The FIDIC Design-Build Contracts

fit for the purposes for which the Works are intended as defined in the Contract’, need to be understood or interpreted in accordance with the governing law of the contract.

Clause 1.4 provides for the contract to be governed by the law of the country stated in the Appendix to Tender (Yellow Book) or the Particular Conditions (Silver Book). For example, the contract might be governed by English law, or French law.

Also of great practical importance is the ruling language of the contract.

The parties might be using versions of the contract or parts of it in more than one language, but the ruling or prevailing language will (again depending on the Book) be that stated in the Appendix to Tender or Particular Conditions.

The language for day-to-day communications might be different from the ruling language but it is probably a good idea to avoid this. If none is stated then it is to be the same as the ruling language.

4.1.3 The priority of documents: Clause 1.5

The priority of documents is another very important topic. A contract in a project of any size or complexity will typically consist of a great many different documents, ranging from the contract general conditions to the detailed speci­fications for the performance of the plant or other facility and will include a whole range of Contractor’s documents.

Clause 1.5 provides for these various documents forming the contract to be taken as ‘mutually explanatory of one another’.

This means, in part, that the contract must be read as a whole, with each document taken together with all the others. But where there are inconsistencies between the various documents then the Yellow and Silver Books, in similar ways, provide for which documents are to prevail – that is, for a ­hierarchy of documents.

In the Silver Book, clause 1.5 says that, for the purposes of interpretation, the priority of the documents is to be in accordance with the following sequence:

(a) the Contract Agreement;

(b) the Particular Conditions;

(c) the general conditions;

(d) the Employer’s Requirements;

(e) the Tender and any other documents forming part of the contract,

The list is similar in clause 1.5 of the Yellow Book, but includes other contract documents (in particular, the Letter of Acceptance, Letter of Tender and Schedules). Broadly speaking, the order of priority is intended to make the more specific documents have priority over the less specific.

But we should emphasise one important practical point. There is a potential trap in (e), above. The words ‘… any other documents forming part of the contract’ in this lowest category of documents highlights the need to ensure that any documents that the parties intend to have as high priority but which are not specifically mentioned in any of the other categories (that is, (a)–(d)), are explicitly assigned an appropriate category, by use of suitably worded Particular Conditions. Otherwise, those documents will by default have the lowest priority.

4.1.4 Compliance with laws: Clause 1.13

This very important, and potentially onerous, clause places on the Contractor the obligation, in performing the contract, to comply with all laws, regulations and the like applying to the project.

Unless otherwise stated in the Particular Conditions, the Contractor is to give all notices, pay all taxes, duties and fees, and obtain all permits, licences and approvals, as required by such laws in relation to the design, execution and completion of the works and the remedying of any defects. If he fails to do so then he must indemnify the Employer in respect of any claims the Employer might face from third parties resulting from that failure.

This can in many cases place a heavy burden on the Contractor. It is to some extent mitigated by the requirement, in clause 2.2 of the Books, that if the Contractor so requests the Employer must, if he can, provide reasonable assistance to the Contractor in obtaining copies of relevant local laws and regulations and assisting the Contractor in applying for the necessary permissions, permits, approvals and the like.

As for the Employer, he has the responsibility of having obtained (or, in due course, obtaining) the necessary planning, zoning or similar permissions for the permanent works, and any other permissions which might be described in the Employer’s Requirements as having been (or being) obtained by the Employer; and, again, if he fails to do so then the Employer is to indemnify the Contractor against the consequences. Thus, for example, the Employer must ensure that carrying out the works on the particular site will not be a breach of local planning rules, but it will be for the Contractor to obtain all the necessary licences, permits and approvals for carrying out the works to the site.

4.2 The Employer

The Employer’s responsibilities (and the steps he must take if he wishes to make a claim against the Contractor) are set out in clause 2.

4.2.1 The right of access to, and possession of, the site: Clause 2.1

One of the most important of these responsibilities is to provide the right of access to, and possession of, the site.

The site means the places where the permanent works are to be executed and any other places specified in the contract as forming part of the site. Access and possession must be given within the times stated in the contract documents. If no times are stated, they must be given so as to allow the Contractor to proceed without disruption.

The right of access which the Employer must give is the legal right to enter and leave the site; that is, it is the Employer’s job to make sure the Contractor can come and go at the stated times (if any), or so as to enable him to proceed without disruption.

The right of possession, which the Employer must also give, is the legal right to occupy and control the site to the extent necessary for the execution of the works.

It is important to note that neither the right of access nor the right of possession is (unless otherwise provided for under the contract) exclusive to the Contractor: that is, he might have to share these rights with other contractors.

If those other contractors interfere with the works while also accessing and using the site or parts of it, then the Contractor might have the basis for a claim against the Employer under clause 2.3. Under that clause, the Employer is responsible for ensuring that his other contractors on site cooperate with the Contractor to permit him to carry out the relevant works (and the ­contractor has a similar duty to cooperate under Clause 4.6).

4.2.2 Evidence of the Employer’s financial arrangements: Clause 2.4

Another important obligation of the Employer is to provide evidence of his financial arrangements.

The Employer must provide reasonable evidence that financial arrangements have been made and are being maintained to enable him to pay the Contractor punctually. He must do so within 28 days after receiving any request from the Contractor. Before making any material change to his arrangements, he must notify the Contractor and give detailed particulars.

It is easy to see why this clause exists. In FIDIC contracts, the Employer is protected against the Contractor’s default by performance and other guarantees (as we saw in Section 2.5), but the Contractor does not normally have such protections available in the event of the Employer failing to pay sums due under the contract.

The duty to provide the Contractor with reasonable evidence that the Employer has arrangements in place to enable him to discharge his payment obligations gives the Contractor a measure of protection; and the contract treats this obligation seriously. It is a ground of suspension or termination of the contract by the Contractor if the Employer fails to provide the required evidence (under clauses 16.1 and 16.2: see section 4.16 below).

4.2.3 Employer’s claims against the Contractor: Clause 2.5

One naturally thinks of the Contractor as making claims, for an additional payment, say, or more time to complete the contract works. But the Employer too can claim; and under the contract these claims will be either for a payment of some kind (damages for delay, for example, or sums due pursuant to a right of indemnity, such as we saw in connection with clause 1.13 above) or for an extension to the defects notification period under the contract (see Section 4.11 below).

If the Employer wishes to make a claim of either type, then he (or, in the Yellow Book, either the Engineer or the Employer) must give notice and particulars to the Contractor of the claim ‘as soon as practicable’ after the Employer becomes aware of the event or circumstances giving rise to the claim.

The notice must specify the basis for the claim and substantiate the amount and/or extension claimed. An important proviso is that any claim for an extension of the defects notification period must be made before the expiry of that period.

There are three important points to note here.

  • First, it may be difficult in a particular case to say whether an Employer did or did not give his notice ‘as soon as [was] practicable’ after he became aware of the event or circumstances giving rise to the claim. Unlike the Contractor’s claims, no specific time limit is placed on when the notice has to be given.
  • Second (and related to the first point), the contract does not bar the Employer from pursuing a claim even if he gives his notice later than ‘as soon as [was] practicable’. Again, this contrasts with contractors’ claims, as the Contractor is barred if he gives his initial notice of claim later than the 28-day period provided for in clause 20.1 (see Section 4.20.1 below).
  • Third, the time from which one is to assess whether the Employer has given his notice as soon as was practicable is the time at which he became aware of the event or circumstances giving rise to the claim. This contrasts with the position of the Contractor, who must give his initial notice 28 days from the time at which he ‘became aware, or should have become aware’ of the event or circumstance. For the Employer, the question to be asked is simply, ‘When did he become aware of the relevant event or circumstance?’, whereas for the Contractor it is, at bottom, when he ought (objectively) to have become aware of that event or circumstance.3

4.3 Contract administration: Clause 3

Clause 3 in both Books deals with the administration of the contract.

4.3.1 The role of the Engineer

Perhaps the most striking difference between the two Books in relation to contract administration is that, under the Yellow Book, the Employer must appoint an Engineer, a non-party to the contract, to administer the contract. Under the Silver Book, the Employer himself is, strictly speaking, the contract administrator, although he may (and in practice often does) appoint a Representative to act for him.

The role of the Engineer has a long history in common law countries and the use of the Engineer as non-party contract administrator in the Yellow, and Red Books is a feature of the common law roots of the FIDIC forms.4 The Engineer traditionally had a dual role: he was at once the agent of the Employer, who retained him, and the impartial administrator.5 The scope of his functions extended beyond certifying payments and other entitlements to making decisions about matters in contention between Employer and Contractor prior to any reference to arbitration. An important quasi-judicial as well as administrative role was therefore characteristic of the traditional Engineer.

In the current FIDIC Yellow and Red Books, the Engineer is no longer expressly required to act ‘impartially’, but he is required, in making ‘determinations’ (see below) to make ‘fair’ ones ‘in accordance with the Contract, taking due regard of all relevant circumstances’ (clause 3.5).

Thus while no longer expected to act impartially between Employer and Contractor, he is still to be ‘fair’ in the decisions he makes concerning, for example, a claim for an extension of time; and thus the duality of the traditional Engineer’s role is to some extent preserved.

Another important departure from the traditional role is that the Engineer in the current FIDIC forms is no longer the pre-arbitration decision-maker between the parties. Although the Engineer’s determinations in the Yellow and Red Books take effect until revised by a Dispute Adjudication Board (or DAB), it is from the decision of the DAB that a dissatisfied party refers a dispute to the final decision of an arbitration tribunal and not directly from the decision or determination of the Engineer.

The introduction of the DAB as an intermediate stage between Engineer’s determination and arbitral award has an important practical effect both on the scope and impact of the Engineer’s decisions and on the likelihood of resolving a dispute before formal and final proceedings are resorted to (as we shall see further in Part III).

4.3.2 ‘Determinations’ in the Yellow and Silver Books

In the Yellow Book, the Engineer makes his determinations pursuant to clauses in the contract that provide for the Engineer to ‘agree or determine any matter’. Before he does so, the Engineer is to consult the parties (Employer and Contractor) to try if possible to reach agreement; it is only where agreement cannot be reached that he is to make his decision, a decision which (as we saw above) must be:

  • fair;
  • in accordance with the terms of the contract; and
  • have due regard to all relevant circumstances.

Once he makes his determination, the Engineer is to give notice to the interested parties with supporting details.

The position here is much the same in the Silver Book, clause 3.5, except that the Employer himself makes the decision. Although in many cases he will in a sense judge his own cause, he is still meant to make decisions fairly, in accordance with the contract and taking into account all relevant circumstances.

One significant difference, however, as we have noted already, is that whereas in the Yellow (and Red) Book the parties are to give effect to the determination unless and until it is revised by a DAB, under clause 3.5 of the Silver Book the Contractor can hold off from giving immediate effect to the Employer’s determination by giving notice of his dissatisfaction with it 14 days after receiving it; in which case the matter is referred to a DAB. This difference is probably attributable to the fact that in the Silver Book there is no non-party decision-maker such as the Engineer.

4.3.3 Employer’s Representative in the Silver Book

Since, strictly speaking, the Employer is himself the contract administrator, his Representative is to be taken to act as the Employer. The Representative can be replaced at any time subject only to the Employer notifying the Contractor of the replacement’s details. Indeed, the Employer can at any time decide to do without a Representative altogether. By clause 3.1, unless and until the Employer notifies the Contractor otherwise, the Employer’s Representative is deemed to have the full authority of the Employer under the Contract, except in respect of clause 15 (that is, termination of the contract by the Employer).

In the Yellow Book, the Engineer can exercise any authority attributable to him as specified in the contract or as necessarily to be implied from the contract, such as from his functions of giving instructions or approving variations, or valuing and certifying sums due. He has no authority to amend the contract, however, or to relieve any party of any duties or obligations under the contract (clause 3.1).

4.3.4 The giving of instructions

One specific function of the Engineer under the Yellow Book (or those to whom he has delegated the power to do so) is the general right to give instructions (which are to be in writing) to the Contractor, at any time, which are necessary either for the execution of the works or for the remedying of any defects in them (clause 3.3). Instructions amounting to a variation to the works are to be treated as such under clause 13 (see Section 4.13 below).

In the Silver Book, clause 3.4, there is a similar right in the Employer to give instructions, expressed as the right to issue instructions (in writing) to the Contractor which may be necessary for the Contractor to perform his obligations under the contract.

4.4 The Contractor

4.4.1 The Contractor’s general obligation: Clause 4.1

In both Books, the Contractor is to:

  • design, execute and complete the works in accordance with the contract, and
  • remedy any defects in the works, so that
  • when completed, the works shall be fit for the purposes for which the works are intended as defined in the contract.

An important feature of this general obligation is the requirement to ­complete the works so that they are ‘fit for the purposes’ for which they are intended ‘as defined in the contract’. The Contractor under such a fitness for purpose obligation is in principle liable even if he took reasonable care in, for example, the design of the facility if the end product does not achieve the purposes for which it was intended.

But how are these intended purposes to be assessed? In the FIDIC Books this is by reference to the terms of the contract: the works are to achieve the purposes defined in the contract; these definitions are to anchor the intended purposes which the end product must achieve. This places a lot of weight, therefore, on the contract documents specifying the intended purposes sufficiently clearly and adequately; but care needs to be taken to avoid doing so too narrowly or too broadly for the design-build contractor to do his job and be responsible for the end result.

Note also that ‘defined’ is not the same as express: an intended purpose for some part of the plant or facility (light fittings, for example) could be implied or to be inferred from the descriptions of the items used rather than expressly stipulated.

Whether the works or some part of them is ‘fit for the intended purpose’ may not always be clear. Take, for example, a contractor who is to design and constructs a spa hotel in a seaside resort. The site directly faces the open sea. The Employer’s Requirements specify ‘steel frame windows’ of certain dimensions ‘for all sea-facing windows’.

Within the fixed price the contractor supplies and installs carbon steel frames with a much lower corrosion resistance than inox or chromium-alloy steel. However, following installation the employer requires that the windows be replaced with inox frames, on the basis that carbon steel frames are not fit for the purpose. The employer contends that, in the sea-facing position, they will corrode at more than three times the rate of chromium-alloy steel of median grade.

We can sympathise with the employer, but is he right? The contractor, after all, might reply that the Employer’s Requirements did not include any particular type or grade of steel and no service life was (let us assume) ever specified. He could say he was entitled to design for the less expensive carbon steel solution and was not in breach of any contract terms. In a case like this there are arguments which could be adduced on either side. Can the contractor be required, he might ask, to install more expensive materials within the lump-sum fixed price even if they were never specified? Or any performance standard in terms of service life ever stated?

The words of clause 4.1 are ‘… for which the Works are intended as defined in the Contract’. But what was the intended purpose as defined in the contract? Could one say that the contract at least implicitly defined the intended purpose as ‘use of frames to windows directly facing the sea’, as the plans and site details showed the location? Or could one argue persuasively that in the absence of any express service life requirement the need to replace the carbon steel frames more frequently than chromium-alloy frames is at bottom a maintenance issue and not one about fitness for purpose?

Again arguments could be adduced on both sides. The employer here would certainly be helped by the fact that an intended purpose might be implied or implicit; but to avoid arguments of this kind the Employer’s Requirements, or other contract documents, should have been more explicit on the point if (as it evidently was) it was an important one.

4.4.2 ‘The works’ which must fit the intended purpose: Clause 4.1

‘The works’ are widely defined to include any work which is necessary to satisfy the Employer’s Requirements, or is implied by the contract, and all works which (although not mentioned in the contract) are necessary for stability or for the completion, or safe and proper operation, of the works.

Also under clause 4.1: the Contractor must provide the plant and Contractor’s documents specified in the contract, and all the Contractor’s ­personnel, goods, consumables and other things and services, whether of a temporary or permanent nature, required in and for the design, execution, completion of the works and remedying of defects.

4.4.3 Securing performance: Clause 4.2

Under clause 4.2 of both Books the Contractor has an obligation to provide security for his proper performance of the contract. Such security typically takes the form of an on-demand bond or guarantee, payable by an issuing bank or insurance company up to a certain amount on presentation of a written demand of the Employer without proof of actual default by the Contractor (see Section 2.5 above).

The Contractor is to obtain the security (at his cost) in the amount and ­currencies stated in the Appendix to Tender (Yellow Book) or Particular Conditions (Silver). If an amount is not stated then the obligation to provide the security does not apply.

In the Silver Book, the Contractor is to deliver the performance security to the Employer within 28 days after both parties have signed the Contract Agreement, and in the Yellow within 28 days of receiving the Letter of Acceptance. The security is to be issued by an entity and from within a ­country (or other jurisdiction) approved by the Employer, and to be in the form annexed to the Particular Conditions or in another form approved by the Employer.

In both Books, the Employer is not to make a claim under the performance security except for amounts to which the Employer is entitled under the ­contract in the event of:

  • failure by the Contractor to extend the validity of the security (in which event the Employer may claim the full amount of the security);
  • failure by the Contractor to pay the Employer an amount due within a period of 42 days;
  • failure by the Contractor to remedy a default within 42 days after receiving the Employer’s notice requiring the default to be remedied; or
  • circumstances which entitle the Employer to termination under the contract (clause 15.2), whether or not notice of termination has been given.

A performance security could be open to abuse by an Employer. The FIDIC contracts all provide that in the event that the Employer makes a call under the security which he was not entitled to make then he must indemnify the Contractor against all damage, loss and cost resulting from the improper call (clause 4.2).

4.4.4 Contractor’s Representative: Clause 4.3

Under clause 4.3 of both Books, the Contractor must appoint a Contractor’s Representative and give him all the authority necessary to act on the Contractor’s behalf under the contract.

Unless the Contractor’s Representative is named in the contract, the Contractor must, prior to the contract commencement date, submit to the Employer for consent the name and details of the person the Contractor proposes to appoint as Contractor’s Representative. If consent is withheld, or later revoked, or if the appointed person fails to act as Contractor’s Representative, then the Contractor must similarly submit the name and details of another suitable person for the role.

4.4.5 Subcontracting: Clauses 4.4 and 4.5

The Contractor may use subcontractors but in all the FIDIC Books he must not subcontract the whole of the works (clause 4.4). Moreover, the Contractor is responsible for the acts or defaults of any subcontractor, his agents or employees, as if they were the acts or defaults of the Contractor himself. Contractually, he remains responsible.

Clause 4.5 of the Silver and Yellow Books deals with ‘nominated ­subcontractors’, which means a subcontractor whom the Employer, under clause 13 (see below), instructs the Contractor to employ as a subcontractor. The Contractor is not under any obligation to employ a nominated subcontractor against whom he has a reasonable objection, but the Contractor must as soon as practicable raise this objection by written notice to the Employer with supporting details.

4.4.6 Setting out: Clause 4.7

Setting out the works is clearly of the utmost importance and the Contractor has an obligation to do so to original points, lines and levels of reference speci­fied in the Contract. He is responsible for the correct positioning of all parts of the works, and must rectify any error in their positions, levels, dimensions or alignment.

4.4.7 Sufficiency of the Contract Price (Silver Book) or Accepted Contract Amount (Yellow Book): Clause 4.11

In both Books the fixed-price lump sum is intended to be sufficient for the works to be designed and executed as required by the contract and the Contractor is meant to have taken steps to satisfy himself that this is so. The Contractor in each Book is deemed to have satisfied himself as to the correctness and sufficiency of the Contract Price (Silver Book) or Accepted Contract Amount (Yellow).

Unless otherwise stated in the contract, the Contract Price/Accepted Contract Amount covers all the Contractor’s obligations under the contract (including those under provisional sums, if any) and all things necessary for the proper design, execution and completion of the works and the remedying of any defects.

4.4.8 Unforeseeable difficulties/physical conditions: Clause 4.12

We looked at this topic in Part I (Section 2.6). But it may be convenient to summarise the basic differences between the two design-build forms here.

In the Silver Book, as we saw, the Contractor bears the risk of unforeseen difficulties unless this is otherwise stated in the contract (clause 4.12). He is otherwise deemed to have obtained all necessary information about risks, contingencies and other circumstances which could influence or affect the works. By signing the contract, he accepts total responsibility for having foreseen all difficulties and costs of successfully completing the works.

By contrast, the Contractor under clause 4.12 of the Yellow Book may obtain an extension of time and additional payment (his cost but not profit) if he encounters physical conditions which were unforeseeable in the sense that no experienced contractor by the date for tender could reasonably be expected to have foreseen them.

4.4.9 Progress reports: Clause 4.21

Unless otherwise stated in the Particular Conditions, monthly progress reports have to be prepared and submitted by the Contractor to the Engineer (Yellow Book) or Employer (Silver).

The reports have to contain detailed information6 about the state of the works up to the end of the preceding calendar month; they must continue to be made until the Contractor has completed all the work which is known to be outstanding at the completion date stated in the Taking Over Certificate (see Section 4.10).

The contracts treat the obligation to provide progress reports seriously and the non-provision of the required report will prevent the Contractor ­obtaining an interim payment (clause 14.3).

4.5 Design

4.5.1 The Contractor’s general design obligations (Yellow and Silver Books): Clause 5.1

Reflecting the very different risk allocation in the two Books between Employer and Contractor, as we discussed in Part I (Section 2.6), the terms of these obligations differ markedly.

As we saw in connection with the Silver Book, by clause 5.1 the Contractor is deemed to have scrutinised at an early stage the Employer’s Requirements and is to be responsible for the design of the works and for the accuracy of the Employer’s Requirements (including design criteria and calculations), except as stated in clause 5.1 sub-paragraphs (a) to (d).

We state those limited exceptions again here, for convenience:

(a) portions, data and information stated to be the Employer’s responsibility in the contract;

(b) definitions of intended purposes of works or any part thereof;

(c) criteria for testing and performance of the completed works;

(d) portions, data or information which cannot be verified by the Contractor, except as otherwise stated in the contract.

The Yellow Book states the Contractor’s general design obligations in quite different terms. The Contractor shall carry out and be responsible for the design of the works; he warrants that he and his designers and design subcontractors have the necessary experience and capability; and gives various undertakings and warranties with respect to the designs he will prepare and the scrutinising of the Employer’s Requirements.

As to errors or incompleteness in those Requirements, the corresponding provisions of the Yellow Book (clause 5.1) do not make the Contractor ­responsible for any such errors or omissions unless an experienced contractor, exercising due care, would have discovered them when scrutinising the Employer’s Requirements before commencing the works. Otherwise, the Contractor is entitled to additional time and payment (including profit) for any delay and additional work resulting from the Employer’s errors or omissions in his Requirements (clause 1.9).

4.5.2 Contractor’s documents: Clause 5.2

Clearly, the Contractor’s documents are crucial to proper completion of a ­project and the FIDIC contracts make detailed provision for them.

Clause 5.2 of the Yellow and Silver Books provides that the Contractor’s documents shall comprise the technical documents specified in the Employer’s Requirements, documents required to satisfy all regulatory approvals, the as-built documents described in clause 5.6 and the operation and maintenance manuals referred to in clause 5.7. The Contractor must prepare all the Contractor’s documents, and also any other documents necessary to instruct the Contractor’s personnel.

Often the Employer’s Requirements will specify Contractor’s documents which are to be submitted to the Employer for review. This enables the Employer or Engineer to monitor and have some control over the ­process without relieving the Contractor of any of his obligations or responsibilities.

Unless otherwise stated in the Employer’s Requirements, each review period is not to exceed 21 days, calculated from the date on which the Employer receives a Contractor’s document and a notice from the Contractor stating that the document is considered ready, both for review and for use.

The Employer may, within the review period, give notice to the Contractor that a Contractor’s document fails (to the extent stated) to comply with the contract. If the document does so fail to comply then it has to be rectified, resubmitted and reviewed at the Contractor’s cost.

The review process has to be taken into account when the programme is prepared as, for each part of the works, and except to the extent that the parties otherwise agree, execution of that part should not start before expiry of the review periods for all the Contractor’s documents which are relevant to its design and execution.

4.5.3 Contractor’s undertaking: Clause 5.3

The Contractor gives a general undertaking in similar terms in both Books. He undertakes that the design, the Contractor’s documents, the execution and the completed works will be in accordance with:

  • the laws applying in the country where the works are carried out; and
  • the documents forming the contract, as altered or modified by ­variations.

4.6 Staff and labour: Clause 6

Clause 6 of the Yellow and Silver Books places a number of obligations upon the Contractor with respect to the proper treatment of staff and labour.

They are fairly straightforward, and cover such matters as compliance with labour laws, minimum wages, reasonable facilities, health and safety protection and proper superintendence of the works by the Contractor to ensure their safe and satisfactory execution.

4.7 Plant, materials and workmanship

4.7.1 Executing the works: Clause 7.1

Clause 7 in both Books deals with the requirements for the items of plant and materials which the Contractor brings to the site in order to execute the project. It covers the Contractor’s obligations concerning the quality of his work and the procedures to be followed for tests and in the event that an item of work fails a test.

By clause 7.1 of the Silver and Yellow Books the Contractor must carry out his work:

  • in the manner (if any) specified in the contract;
  • in a proper, workmanlike and careful manner, in accordance with ­recognised good practice; and
  • with properly equipped facilities and using non-hazardous materials, unless otherwise specified in the contract.

The quality of materials and standard of workmanship will be specified ­elsewhere in the contract documents, which will normally refer to the national standard specifications of the country of the project, among many other details.

Phrases such as ‘proper workmanlike and careful manner’, ‘recognised good practice’ and ‘properly equipped facilities’ are not precise. These requirements will have to be interpreted by the Engineer or Employer in relation to the actual goods that are supplied and work that is executed by the Contractor.

4.7.2 Samples: Clause 7.2

The Contractor is to submit samples of materials, and relevant information, to the Engineer or Employer for review in the Yellow and Silver Books, prior to using the materials in or for the works (clause 7.2).

4.7.3 Inspections: Clause 7.3

The contracts give the Engineer (if Yellow Book) or Employer (if Silver) a wide-ranging right to inspect the works in the course of the project. This includes the right to be informed whenever work is ready and before it is ­covered up.

Under clause 7.3 the Employer’s personnel must:

  • at all reasonable times have full access to all parts of the site and all places from which natural materials are being obtained; and
  • during production, manufacture and construction (at the site and ­elsewhere), be entitled to examine, inspect, measure and test the materials and workmanship, and to check the progress of manufacture of plant and production and manufacture of materials.

Under the clause, the Contractor must give notice to the Engineer or Employer whenever any work is ready and before it is covered up. The Engineer or Employer is then either to carry out the examination or testing without unreasonable delay, or promptly to give notice to the Contractor that he does not require to do so.

If the Contractor fails to give the notice, he must, if and when required by the Engineer or Employer, uncover the work and then reinstate at his own cost.

4.7.4 Testing: Clause 7.4

The contracts contain detailed provision with regard to testing the quality and performance of the works and any part of them.

Clause 7.4 provides for requirements concerning testing that apply to all tests specified in the contract other than the tests after completion (if any): see further Sections 4.9 and 4.12 below.

The Contractor is to provide everything necessary to carry out the tests specified, unless otherwise stated in the contract. He is to agree with the Engineer or Employer the time and place for the specified testing.

The Engineer or Employer may vary the location or details of specified tests, or instruct the Contractor to carry out additional tests. If these varied or ­additional tests show that the item is not in accordance with the contract, the additional or varied tests are to be carried out again at the Contractor’s expense.

The Engineer or Employer must give the Contractor not less than 24 hours’ notice of his intention to attend the tests. If he does not attend at the time and place agreed, the Contractor may proceed with the tests unless otherwise instructed by the Engineer or Employer, and the tests shall be deemed to have been made in his presence and to be accurate.

4.7.5 Rejection and remedial work: Clauses 7.5 and 7.6

By clause 7.5, if any plant, material or workmanship is found to be defective, or not in accordance with the contract, the Engineer or Employer can reject it by notifying the Contractor (but approval must not be unreasonably ­withheld).

If the Engineer or Employer requires plant, materials or workmanship to be retested, the tests must be repeated under the same terms and conditions.

If the Employer suffers additional costs due to the retesting, the Contractor shall pay these costs to the Employer.

Under clause 7.6, the Contractor must, within a reasonable time, comply with any instruction from the Engineer or Employer to:

  • remove and replace any plant or materials which do not conform with the contract; or
  • remove and re-execute any works which do not conform with the contract.

The Engineer or Employer should only insist upon removal and ­replacement when it would be unreasonable to repair.

Also under clause 7.6, the Contractor must comply with any iinstruction from the Engineer or Employer to execute works which are urgently required for the safety of the contract works. If the Contractor fails to comply with the instruction, the Employer will be entitled to employ others to carry out the instruction at the Contractor’s cost.

4.7.6 Ownership: Clause 7.7

Clause 7.7 of the Books also provides for the ‘passing of property’ or ­ownership in plant and materials. Unless the laws of the country where the works are ­carried out provide otherwise, items of plant and materials will become the property of the Employer either: (a) when they are delivered to site; or (b) when the Contractor is entitled to be paid for them, whichever takes place first.

4.8 Time: commencement, delays and suspension of the works

4.8.1 Commencement and time for completion of the works: Clauses 8.1 and 8.2

Clause 8.1 of the Books provides for the contract commencement date to be notified to the Contractor by the Engineer or Employer at least 7 days prior to the commencement date, and (unless otherwise stated in the contract) for that date to be within 42 days of the date when the contract came into effect.7

The Contractor as soon as reasonably practicable after the commencement date must proceed with the design and execution of the works and, by clause 8.2, must complete the whole of the works, and any section,8 within the time for completion of the works or section.

4.8.2 Programme: Clause 8.3

We looked at the programme and its importance in Part I (Section 1.7).

The Contractor must submit to the Engineer or Employer his programme within 28 days after the commencement date (if Silver Book) or 28 days after notice of the commencement date (if Yellow).

As we saw in Section 1.7, the programme:

  • provides the basis for monitoring the Contractor’s progress and planning Employer/Engineer activities and obligations;
  • becomes a base reference for the Engineer’s or Employer’s determination of Contractor’s claims for extensions of time for completion arising from alleged disruption or delay.

The programme must show:

  • the order of execution of the works, including the anticipated timing of each major stage of the works; in the Yellow Book more details of this are required (clause 8.3(a));
  • sequencing of the works, taking into account the lead time for obtaining any approvals;
  • the periods for review of Contractor’s Documents; in the Yellow Book additionally the periods for review of any other submissions, approvals, or consents mentioned in the Employer’s Requirements;
  • the sequence and timing of inspections and tests.

The programme should be accompanied by a supporting report (or method statement) setting out how the Contractor intends to execute the works and the resources he intends to use.

If the Engineer or Employer thinks the programme does not comply with the contract then he must give notice to the Contractor within 21 days of receiving it stating how the programme does not comply; otherwise, the Contractor is to proceed in accordance with the programme.

As we mentioned in Section 1.7, the Contractor is required to give advance notice or early warning to the Engineer or Employer of potential events which might adversely affect or delay the works. There is no similar obligation on the Engineer or Employer.

Linked to the requirement to maintain valid programmes and to advise the Engineer or Employer of potential delaying events is the requirement to submit monthly progress reports (Section 4.4).

Each report must include charts and detailed descriptions of progress, photographs, details of the manufacture of each major item of plant and materials, records of the Contractor’s personnel, copies of quality assurance documents and the like, lists of notices given with respect to Employer’s and Contractor’s claims, safety statistics and comparisons of planned and actual progress and details of measures being, or to be, adopted to overcome delays.

As we noted in Section 1.7, if the Contractor fails to provide a progress report as required he will not be entitled to receive an interim payment for the relevant period.

4.8.3 Delays and extensions of time: Clause 8.4

We have already considered this topic in Part I (Section 1.7) but it is probably helpful to summarise here the main points of similarity and contrast between the two Books.

If any of the circumstances listed under clause 8.4 of the Books occurs and results in delay to completion of the works, the Contractor is entitled to an extension of the time for completion subject to giving notice of claim under clause 20.1.

In the Yellow Book the relevant delay events are:

  • a variation or other substantial change in the quantity of an item of work;
  • a cause of delay giving rise to an entitlement under another sub-clause;
  • exceptionally adverse climatic conditions;
  • unforeseeable shortages of personnel or goods caused by epidemic or governmental actions;
  • any delay, impediment or prevention caused by or attributable to the Employer, the Employer’s personnel or the Employer’s other contractors on the site.

In the Silver Book, as we saw, only the first, second and last of these grounds apply (variations, express mention in another clause of the contract or delays attributable to the Employer).

Moreover, in the Silver Book general conditions, no additional time is permitted for (a) unforeseeable physical conditions (whereas it is under clause 4.12 of the Yellow Book), or (b) except in the limited circumstances we looked at earlier in clause 5.1, errors or omissions in the Employer’s Requirements (Section 4.5.1).

4.8.4 Suspension of the works: Clauses 8.8 to 8.10

Under clause 8.8 the Engineer or Employer may at any time instruct the Contractor to suspend progress of part or all of the works. During such suspension, the Contractor must protect the affected part or parts against any deterioration, loss or damage. The Engineer or Employer can notify the cause of the suspension but does not have to do so.

What is the Contractor’s position when the works are thus suspended?

If the cause is notified and is the responsibility of the Contractor, he will not be entitled to any extension of time or additional payment due to the suspension.

Otherwise, he will be entitled (subject to giving notice) to both an extension of time for delay and to payment of the cost he has incurred (but not profit) as a result of complying with the instruction to suspend and/or ­resuming work. The Engineer or Employer then proceeds to make a determination under clause 3.5.

By clause 8.10 the Contractor will also be entitled to payment for plant and/or materials that have not yet been delivered to site, if:

  • the work on plant or delivery of plant and/or materials has been suspended for more than 28 days; and
  • the Contractor has marked the plant and/or materials as the Employer’s property in accordance with the Employer’s instructions.

4.8.5 Prolonged suspension: Clause 8.11

The contracts try to protect the Contractor from a prolonged suspension. If the suspension lasts for more than 84 days, the Contractor can request permission to recommence. If permission is not given within 28 days, the Contractor can treat the suspension as an omission of the suspended works or give notice to terminate the Contract if the whole of the works is affected by the suspension.

4.9 Tests on completion

4.9.1 Contractor’s obligations: Clause 9.1

The Contractor must demonstrate to the Employer that the works have ­complied with the requirements of the contract, including the expected performance.

When the works have reached a stage when they are substantially complete and the Contractor believes they are ready to be tested, he notifies the Employer or the Engineer. The tests on completion required under the ­contract will typically be set out extensively in the contract.

Prior to commencing the tests on completion, the Contractor must:

  • provide ‘as-built’ documents and operation and maintenance manuals;
  • give at least 21 days’ notice to the Engineer or Employer of the date after which he will be ready to carry out the tests.

The tests on completion should be carried out within 14 days after the above date, on the day or days chosen by the Engineer or Employer.

In considering the results, account must be taken of any adverse effect if the Employer was using the works.

If the tests on completion are unduly delayed by the Employer, the Contractor is entitled in the first place to an extension of time and/or additional payment. If the delay continues for more than 14 days, the Employer will be deemed to have Taken Over the works (see Section 4.10) on the date when the tests should have been completed.

4.9.2 Delayed tests: Clause 9.2

If the tests on completion are unduly delayed by the Contractor, the Engineer or Employer can instruct the Contractor to carry out the tests within 21 days, on dates fixed by the Contractor.

If the Contractor fails to do so, the Employer may proceed with the tests at the risk and cost of the Contractor. In such a case, the tests will be deemed to have been carried out in the presence of the Contractor and the results will be deemed to be accurate.

4.9.3 Re-testing: Clauses 9.3 and 9.4

If the works fail to pass the tests, the Engineer or Employer or the Contractor may require the failed tests, and tests on completion of related work, to be repeated.

By clause 9.4, if the works fail to pass the repeated tests on completion, the Engineer or Employer can:

  • order further retesting;
  • issue a Taking-Over Certificate; or
  • reject the works if the failure deprives the Employer of substantially the whole of the benefit of the works.

In this latter case, the Employer can terminate the contract as a whole, or in respect of any major part which cannot be put to the intended use, and recover the amounts paid to the Contractor for the rejected part, together with financing costs and the cost of dismantling.

4.10 Employer’s taking over

4.10.1 Taking over of the works: Clause 10.1

When the works are in his opinion completed and ready to be taken over by the Employer, the Contractor applies by notice to the Engineer or Employer for a Taking-Over Certificate (TOC).9 If the works are divided into sections (see Section 4.10.2 below), the Contractor similarly applies for a TOC in respect of each section.

The issuing of the TOC is an important milestone in the project. It signifies the date at which the works are complete, subject to rectification of defects and completing outstanding items of work, and from which the Employer can go into commercial use and operation of the plant or facility.

Contractually, the date indicated in the TOC is of great importance as it is the date from which:

  • the Employer takes responsibility for care and maintenance of the works;
  • one half of the retention money (see Section 4.14) is paid to the Contractor;
  • the Employer’s entitlement to delay damages ends; and
  • the Defects Notification Period (see Section 4.11) begins.

The contract discourages delay on the part of the Engineer or Employer in issuing the TOC. Within 28 days after receipt of the Contractor’s notice applying for a TOC, he must either:

  • issue a TOC stating the date on which the works were completed in accordance with the contract, save for any minor outstanding works and defects; or
  • reject the application, giving reasons and specifying all the work required to be done by the Contractor before the issue of the TOC.

If the Engineer or Employer fails to respond within 28 days of receipt of the Contractor’s notice, and the works are substantially in accordance with the contract, then the TOC is to be deemed to have been issued on the last day of the 28-day period.

4.10.2 Taking over of part of the works: Clause 10.2

It is sometimes desirable for employers, particularly in highly complex types of construction with multiple uses or free-standing elements, to use and operate parts of the works before they have been completed as a whole.

If the works have been divided into sections, by appropriate drafting of the contract documents, this presents no difficulty so long as the part the Employer wishes to use falls within a section for which a TOC has been issued.

However, the two Books differ over whether an Employer who has not got the benefit of sectional completion but who wishes to use and operate part of the works before the TOC is issued may do so.

In the Silver Book (clause 10.2), unless the parties agree the Employer may not use or take over any parts of the works other than sections.

In the Yellow Book (and the Red) the Engineer can at the sole discretion of the Employer issue a TOC for any part of the works. However, the Employer is not to use any part (except as a temporary measure which is either agreed by the parties or specified in the contract) unless the Engineer has issued a TOC for that part.

In the event that the Employer does nevertheless use any part of the works before a TOC has been issued for that part, then:

  • the relevant part is deemed to have been taken over from the date on which it is used;
  • the Employer takes over responsibility for the care of that part; and
  • if requested by the Contractor, the Employer issues a TOC for that part.

Clause 10.2 then provides for the Contractor to be given the opportunity to carry out outstanding tests on completion, and to be compensated for any costs plus reasonable profit he incurs as a result of the unauthorised taking over and for a proportionate reduction in delay damages.

4.11 Defects liability

4.11.1 The Defects Notification Period: Clauses 11.1 to 11.3

The Defects Notification Period (or DNP) is the period following Taking Over when the Contractor is to rectify defective works and complete outstanding items of work notified to him during the period. The notification period is 12 months, unless stated otherwise, from the date of completion stated in the TOC for the works (or section).

The contracts’ intention is that at or soon after expiry of the DNP the works will be delivered to the Employer in the condition required by the contract, ‘fair wear and tear excepted’.10

By clause 11.2, the Contractor is required at his own cost to rectify or ­complete any defect or notified incomplete item of work attributable to:

  • the design of the works;
  • plant, materials or workmanship not in accordance with the contract;
  • improper operation or maintenance for which the Contractor is responsible;
  • failure of the Contractor to comply with any other obligation.

If the notified defect or incomplete work is attributable to any other cause then the Contractor is entitled to have the work involved in rectifying or completing the relevant item treated as a variation under clause 13 (see section 4.13).

4.11.2 Failure to remedy defects: Clause 11.4

If the Contractor fails to remedy any defect or damage to the works within a reasonable time, then the Engineer or Employer may by notice set a date by which the defect or damage is to be remedied. If the Contractor persists in failing to remedy the defect or damage, then the Employer has a number of options:

  • he can carry out the work himself or pay others to do it, claiming the cost of this from the Contractor; or
  • he can reduce the contract price appropriately; or
  • if the defect or damage is so extensive as to deprive the Employer of ­substantially the whole benefit of the works or any major part of it, then terminate the contract either as whole or in respect of the relevant part.

In this latter event, the Employer may recover (without prejudice to any rights he might have) all sums paid to the Contractor in respect of the works or the affected part plus financing cost and dismantling and related costs.

4.11.3 Extending the DNP: Clause 11.3

By clause 11.3 the Employer can seek to extend the Defects Notification Period if and to the extent that the works (or section), or a major item of plant, after taking over cannot be used for the purposes for which they were intended by reason of a defect or damage. However, unless this is varied by the Particular Conditions, the DNP cannot be extended by more than two years.

The expiry of the DNP triggers the Contractor’s entitlement to the balance of the retention monies, subject to a deduction in proportion to any outstanding rectification work (clause 14.9).

4.11.4 Further tests: Clause 11.6

If the work of rectifying any defects may have affected the performance of the works, the Engineer or Employer may require a repetition of any test required under the contract within 28 days after the remedying of the defect or damage. The cost of performing repeated tests is to be borne by the party liable for the cost of rectifying the defects.

4.11.5 The Performance Certificate: Clause 11.9

Another important milestone is the issue of the Performance Certificate. In both Books the Performance Certificate alone signifies acceptance of the works. The contracts encourage timely issue of the Certificate. It is to be issued by the Engineer or Employer within 28 days of the latest of:

  • the expiry of the DNP; or
  • as soon thereafter as the Contractor has supplied all the Contractor’s documents and completed and tested the works including remedying any defects.

If the certificate is not issued accordingly then it will be deemed to have been issued on the date 28 days after it should have been issued.

4.11.6 Unfulfilled obligations: Clause 11.10

Although the issue of the Performance Certificate signifies acceptance of the works, the parties each remain responsible for the fulfilment of any obligation remaining unperformed at the date of issue of the Certificate. These obligations include the Contractor’s clearance of the site under clause 11.11 and the various final accounting and payment steps that are to be undertaken pursuant to clause 14 (see Section 4.14).

4.12 Tests after completion

In the Yellow and Silver Books, provision is made in clause 12 for testing after completion; but this clause only applies if such tests are specifically stated in the contract. They tend to be provided for in projects where the complexity of the plant or facilty or the technology used make it important to provide for further testing after Taking Over. These tests often involve an extended trial operation.

The tests are to be carried out as soon as reasonably practicable after the works or section have been taken over by the Employer. The Contractor is entitled to 21 days’ notice of the date after which the tests after completion will be carried out. Unless otherwise agreed, the tests shall be carried out within 14 days after this date, on the day or days determined by the Employer or Engineer.

4.13 Variations and adjustments to the contract price

In any construction project, there will be need to change the initial requirements as construction proceeds. This could be for any number of reasons, including:

  • the Employer changing his mind about some requirement;
  • the Engineer or Employer needing to issue further information which involves changes to the initial requirements;
  • correcting an error in information issued to the Contractor.

The Engineer or Employer may instruct variations under the contract (but cannot vary the terms of the contract themselves, which would require the parties’ agreement).

4.13.1 Right to vary: Clause 13.1

The Engineer or Employer can make any variation that he considers necessary, covering any change to the works, except that no variation may comprise the omission of any work which is to be carried out by others.

The Contractor has a limited right to object to a variation. He may do so where, for example, he cannot readily obtain the goods necessary to carry it out, but the Engineer or Employer has the final say and can confirm an instruction to vary.

4.13.2 Variation procedure and value engineering: Clauses 13.2 and 13.3

Variations can be initiated at any time prior to issuing the Taking Over Certificate. This can be in any one of three ways:

  • an instruction to the Contractor to carry out or omit certain work;
  • a request to the Contractor to submit a proposal;
  • the Contractor submitting at any time on his own initiative a proposal which he thinks will be of advantage to the Employer, for example in accelerating completion or improving the efficiency of the plant or facility.

In the latter case, the proposal (volunteered by the Contractor) is called value engineering, signifying its (perceived) value or benefit to the Employer. The Contractor benefits if the proposal is accepted by, for example, saving cost he would otherwise have to expend in designing and installing additional plant or equipment.

Clause 13.3 sets out steps that need to be taken where the Employer requests a proposal from the Contractor prior to instructing a variation. These steps require the Contractor to respond promptly and to set out clearly why he cannot comply (if he is of the view that he cannot), or (if he feels he can) giving full details of the proposed work, programme impact and other matters.

The Employer then decides whether to instruct the variation, although the Contractor must proceed with the work pending a response. If a variation is instructed the Contractor will be entitled to additional payment, including profit, which the Engineer or Employer should assess under the clause 3.5 procedure for determinations.

4.13.3 Changes in legislation: Clause 13.7

The Books make specific provision for one type of change which could (and often does) have considerable practical consequences. This is changes in the laws and regulations affecting the works.

By clause 13.7 of both Books, the contract price is to be adjusted for any increase or decrease in cost arising from any change in the laws of the place where the works are carried out made after the Base Date (that is, 28 days prior to the latest date for submission of tender). Thus, any laws or regulations in existence at the date of the contract are at the Contractor ‘s risk; but if they change after the contract has been concluded then the Employer bears the risk if they increase the Contractor’s costs.

In the Yellow and Silver Books, if the Contractor thinks he will suffer additional cost and/or delay as a result of such changes then he must give notice under clause 20.1. The Engineer or Employer then agrees or makes a fair determination of the adjustment to be made to the contract price under clause 3.5, including reasonable profit, and any extension of time.

4.13.4 Cost fluctuations: Clause 13.8

The contracts provide for adjustment of the amounts payable to the Contractor to take account of rises or falls in the cost of labour, goods and other inputs to the works. This is, however, provided that the Appendix to Tender contains a completed ‘table of adjustment data’ (Yellow Book) or the Particular Conditions contain an appropriate adjustment formula (Silver Book).

4.14 Payment

In the Yellow and Silver Books the contract is, as we have seen, signed on the basis of a fixed-price lump sum, including all fees, taxes and duties required to be paid by the Contractor under the contract.

4.14.1 Interim payments: Clause 14.3

The Contractor is entitled to payments at intervals during the course of the works, provided he applies for them in accordance with clause 14.3.

He must submit a Statement to the Engineer or Employer after the end of the period of payment stated in the contract (or, if none is stated, at the end of each month).

This Statement must include an estimated contract value of the works and Contractor’s documents produced up to the end of the relevant month. It must give effectively an account of sums to be added or deducted between the parties and provide supporting documents necessary for the Engineer or Employer to verify the amounts claimed. It has also to be accompanied by the Contractor’s progress report (under clause 4.21) for the period to which the Statement relates.

No payment is to be made until the Employer has received the performance security.

Thereafter, in the Yellow Book, the basic procedure is that the Engineer, within 28 days of receiving the Statement and supporting documents, issues to the Employer an interim payment certificate stating the amount which the Engineer fairly determines to be due to the Contractor. Payment may be withheld for defective work or failure to perform obligations under the Contract, subject to notice to the Contractor.

In the Silver Book, again subject to receiving the performance security, the Employer is to give a notice to the Contractor within 28 days of receiving the Statement and supporting documents of items in the Statement with which he disagrees, with details. Again, the Employer can withhold sums in respect of defective work or any failure by the Contractor to perform his obligations, subject to notice.

4.14.2 Timing of interim payments: Clause 14.7

In the Yellow Book, the Employer is to pay the Contractor the amount ­certified in each interim payment certificate within 56 days of the Engineer receiving the Statement and supporting particulars. In the Silver Book, the Employer must pay the amount due in respect of the Statement within 56 days of receiving the Statement and supporting particulars.

The contracts treat the payment of the Contractor seriously. In the event of prolonged non-payment, they permit him to suspend the works or reduce his rate of working, and ultimately to terminate the contract, subject to 21 days’ notice (clauses 16.1 and 16.2: see Section 4.16 below).

4.14.3 Advance payment: Clause 14.2

Advance payments are interest-free loans to the Contractor to enable him better to mobilise and get the project works under way. They may be (and often are) made in instalments, or as a single payment.

In the two Books, the Employer must make an advance payment where at least the total amount of such a payment is specified in the contract; where a Statement under clause 14.3 is provided; and where the Contractor has furnished the performance security and an advance payment guarantee (in order to secure the payment).

The amount of the advance is then to be repaid by the Contractor through proportional deductions from interim payments (if Silver Book) or interim payment certificates (if Yellow). The advance must be fully repaid before the issue of the Taking Over Certificate, otherwise the whole of the balance outstanding upon issue of that Certificate shall immediately become due for repayment.

As the advance is repaid, the amount of the advance payment security should be reduced accordingly.

4.14.4 Retention money: Clauses 14.3 and 14.9

This is money retained by the Employer from sums otherwise due to the Contractor as an additional security for the Contractor’s performance.

Retention is effected by making a deduction in an interim payment certificate or from an interim payment of an amount calculated by applying the percentage of retention given in the Appendix to Tender (Yellow Book) or Particular Conditions (Silver) until the amount retained reaches the limit of retention money (if any) stated in the Appendix to Tender or Particular Conditions. Typically, 10% retention is provided for until reaching a limit expressed as 5% of the contract price.

By clause 14.9, one half of the retention monies is to be repaid following issue of the Taking Over Certificate with the balance payable following expiry of the Defects Notification Period.

4.14.5 Delayed payment and the right to financing charges: Clause 14.8

The contracts penalise the Employer for slow payment of sums due by ­entitling the Contractor to claim compounded financing charges until ­payment is made.11

Clause 14.8 in both Books provides for these charges to be at the annual rate of 3% above the discount rate of the central bank in the country of the currency of payment, unless the contract otherwise provides.

Note that the Contractor in entitled to this payment ‘without formal notice or certification, and without prejudice to any other right or remedy’ (clause 14.8).

This means the Contractor’s right to the charges does not depend upon his giving any notice or receiving any certificate; for example, he is thus able, and arguably ought, to apply for the charges as part of his interim payment application under clause 14.3.

It will be useful to develop this point a little.

By clause 14.3 (e) of the Silver Book and 14.3 (f) of the Yellow, the application Statement should include ‘any other additions or deductions which may have become due under the Contract or otherwise, including those under Clause 20 [Claims, Disputes and Arbitration]’. Accrued financing charges under clause 14.8 would appear to fall within this category, and so should be included in the Statement.

The effect of clause 14.8 is that the Contractor need not give any notice or receive any certificate in order to be entitled to apply for payment of the accrued financing charges under clause 14.3. However, if having applied for them the Employer does not pay in accordance with clause 14.6, then it would seem the Contractor has a claim under clause 20.1, and should therefore give his initial notice within the 28 days or face the time bar.

Thus, although the contractual entitlement to the financing charges arises irrespective of any notice or certificate, the Contractor’s right to claim those charges in the event of the Employer’s non-payment will depend upon his ­giving his clause 20.1 notice in time. A contractor facing non-payment of accrued charges for late payment should never confuse these two quite different points.

4.14.6 Financial steps after Taking Over: Clauses 14.10 to 14.13

After Taking Over there are three main steps the parties will need to take to conclude the financial aspects of their contract. These are:

  • the Contractor’s Statement at Completion (clause 14.10)
  • the Final Payment Application process and Discharge (14.11–14.12)
  • the Final Payment (14.13)

Contractor’s Statement at Completion

Within 84 days after receiving the Taking Over Certificate for the works, the Contractor must submit to the Engineer or Employer a Statement at Completion with supporting documents. These should show, in detail:

  • the value of all work done in accordance with the contract up to the date of completion stated in the Certificate;
  • any further sums which the Contractor considers due;
  • an estimate of other amounts which the Contractor considers will become due to him under the contract, with the estimated amounts shown separately.

In the Silver Book, the Employer is to notify the Contractor within 28 days of any items in the Statement with which he disagrees, with supporting details, and make payment within 56 days after receiving the Statement and supporting documents (in accordance with clause 14.7).

In the Yellow Book, following a similar timetable, the Contractor is entitled to a certificate from the Engineer within 28 days and payment within 56 days of the Statement and documents.

Final payment application process

Within 56 days after receiving the Performance Certificate, the Contractor must submit a draft final statement with supporting documents showing:

  • the value of all work done in accordance with the contract;
  • any further sums which the Contractor considers to be due to him under the contract or otherwise.

If the Engineer or Employer disagrees with or cannot verify any part of the draft final statement then the Contractor is to submit such further information as may reasonably be required, and shall make such changes in the draft as may be agreed. The Contractor then prepares and submits the final statement as agreed.

If there remains any disagreement following discussion then the Contractor is entitled to a certificate or payment in respect of the agreed items. The dispute as to the balance may be referred to a Dispute Adjudication Board.

The aim therefore is to arrive at an agreed final statement, with the matters which cannot be agreed hived off to the decision of a DAB.


When submitting the final statement the Contractor is to submit a written discharge stating that the total of the final statement represents full and final settlement of all moneys due to the Contractor under or in connection with the contract. The discharge may state (and it would probably be wise for the Contractor to make sure that it does) that the discharge takes effect only when the Contractor has received the performance security and payment of the outstanding balance of the total stated.

Final payment

In the Yellow Book, within 28 days after receipt of the Contractor’s final ­statement and written discharge, the Engineer is to issue the final payment certificate stating the amount that is finally due to the Contractor. This is after giving credit for all amounts previously paid and for all sums to which the Contractor is entitled under the contract and the balance(if any) due from the Employer to the Contractor or vice versa. The Employer must then make the final payment to the Contractor within 56 days after the date of his receipt of the Engineer’s final payment certificate.

In the Silver Book the final payment is to be made within 42 days of receipt of the final statement and written discharge.

4.14.7 Cessation of Employer’s liability: Clause 14.14

The Books provide that the Employer is not to be liable to the Contractor for anything under or in connection with the contract except to the extent that the Contractor has included an amount expressly for it:

  • in the final statement; and also
  • (except for matters arising after issue of the Taking over Certificate) in the Statement at Completion.12

4.15 Termination by the Employer

The Employer may terminate the contract either:

  • for the Contractor’s default, as set out in clause 15.2 of the Books; or
  • for the Employer’s own purposes or convenience.

As one might expect, the financial and other consequences of a termination differ widely depending on which applies.

4.15.1 Termination for Contractor default: Clause 15.2

We should first mention an important provision in clause 15.1 of both Books: the general right of the Employer or Engineer to issue a notice to the Contractor to make good and remedy any failure and carry out any obligation under the contract within a specified reasonable time. As we shall now see, Failure by the Contractor to comply with such a notice to correct is a ground of termination under clause 15.2.

Clause 15.2 of the Silver Book provides that the Employer can terminate the contract if the Contractor:

  • fails to provide the performance security as required by clause 4.2;
  • fails to comply with a notice to correct under clause 15.1;
  • abandons the works or otherwise plainly demonstrates an intention not to continue performance of his obligations under the contract;
  • without reasonable excuse fails to proceed with the works in accordance with clause 8;
  • subcontracts the whole of the works or assigns the contract without the required agreement;
  • becomes bankrupt or insolvent, goes into liquidation, or one or other listed event of insolvency occurs;
  • commits any one of a long list of corrupt acts or the Contractor’s personnel or agents commit such acts.

In the Yellow Book, a similar list of grounds applies but with the addition of the Contractor’s failure to comply, within 28 days of receiving it, with a notice under clause 7.5 to make good rejected plant, materials or workmanship or an instruction under clause 7.6 to carry out remedial works.

Where any of the grounds apply, the Employer can give 14 days’ notice to the Contractor of termination. Immediate notice can be given in the event of an act either of insolvency or of corruption (as specified in clause 15.2).

The Employer should take legal advice before giving notice of termination.

The consequences of issuing a notice when the ground relied on is not made out could be serious and it is not always possible for the Employer to withdraw a notice once given.

After expiry of the Employer’s notice the Contractor is to leave the site and deliver any required goods and the Contractor’s documents and other design documents to the Employer or Engineer. He should also seek immediately to assign any subcontracts as required in the notice and comply with any reasonable instructions to secure the works or avoid harm or damage to persons or property.

Following termination, the Employer may complete the works himself or arrange for others to do so; and he or his other contractors can use any of the Contractor’s goods and design material as needed.

4.15.2 Valuation for works executed at date of termination: Clause 15.3

As soon as practicable after the termination, the Engineer or Employer is to determine the value of the works at the date of termination and any other sums due to the Contractor for work executed.

4.15.3 Payments after termination: Clause 15.4

The Contractor is entitled to receive the value of the work executed in accordance with the contract at the date of termination, less the Employer’s losses and extra costs resulting from it.

The Employer is also entitled to withhold further payments until the cost of completing the works, of remedying defects and any damages for delay, together with any other expenses, have been assessed.

4.15.4 Termination for convenience: Clause 15.5

The Employer can terminate the contract at any time for his own convenience by giving notice to the Contractor.

The termination takes effect 28 days after the later of the dates on which the Contractor receives the notice or the Employer returns the Contractor’s performance security. The exception to the right to terminate for convenience is that the Employer cannot terminate the contract in order to execute the works himself or arrange for other contractors to do so.

The financial consequences of a termination for convenience are the same as for termination resulting from force majeure under clause 19.6. We will consider these shortly, in Section 4.19.

It is noteworthy that the effect of treating the consequences as the same means that, surprisingly perhaps, the Contractor is not entitled to loss of profit even though he finds the contract terminated through no fault of his but entirely for the Employer’s own purposes or convenience.

By clauses 15.5 and 16.2, following termination the Contractor is to cease all further work, unless instructed to carry out work for safety and protection purposes, is to hand over Contractor’s documents, plant, materials and other work for which he has received payment and is to remove all goods from site (except as necessary for safety) and leave the site.

4.16 Suspension and termination by the Contractor

4.16.1 Suspension: Clause 16.1

In the Silver Book, the Contractor may either suspend the works or reduce the rate of work if the Employer fails to:

  • provide evidence of his financial arrangements under clause 2.4; or
  • pay the Contractor within the times prescribed by clause 14.7.

The Contractor is to give not less than 21 days’ notice and is entitled to maintain the suspension or reduction in work rate until he has received the evidence or the payment outstanding.

The position is similar in the Yellow Book, except that in addition to a failure to pay the Contractor, the Engineer’s failure to certify an interim payment in accordance with clause 14.6 is a stated ground for suspension.

In both Books, the Contractor can claim costs (plus profit) and an extension of time if he incurs cost or suffers delay as a result of suspending the works or reducing his rate of work in accordance with clause 16.1.

4.16.2 Termination: Clause 16.2

In both Books, the Contractor may terminate the contract if:

  • the Employer fails to provide the required evidence of his financial arrangements;
  • he fails to pay the Contractor an amount due;
  • he substantially fails to perform his obligations under the contract;
  • without the Contractor’s prior agreement he assigns or transfers to a third party the contract or any benefit or interest in or under it;
  • a prolonged suspension affects the whole of the works as described in clause 8.11;
  • the Employer becomes bankrupt or one or another listed event of insolvency occurs.

The Yellow Book adds to the above the failure by the Engineer to issue the relevant interim payment certificate within 56 days after receiving the Contractor’s Statement and supporting documents.

For each of the above events, the Contractor must give 14 days’ notice to the Employer of termination, except that he can by notice terminate immediately in the event of prolonged suspension or insolvency.

As with termination by the Employer, the Contractor should always seek legal advice before giving notice.

4.16.3 Events after termination: Clause 16.3

Following termination, the Contractor ceases all further work, except as may be instructed for the safety of life, property and the works; hands over to the Employer any Contractor’s documents, plant, materials and other work for which he has received payment; removes from site all his equipment and facilities; and leaves the site.

4.16.4 Payment on termination: Clause 16.4

Following termination, the Employer must return the performance security and pay:

  • the sums payable to the Contractor for work performed for which a price is stated in the contract;
  • the cost of plant and materials ordered for the works which have been delivered to the Contractor or which he is liable to accept;
  • any other cost or liability reasonably incurred in expectation of completing the works;
  • the cost of removing temporary works and the Contractor’s equipment from the site and return of these items to the Contractor’s base as well as the cost of repatriating the Contractor’s staff and labour;
  • the amount of any loss of profit or other loss or damage suffered by the Contractor as a result of the termination.

4.17 Risk and responsibility

Clause 17 in both Books has the above heading although, as we have seen in this Part of the Handbook and the last, the contracts throughout assign ­differing degrees and types of risk to the parties and apportion their ­responsibilities.

What the contracts do in clause 17 is to set out certain specific topics and then to identify within each the risks and responsibilities which are to be assumed by Employer and Contractor and their extents.

4.17.1 Indemnities: Clause 17.1

This clause provides for one or other of the parties to ‘indemnify and hold harmless’ the other party against certain eventualities.

The obligation to ‘indemnify’ in this context means to be fully responsible for discharging a relevant liability which the other party has incurred to a third party, and covers payment of the indemnified party’s costs, legal fees and other loss resulting from the liability incurred.

For example, suppose that as the design-build contractor I poorly design a process plant for you, the employer. As a result of that poor design, a river supplying water to a village downstream of the plant becomes polluted and causes injury to others. Then, if you face claims from the injured villagers as the developer of the site, I may have to indemnify you, and ‘hold you harmless’ against their various claims, including paying any legal and other expenses you might incur in responding to their claims.

In summary, under clause 17.1 the Contractor must indemnify the Employer against all claims, damages, losses and expenses in respect of injury, disease or death and damage to or loss of property arising out of his design, execution and completion of the works unless the injury or damage is due to the negligence, wilful act or breach of contract of the Employer or the Employer’s personnel or agents.

For his part, the Employer must (in summary) indemnify the Contractor with respect to injury, disease or death attributable to the negligence, wilful act or breach of contract of the Employer, or the Employer’s personnel or agents and in respect of certain matters excluded from insurance cover.

4.17.2 Contractor’s care of the works: Clause 17.2

The Contractor must take full responsibility for the care of the works and goods from the contract commencement date until the Taking Over Certificate is issued (or deemed to be issued). If any loss or damage occurs to the works during this period, other than from one of the causes listed as an Employer’s Risk in clause 17.3 (see below), the Contractor must rectify the loss or damage at his own risk and cost.

The Contractor will also be liable for any loss or damage caused by his actions after the issue of the Taking Over Certificate or where the cause of the loss or damage was some earlier event for which he is responsible.

4.17.3 Specific Employer’s risks: Clauses 17.3 and 17.4

In the Yellow Book, the Employer’s risks listed in clause 17.3 are (in summary) as follows: