In recent years, a number of post-communist countries have joined the European Union (EU) or are seeking to do so. The new member states are mainly from the Central and East European (CEE) region and many have experienced a surge in large investments in infrastructure projects co-financed by the EU, the European Investment Bank (EIB) and the World Bank. According to the Procurement Guidelines of the international and European financing institutions, tenders financed by them are, by definition, open to international competition for projects.

Interestingly, there is a remarkable difference between the tenders financed by international financial institutions and tenders financed by the European institutions, i.e. the EU and EIB. Both seem to be at the root of contractual problems in many CEE countries. Whereas the World Bank and other international financial institutions that provide co-financing for infrastructure construction projects require well-established sample forms of contract for works to be used, the European institutions impose this condition only with respect to their financial support for ‘third countries’ (i.e. outside of the EU). Within the EU, lawmakers – until recently – did not take any precautions. The underlying reason for such an approach is that well-established local standard forms already existed in Western Europe, for example, the ÖNORM B 2110 (Austria), the VOB/B (Germany), the AB 92 and ABT 93 (Denmark), the CCAG (France and Belgium), the DPR 207/2010 (Italy) and the UAV 1989 and 2012 (the Netherlands). Hence EU lawmakers assumed that sample forms were only needed in developing countries.

FIDIC standard forms were introduced to the CEE region in late 1990s, given the massive amount of international and European financing of construction projects. A lack of fair and adequate local sample forms also played a role in their rapid introduction to the CEE. Under the Phare, Tacis and ISPA programmes, EU and EIB financiers scrutinized ex-ante that the FIDIC standard forms (generally the Red and Yellow Books) were being used in the proper way. FIDIC forms are international benchmarks for their efficient risk allocation, tradition, respect, fairness and a balanced approach to business.

The authors of the FIDIC forms have intentionally set the risk allocation in most of the standardized conditions to be fair and balanced, the exception being the FIDIC standard form for privately negotiated EPC Turnkey Projects (EPC/1999 Silver Book). The balanced approach, as incorporated in the FIDIC standard forms for Construction and Plant and Design-Build (the 1999 Red and Yellow Books) is deemed appropriate in developed countries as giving the best results and providing the lowest transport infrastructure project costs in the long term.

However, employers in CEE region tend to modify the standardized FIDIC risk allocation to the disadvantage of contractors. Such modification of standard risk allocation usually causes the types of problems described in the Check List for One Sided Contracts (JICA, 2011), i.e.:

• bid failure and disruption of project implementation;
  
• non-participation in the bid of conscientious and capable contractors;
  
• contract award to a bidder who fails or is incapable of estimating the risks properly;
  
• poor construction quality and delay of the work due to lack of risk contingency;
  
• undermining the relationship of mutual trust and respect between the parties;
  
• unsubstantiated claims from the contractor;
  
• frequent disputes between the employer and the contractor;
  
• higher bid prices and/or large discrepancies between the bid and the final price;
  
• in extreme cases, the eventual termination of the contract.

Four factors are mentioned in the above list which could serve as motives for making a contract one-sided when preparing the contract documents: (1) the employer has not prepared sufficient budget; (2) lack of employer understanding of the terms and conditions, including appropriate allocation of rights and obligations, the capability of contract management and sense of ownership; (3) lack of time and calculation of costs required to create the contract documents; and (4) slavish adherence to domestic laws, regulations and domestic procedures (JICA, 2011).

Lessons learnt in developed countries can help avoid or solve similar problems in developing countries lacking sufficient infrastructure or where large infrastructure projects are planned for the future.

The following text will compare the traditional treatment of construction project risks in developed countries such as the United States of America and the United Kingdom against the practices encountered in the CEE. Examples will illustrate what kind of consequences a distorted standard form of risk allocation may have.

For many years, substantial efforts have been made in the UK to find a suitable model for transport infrastructure tendering. This was in response to projects inherently suffering from prolongation and price increases and long-term industry-wide concern. Many strategic steps have since been taken to make changes and provide solutions to these problems within the construction industry.

One of the key points was the development of a new form of contract called the New Engineering Contract (NEC) in the 1980s. Prepared by engineers, this contract is widely regarded as providing solid support for good project management. This form is commonly used in most large construction projects commissioned by public employers in the UK. The Crossrail project in London and the London 2012 Olympic Games are two recent examples. There are several, optional, NEC sample forms. The target price form is used most frequently because it has proven itself to save money (actual price below the level of the agreed target price) and minimize losses (price increases in excess of the agreed target price). This form is based on the pain/gain mechanism where the benefits and losses are shared between the employer and the contractor. NEC sample forms motivate and encourage cooperation between the participants. Moreover, these sample forms are a proven measure against employer-contractor ‘wars’ which, in every case, have adverse impacts on projects.

With an NEC sample form, the programme (time schedule) is used as a key project management tool and mutual compensation events are presented and defined in a clear, straightforward manner.

Established, experienced lenders respect and promote in their guidelines where projects financed by them abide by the principles of fairness and appropriately allocate risk. For example, the EIB requires that ‘the contractual conditions are fair and reasonable’, the EBRD states:

Contract conditions shall be drafted so as to allocate the risks associated with the contract fairly, with the primary aim of achieving the most economic price and efficient performance of the contract … Wherever appropriate, standard forms of contract incorporating generally accepted international conditions must be used

The World Bank states, ‘The conditions of contract shall provide a balanced allocation of risks and liabilities.’

Government attempts at risk aversion are explicable as its agencies are liable and responsible to other authorities (such as regulators) for any expenditure arising under such contract. This often results in attempts to minimize the risks by shifting them to the contractor. This risk aversion may be the specific reason for recent issues which plague public procurement such as delays, cost overruns and lack of technical-executive contractual know-how in monitoring project implementation (Banica, 2013).

Some employers in the CEE procure public projects to be financed from EU funds with modified FIDIC contract forms. These sample forms tend to disadvantage the contractor through onerous provisions that dramatically skew the standard risk allocation.

The main trend was to replace the provisions of the FIDIC CONS/1999 Red Book or FIDIC P&DB/1999 Yellow Book with the provisions of the FIDIC EPC/1999 Silver Book. In this way, employers could deliberately avoid and shift the standard risk allocation to their advantage. Employers often did so on the advice of inexperienced lawyers or, in some cases, deliberately. Concerning legal advisors, understanding the legal and practical aspects of construction is essential to drafting a good document. The goal, after all, is to construct the project with as few problems as possible. The secondary goal is to protect the client (Sabo, 2013).

In many cases, employers were not aware of the long-term, negative consequences on particular projects and the construction industry as a whole. For example, the FIDIC EPC/1999 Silver Book, due its risk allocation concepts designed for EPC, is inherently unsuitable for use in large transport infrastructure projects. Furthermore Sub-Clauses in Silver Book such 4.12 or 5.1 are invalid in some jurisdictions (Kus, Markus and Steding, 1999).

The following is a summary of some typical interventions/modifications of risk allocations witnessed in the CEE countries and worldwide.