In construction sector, infrastructure has to be designed in detail before it is built. If the detailed designs are already prepared by an independent engineering team and the contractor only has to follow the designs and carry out the works, the form of contract follows FIDIC Red Book (template for construction contract). If the contractor should also come up with the detailed designs and overall concept how to build the infrastructure by themselves, following basic performance requirements, FIDIC Yellow Book form of contract is often used (template for plant and design-build contract).
At the beginning of our discussions about project implementation, our clients for whom we help secure external financing often prefer using Yellow FIDIC even for simpler works like utility networks, roads or railways. Their reasons seem sound, at least at the first glance:
- Lack of internal capacity or time to handle preparation of detailed designs separately
- Bypassing the financiers’ requirement to finance project preparation from own funds, to show commitment to the project
- Lack of understanding of the market and current technology to be able to judge the best available solution
- Saving money by pooling both design and build activities into one contract, assuming that bidders are more willing to squeeze unit price if contracts are larger
- Concentrating liability with one contractor rather than arguing who is to blame between the designer and the works contractor when things go wrong
Each one of these reasons however has been disproved by experience, more often than not:
- Procurement of Yellow FIDIC contracts is much more demanding on technical capacity and experience of evaluators since the difference between proposed solutions can be major and common baseline for evaluation is difficult to find (making also unsuccessful tenderers more likely to think they have been treated unfairly, resulting in more complaints); separate tender for designs and a tender for works under Red FIDIC Book are quicker and much more straightforward
- Prices of bids under Yellow FIDIC can fluctuate a lot since the solutions can be vastly different; in some cases even the cheapest offer can exceed the available external financing, requiring to spend more own funds than the preparation of designs would have cost in the first place (there is certainly also a chance for major savings but a far smaller one than the likelihood of a cost overrun)
- Solutions proposed by construction and turnkey companies may not be best available on the market but rather tailored to pass the minimum tender requirements and then allow largest room for margin and lowest risk to the contractor; independent and experienced engineers without a business stake in the construction can better advise on exactly what routes, materials, quantities and processes should be used for durable and cost-efficient infrastructure
- Instead of saving money, design-build bids tend to end up pricier than a design contract and a separate works-only contract together – serious bidders price in management fee over subcontracted engineers, time and risk in securing permits and other paperwork, expected delays and effort in arguing with the client over the final solution, and additional contingencies in material quantities
- Uncertainty over who is liable persists even in Yellow FIDIC contracts – the contractor can blame incomplete requirements, deficient initial surveys and information communicated as a basis for pricing, additional requirements from the client during approval of detailed designs, etc.; moreover, with contractor already selected through a lengthy and complex procurement process, dissatisfaction in the design stage makes it much more costly and politically difficult for the client to terminate the contract
Yellow FIDIC based contracts are still better for addressing complex infrastructure challenges where neither the problem nor the solution are fully clear, the client staff is experienced, political climate favorable to the client, and budget constraints are secondary to solving the problem. Otherwise, for straightforward civil works and in situations where budget is tight and political climate unstable, investing into independent engineers to prepare complete design documentation and then tendering a contractor for works only is the safer option.
Director Infrastructure and Development Financing