The Renaissance of Fairness in Ground Risk Allocation – The New ITA/FIDIC Emerald Book

Abstract

Unfair contracting practices are a major contributor to the high cost, failed schedules, bankrupted Contractors and other abominations afflicting major subsurface projects in many countries. The new Emerald Book is an ITA/FIDIC joint initiative to create a fairer contractual framework for the construction of underground works and heralds an international recognition of the benefits of carefully apportioning ground conditions risk Inappropriate risk allocation contributes to the cost, schedule uncertainty, business risk and complexity of underground infrastructure delivery. In recent decades ill-informed allied professionals have wrongly guided Employers to specify irresponsible contractual terms that entirely place ground condition risk (sovereign risk) with the Contractors and then invite the market to enter a fierce commercial battle in which the lowest bidding Contractor assumes the sovereign‟s ground risk. Financiers are advantaged by such risk apportionment but rarely is this motivation for such practices acknowledged or discussed. Under the new Emerald Book, FIDIC arrangements commercial tension is directed to the price for construction and associated works for the execution of the excavation and lining works including design and construction methods and the reaction of the ground to such methods. The Geotechnical Baseline Report sets out the allocation of the risk between the parties for such subsurface physical conditions. Under the new FIDIC/ITA Emerald Book arrangements the Contractor is expected to perform in accordance with its bid and is only compensated for the conditions encountered. For the Employer this means that they can rely upon the Contractor to perform as warranted under the Contract – demanding the competence, skill and expertise required to undertake the anticipated task. For the Contractor it means that where the encountered conditions and reaction of the ground is not as warranted by the Employer, there is a mechanism to adjust the terms of the Contract to compensate for the consequences of unanticipated conditions. The attraction of this new FIDIC/ITA Emerald Book Contract framework is that for the most part it draws upon the well-known normal FIDIC forms of contracting providing reassurance to Employers, Contractors and Banks that the allocation of risks, mechanisms for dispute and conduct of Contract management are sound, reliable and internationally understood. Innovative features of the new Emerald Book include a contractual mechanism to extend or shorten the time for completion, adjustments to remuneration and a focus on the expertise of the Contractor. Importantly these innovations are linked to Geotechnical Baseline Reports and therefore the rock. In this way rock beats paper because remuneration is based upon fact and not maneuvering for commercial variations and other elaborate desperate mechanisms.