Standard Forms Of Contract

Standard forms are prevalent throughout the industry as they offer several advantages; mainly
involving saving time and money. To draft a contract from scratch requires an extensive amount
of time and legal knowledge, having a firm of solicitors spend countless hours drafting a
construct contract will be very expensive. Not to mention the time that all of the project team and
tenderers will need to spend reading and understanding the contract as well as seeking legal
advice. By using a standard contract this allows the team to focus on the project itself rather than
the terms and conditions, allowing management of risk more effectively and ensuring that all of
the required items are included. There is also the benefit of decades of court rulings, legislation
and experience built into existing contracts, most of which will not exist when drafting a bespoke
form.

FIDIC vs NEC3
FIDIC is an internationally recognised traditional form of contract, it focuses on risk, liabilities
and responsibilities rather than management processes. FIDIC is popular across the world and is
especially prevalent in the Middle East. There is a great deal to be said for this approach, given
that FIDIC has been used successfully for over 50 years. As with any contract the allocation of
risk depends on the contract option chosen and this depends on the designer and level of design.
FIDIC has four main options which are classified by colour; Red is a re-measureable contract;
but often amended to be a fixed price lump sum, yellow the design and build option, green is
short form and FIDIC also offers a turnkey contract option, known as the silver book, which is
something NEC3 does not, (but something that will be remedied in NEC4) This is ideal if
handing a highly complex project over to a client which has several interfaces being carried out
by different companies and require expert install and commissioning.

The NEC3 is a modern contract which takes a much more collaborative approach to
construction, project management and risk. It focuses on plain English and aims to alleviate the
use of legal jargon and use words which have a more natural meaning. It also avoids ambiguous
terms such as ‘fair’ and ‘reasonable’ in favour of more measurable and scientific methods. NEC
has its own unique terminology though; a variation under other contracts, is called a
Compensation Event under NEC. The reason for the name is change is because NEC varies in
the traditional approach to managing change in that effect of both time and cost are managed
together so there are no claims for extensions of time or the like, left at the end of the project;
they all have to be dealt with in a certain timescale. There are also only 19 events stated under
clause 60.1 which can give rise to a Compensation Event – under FIDIC there are any number of
cause which could give rise to a claim.

The NEC's biggest emphasis is on Time and Programme. A programme has to be accepted at the
start of the project, and until a programme is accepted, 25% of the work carried out to date can
be deducted. The accepted programme is used to assess all changes and the programme is
updated as the project progresses. A criticism of the NEC has been that it places too much
emphasis on detailed programming requirements, which can be very difficult to comply with,
however, a programme can be accepted at any time by the Project Manager and essentially it is
up to his discretion, as he uses this as a central document in all contract administration.
A big advantage of the NEC versus other contracts is the use of the Early Warning Notification
(EWN) system; the Project Manager is notified regarding any event which could affect time,
cost, or quality. It is a very proactive method of working. I have worked on amended FIDIC
contracts which have tried to implement the EWN system in an attempt to more proactively
manage change, I am seeing this more and more on none NEC contracts now.

As with FIDIC, the NEC has several options which are alphabetical. A quick overview of the
options are as follows:

Option A Priced activity schedule – activities cannot be paid for under the contract until they are
100% complete – this is very advantageous to clients and takes a great deal of financial risk off
them.

Option B - Bills of Quantities - this is ideal when the likelihood of change to the quantities is
relatively high. As all the rates are already priced and can be used going forward, however there
is no incentive for the Contractor to keep costs down.

Option C & D - Priced Activity Schedule and Bills of Quantities respectively both with Target
Cost - Payment is made on the basis of actual costs with an incentive mechanism for the
Contractor to minimise costs. Savings and over-runs are shared between the parties. The sharing
of risk in this option reduces the occurrence of disputes.

Option E + F – Both options are cost reimbursable or cost plus contract payment is made on the
basis of actual costs plus a percentage mark up, however option F is the management contracting
option.

As mentioned above both suites of contract have their merit, FIDIC lends itself much more to
large international project that need a turnkey solution and price certainty for the end user.

Since the existing ME market is most familiar with FIDIC it is hardly surprising that this is the
most common contract used. However NEC could offer a huge range of benefits too and given
that it is written in plain English, could easily be translated into Arabic for use across the GCC.