractor must comply with a prescribed Operation Management System and Licence Agreement. At present no guidance is given on the contents of these and FIDIC have invited comments.
- As in the Silver (Engineering, Procurement and Construction) Book, the employer appoints a Representative to liaise with the contractor but during the Operation Service Period additional provision is made for an Auditing Body to oversee their performance.
- This Body will be independent of both the employer and contractor .
- During the Operation Service Period the contractor must achieve a required level of production output, failing which the employer can recover specified performance damages or commence the termination process.
- An Asset Replacement Fund is set up by the employer to provide for replacement of assets during the Operation Service Period although a Schedule may limit the amounts available for this purpose.
- During the Operation Service Period a retention system continues to operate with five per cent of each interim payment being placed in a Maintenance Retention Fund.
- The employer (but not the contractor) may terminate for convenience but not so as to arrange for the works to be executed by another contractor.
- FIDIC have introduced a revised approach to the treatment of risks and insurance. More detailed provision is made as to the precise risks which the employer and contractor are each to bear, although during the Design-Build Period there is a "sweeper" provision; this specifies that the contractor is responsible for all risks unless specifically allocated to the employer.
- In addition to the general fitness for purpose obligation found in the Yellow and Silver Books, the contractor agrees to indemnify the employer against all errors in the contractor's design which result in the works not being fit for purpose.
- Force Majeure is no longer referred to as such in the contract although a definition of "Exceptional Risks" makes similar provision.
- If any Employer's or Exceptional Risks occur, the contractor is entitled to an extension of time and payment of cost during the Design Build Period. During the Operation Service Period he only receives payment of cost as this period cannot be extended.
Some of the above issues may prove controversial. Employers may be reluctant to accept the strengthening of the Financial Memorandum clause on account of a perceived substantial increase in transparency. Employers may also be concerned that the appointment of the Audit Body is likely to lead to loss of direct control over the contractor during the Operation Service period. Contractors may be concerned as to any scheduled limitation on sums available for the Asset Replacement Fund which may lead to their being potentially liable for excess sums over a lengthy Operation Service Period. They may seek to replace the Maintenance Retention Fund by a bond or other security. They may also argue that they should also be able to terminate for convenience during the Operation Service period. In addition, consideration may need to be given by both parties to the precise operation of the dispute resolution process in the Operation Service Period, in particular as to whether a standing dispute resolution board or boards should be available. The parties may also wish to add more elaborate provision as to security for the contractor's obligations, taking into account the 20-year duration of this period. It remains to be seen whether further guidance and detail in the First Edition will amplify some of the issues referred to above where only limited information is presently available.