Civil Engineering Works: Infrastructure Construction Projects

Chapter 17
Civil Engineering Works: Infrastructure Construction Projects

17.1 Investments in developing countries

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.

17.2 The approach to the risk allocation in the United States

According to the US Department of Transportation (

The goal of an optimal allocation of risk is to minimize the total cost of risk on a project, not necessarily the costs to each party separately. Thus, it might sometimes seem as if one party is bearing more of the risk costs than the other party. However, if both owners and contractors take a long-term view and take into consideration the benefit of consistently applying an optimal method to themselves and to the rest of their industry, they will realize that over time optimizing risk allocation reduces everyone’s cost and increases the competitiveness of all parties involved.

Poor risk allocation is one of the most frequent reasons for construction project litigation in the US.

In the US, individual transport infrastructure employers compile their contracts according to standard risk allocation manuals. For example, the AASHTO Guide Specifications for Highway Construction is widely used in general contracting as a delivery method. Numerous precedents and well-established adjudication practices of the courts confirm the advantages of efficient risk allocation. While proven to be effective, standard risk allocations are not standardized procedures with completely universal application. There is no standardized procedure that would eliminate the need to systematically identify the hazards and analyse the risks inherent to every particular construction project. No standardized procedure will replace a prudent employer’s ability to determine priorities (such as speed, price, standard, minimization of environmental impacts, and so on) when preparing a project.

The US Department of Transportation instructs that risk allocation should always be based on the following principles:

  • Risk should be allocated to the party best able to control it. The employer, for example, will not burden the project with a risk surcharge in the contractor’s contract price when retaining the risk of unforeseeable ground conditions. This is also confirmed by the recent award in Metcalf Construction Co. v. United States, (U.S Ct. of Appeals for the Federal Circuit, Case No. 2013-5041, Feb. 11, 2014) where the U.S. Court of Appeals for the Federal Circuit reversed a decision of the U.S. Court of Federal Claims that had permitted the Government to shift risk of unforseeable ground conditions to the contractor via contractual disclaimer in a Design-Build contract. The aim of the disclaimer was to deny any chance of contractor relief on a differing site condition claim. It is a clear signal to public employers that it is not acceptable to shift unforeseeable and uncontrollable risk to the contractor. It is also a confirmation of the necessity of balanced efficient risk allocation even in Design-Build contracts. This key decision comes at a critical time as the government (perhaps due to economic recession), seems to have adopted aggressive strategies to avoid paying reasonable contractor claims (for more information see
  • Risk should be allocated in accordance with project priorities. Take, for example, the situation where short completion time is a priority. The employer may then allocate some other risks beyond the standard to the contractor (such as obtaining construction permits).
  • To share a risk where it is convenient. Take, as a good example, extremely adverse climatic conditions where an ‘extremely bad weather risk’ is to be shared between the parties.

Some (or all) of the risks beyond standard can be more conveniently allocated to the contractor where there are no major risks that would jeopardize a particular project and where a detailed risk analysis has been done. Of course, these risks have to be identified, or it must be at least possible to assess these risks independently. Any indeterminate requirement or general, illogical, risk shift will result in a non-assessment of the risk. In such cases, the setting of a contract price comes down to a mere guess. Such an initial condition cannot then lead to a successful construction project as it also complicates the tender process. Tendering may then take an intolerably long time because of a large number of requests by tenderers following the terms of reference in public procurement projects. Sometimes, a tender will have to be cancelled and announced anew in such situations. The resulting damages and impossibility of using, for example, a newly built road will ultimately burden the taxpayer.

17.3 The approach to the risk allocation in the United Kingdom

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.

In the UK, there is also a unique standard used to manage delay and disruption-related issues during construction project realisation known as the SCL Protocol (the Delay & Disruption Protocol, published by the United Kingdom Society of Construction Law; free to download at, which can be made a part of contract via a reference.

Additional instruments are available, for example, Early Contractor Involvement (ECI), i.e. an effort to make use of the contractor’s experience and capabilities as early as at the public contract pre-awarding phase. Use of expert systems such as Building Information Modelling (BIM), i.e. the use of software modelling of a construction process as a whole, providing an ultimate over-view of the works being executed and allowing the utmost cooperation between all participants.

Several strategic resolutions have taken place at the government level, including a special Act regulating construction in the UK. For example, The Housing Grants, Construction and Regeneration Act (1996) (‘the Act’). At Section 108, the Act compels all parties who are parties to a construction contract to refer any dispute to adjudication as a first step. This is a mandatory provision by operation of law that cannot be changed by contract. During the dispute process, parties must adhere to short (and strict) time limits. For example, a dispute must be adjudicated within 28 days of notification of the dispute. If a party fails to comply with the adjudicator’s resolution, the other party can compel performance through a streamlined litigation process at the Technology and Construction Court – a court dedicated to resolving disputes related to construction contracts. This court, in most instances, quickly confirms the previous adjudication award.

17.4 The approach to the risk allocation in Central and Eastern Europe

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.

17.4.1 Restricted competencies of the Engineer

Execution of the engineer’s rights and duties consists concurrently of two agendas. The first is to act on the employer’s behalf. The contractor may thus perceive the engineer’s conduct as an action or inaction of the employer (such as the engineer’s instruction regarding a variation). The second is that the engineer is a neutral third party who is professionally required to keep a fair balance between the contractor and the employer (such as during resolution of disputes, certifications, and so on).

In practice, employers try to restrict the engineer’s powers, for example, by making the engineer’s decisions subject to employer approval, or they withdraw disobedient engineers and replace them with obedient ones. This process starts at the contract phase between the employer and the engineer. Terms are agreed upon which imply the engineer is in fact the employer’s representative. These steps often result in a paralysed system of project administration and management. As such, the engineer will become the one acting on the employer’s behalf and the project will lose the advantages that come from the execution and purpose of the engineer’s position. Whether the contract administration exercised by such a person is efficient or inefficient depends on the capabilities and good faith of the individuals in their positions.

The practice went so far and cases were encountered where the engineer was used as a tool for bad faith behaviour by the employer. In such situations, variations are typically instructed by the engineer to be later declared invalid by the employer for lack of empowerment of the engineer (or conflict with public procurement law). Payments previously made for those variations were retrospectively offset by the employer against future payments for works done, with the effect being a loss on the contract or, in some cases, bankruptcy of the contractor.

However, different conditions were agreed in the main contract for works between the employer and the contractor (where the engineer had to be fair) and in the professional service agreement between the employer and the engineer (where the engineer was under threat of contractual penalties to avoid contractor claims). This further led to claims and lawsuits for damages by contractors against engineers.

17.4.2 Inefficient risk allocation

FIDIC EPC/1999 Silver Book risk allocation is used in transport infrastructure construction projects despite the fact that the use of general contracting (FIDIC CONS/1999 Red Book) or DB (FIDIC P&DB/1999 Yellow Book) is more efficient.

There are, for example, risks of errors in setting-out (Sub-Clause 4.7), wrong site data (Sub-Clause 4.10), unforeseeable physical conditions (Sub-Clause 4.12), and errors in the employer’s requirements (Sub-Clauses 1.9 and 5.1) that are allocated to the employer under CONS/1999 Red Book and P&DB/1999 Yellow Book. Employers change these clauses and allocate risks caused by their own bad project preparation or negligence to the contractor by not allowing the contractor to claim any additional payments or extensions of time for completion in cases of risk realization. In doing so, the employer insures against their own inability to prepare the contract properly and on a timely basis by allocating the risk of defective contract preparation (and its consequences) to the contractor.

Sometimes, employers need to commence projects at any cost and without sufficient preparation. Reasons may be financial (conditions given by the lenders or subsidies providers), political (complete the project before the next elections), economic (the urgent need of a road, tunnel or bridge), dishonesty (corruption), international obligations (a treaty on infrastructure development), fear (lack of responsibility) or intentional avoidance of responsibility.

Another problem is that public employer had to choose consultants and designers on the basis of lowest price. Such procurement leads again to errors in tender designs and bad project preparation.

The employer may see a shift in risk allocation as an appropriate way to solve the problem of lack of preparation and the best way how to avoid responsibility. In practice, the employer will not achieve its goals in this way and projects affected by defective risk allocation will almost certainly end in trouble and dispute. Without efficient and fair contractual remedies, the contractor who accepted the onerous contract with inefficient risk allocations will defend potential claims under general principles of law. In civil law countries, for example, the principles of unjust enrichment and good faith protection will very likely be argued against the employer. Translated into the language of law, the absurd risk allocation may then be called unreasonable limitation of responsibility. Another (even worse) scenario may await the employer: the contractor will terminate the contract and abandon the project after a risk is realized that could not have been controlled or accounted for in their bid price. The final, common scenario is one where the contractor goes into bankruptcy because of risk realization. The employer is then left to ‘clean up the mess’ of conducting a new tender, resolving difficulties with warranties, and so on.

Take, as an example, the approach of a Romanian employer for a transport infrastructure public contract who went so far as to allocate the risk of unforeseeable physical conditions to the contractor even when there was not enough time to do the site inspections and explorations during tender preparations. This employer is exclusively assigning the liability for defects in their own design documents by making the strict wording of the FIDIC EPC/1999 Silver Book even more rigorous against the contractor. In this case, the employer removed exemptions of contractor liability (Sub-Clause 5.1) from the tender requirements. As such, the contract becomes impossible to price and evaluate and lacks transparency from the outset. The project is almost certainly doomed to failure – either ending in dispute or premature termination.

17.4.3 Limitation of contractors’ claims

Limitation of the contractors’ claims for additional payments and extensions of time take the form of either complete elimination or modifications in their parameters. Here, the matter in question is nothing more than a shift in risk allocation. For example, the employer will try to compensate their failure to meet basic obligations (such as to properly and timely provide the contractor with access to the site) by assigning the adverse implications to the contractor. In this way, they relieve the contractor of the possibility of claiming an additional payment or confining the claim to payment of direct costs regardless of additional lost profit and/or overhead surcharges.

17.4.4 Contractual determination of a maximum total contract price

Another extreme is in defining the upper limit of the total contract price as, for example, 110% of the tender price (except for adjustments or changes in legislation and cost). Guaranteed like this, such a maximum price (inherent in CM At-Risk projects) is obviously unreasonable in risky transport infrastructure projects. Again, it is likely that such provisions would be deemed void by a court in a dispute and that the contractor would finally succeed with their claims. Furthermore, such a provision presents a great risk in terms of the possibility of efficiently managing the project and bringing it to a successful conclusion – particularly in connection with the lowest bid price being the only criterion for success in the respective tender.