Understanding Clauses in FIDIC Conditions of Contract for EPC/ Turnkey Projects First Edition 1999

Clause No. 14
Sub-Clause No. 14.1

Contract Price and Payment

The Contract Price

Summary Contract Price is an agreed amount or lump sum amount for the design, execution and completion of the works, remedying of defects and adjustments. The Contract Price is inclusive of all taxes, duties and fees and adjusted as per changes in legislation. The Contract Price is linked with variation, legislation, access to site, delay damages, provisional sum, costs, unforeseeable difficulties, employers risk etc.

Content of the FIDIC Clause in Brief Clause 1 General Provisions, Sub-Clause 1.1 Definitions, Sub-Clause 1.1.4 Money and Payments Sub-Clause 1.1.4.1 Contract Price Means the agreed amount stated in the Contract Agreement for the design, execution and completion of the Works and the remedying of any defects, and includes adjustments (if any) in accordance with the Contract. Clause 14 Contract Price and Payment, Sub-Clause 14.1 The Contract Price Unless otherwise stated in the Particular Conditions: (a) payment for the Works shall be made on the basis of the lump sum Contract Price, subject to adjustments in accordance with the Contract; and (b) the Contractor shall pay all taxes, duties and fees required to be paid by him under the Contract, and the Contract Price shall not be adjusted for any of these costs, except as stated in Sub-Clause 13.7 [Adjustments for Changes in Legislation]. Clause 4 The Contractor, Sub-Clause 4.11 Sufficiency of the Contract Price The Contractor shall be deemed to have satisfied himself as to the correctness and sufficiency of the Contract Price. Unless otherwise stated in the Contract, the Contract Price 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. Clause 4 The Contractor, Sub-Clause 4.12 Unforeseeable Difficulties Except as otherwise stated in the Contract: (a) the Contractor shall be deemed to have obtained all necessary information as to risks, contingencies and other circumstances which may influence or affect the Works; (b) by signing the Contract, the Contractor accepts total responsibility for having foreseen all difficulties and costs of successfully completing the Works; and (c) the Contract Price shall not be adjusted to take account of any unforeseen difficulties or costs. Clause 13 Variations and Adjustments, Sub-Clause 13.3 Variation Procedure Upon instructing or approving a Variation, the Employer shall proceed in accordance with Sub-Clause 3.5 [Determinations] to agree or determine adjustments to the Contract Price and the Schedule of Payments. These adjustments shall include reasonable profit, and shall take account of the Contractor's submissions under Sub-Clause 13.2 [Value Engineering] if applicable. Clause 13 Variations and Adjustments, Sub-Clause 13.5 Provisional Sum Each Provisional Sum shall only be used, in whole or in part, in accordance with the Employer's instructions, and the Contract Price shall be adjusted accordingly. The total sum paid to the Contractor shall include only such amounts, for the work, supplies or services to which the Provisional Sum relates, as the Employer shall have instructed. Clause 13 Variations and Adjustments, Sub-Clause 13.7 Adjustments for Changes in Legislation The Contract Price shall be adjusted to take account of any increase or decrease in Cost resulting from a change in the Laws of the Country (including the introduction of new Laws and the repeal or modification of existing Laws) or in the
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Understanding Clauses in FIDIC Conditions of Contract for EPC/ Turnkey Projects First Edition 1999

judicial or official governmental interpretation of such Laws, made after the Base Date, which affect the Contractor in the performance of obligations under the Contract. Clause 13 Variations and Adjustments, Sub-Clause 13.8 Adjustments for Changes in Costs If the Contract Price is to be adjusted for rises or falls in the cost of labour, Goods and other inputs to the Works, the adjustments shall be calculated in accordance with the provisions in the Particular Conditions. Guidance for the Contract Price When writing the particular conditions, consideration should be given to the amount and timing of payment(s) to the Contractor. Normally, EPC/ turnkey contracts are based on a lump sum price. The contractor thus takes the risk of changes in cost arising from his design. In order to value variations, tenders may be required to be accompanied by detailed price breakdowns, including quantities, unit rates and other pricing information. This information can also be useful for the assessment of interim payments. However, the information may not have been priced competitively. When the tender documents are being prepared, the employer must therefore decide whether he will accept being bound by the tenderer's breakdowns. If not, he should have ensured that his representative has the necessary expertise to value any variations which may be required. Additional subclauses may be required to cover any exceptions to the options set out in subclause 14.1, and any other matters relating to payment. If subclause 14.1(b) is not to apply, additional subclause(s) should be added. Example subclause on exemption from duties All goods imported by the contractor into the country shall be exempt from customs and other import duties, if the employer's prior written approval is obtained for import. The employer shall endorse the necessary exemption documents prepared by the contractor for presentation in order to clear the goods through customs, and shall also provide the following exemption documents: (Describe the necessary documents, which the contractor will be unable to prepare) If exemption is not then granted, the customs duties payable and paid shall be reimbursed by the employer. All imported goods, which are not incorporated in or expended in connection with the works, shall be exported on completion of the contract. If not exported, the goods will be assessed for duties as applicable to the goods involved in accordance with the laws of the country. However, exemption may not available for: (a) goods which are similar to those locally produced, unless they are not available in sufficient quantities or are of a different standard to that which is necessary for the works; and (b) any element of duty or tax inherent in the price of goods or services procured in the country, which shall be deemed to be included in the contract price. Port dues, quay dues and, except as set out above, any element of tax or duty inherent in the price of goods or services shall be deemed to be included in the contract price. Example sub-clause on exemption from taxes Expatriate (foreign) personnel shall not be liable for income tax levied in the country on earnings paid in any foreign currency, or for income tax levied on subsistence, rentals and similar services directly furnished by the contractor to contractor's personnel, or for allowances in lieu. If any contractor's personnel have part of their earnings paid in the country in a foreign currency, they may export (after the conclusion of their term of service on the works) any balance remaining of their earnings paid in foreign currencies. The employer shall seek exemption for the purposes of this sub-clause. If it is not granted, the relevant taxes paid shall be reimbursed by the employer. Pg. 2/6 Compiled by Divyanshu Dayal. dayal1005@gmail.com Portfolio-FIDIC

Understanding Clauses in FIDIC Conditions of Contract for EPC/ Turnkey Projects First Edition 1999

Contract Price In Relation to the Type of Contract. One of the most critical issues in apportioning risks is the way that prices are calculated and fixed in the contract. There are usually three ways to define the contract price which is to be paid to the contractor for carrying out the works: Lump sum: The contractor agrees a fixed price (a lump sum price) for the execution of certain specified construction works. Payment is received either when the contractor has substantially completed the works or by installments according to a payment schedule. The lump sum price is usually agreed at the time of contract formulation when the work starts. The contractor bears the risk of any additional quantities compared with its estimation. Cost Contracts: The contractor is paid for the works that are expended together with an additional payment called a fee to cover profit and overheads of the contractor. The contracts are not based on pre-agreed prices. Re-measurement Contracts: Combination of unit prices and measured quantities. The parties agree the rates of remuneration per unit but not the price of the work as a whole. The whole works become measured by a quantity surveyor or similar. The rate in the bill will be multiplied by the actual quantity of each item fixed. For example the Turkish Law on public procurement contracts reads as follows: Unit price contracts shall be made over the total price calculated by multiplying the quantity for each work of item specified in the schedule prepared by the contracting entity, with unit prices proposed by the tenderer for each corresponding work of item, on the basis of, preliminary or final projects and site lists thereof along with unit price definitions in procurement of works whereas on the basis of detailed specifications of the work involved in procurement of goods or services. Comments on Contract Price based on Type of Contract as per FIDIC Depending on the FIDIC form of Contract used, the price which is to be paid by the employer (the contract price) is not yet fixed at the moment of contract execution. At this stage all that is known and agreed is that the employer shall pay the contract price (subclause 14.1), which is either composed as per the following: Red Book (The Construction Contract): The re-measured accepted contract amount and any adjustments made under the rules of the contract. Accepted contract amount is nothing more than a price estimate. All of the works, whether originally agreed or subsequently adjusted in accordance with the contract, will be measured and evaluated according to subclause 12.3. Thus the contractor does not take any risk of the design. The design in fact is provided by the employer. Yellow Book (The Plant and Design Build Contract): Composed by the lump sum accepted contract amount as adjusted in accordance with the contract. Silver Book (Engineering Procurement and Construction/ Turnkey Contracts): The parties agree to a lump sum contract price. However the adjustments are not generally excluded in totality. The lump sum contract price under a Silver Book Contract covers much more risks than the contract price under a Yellow Book Contract. The contractor under a Silver Book Contract takes the risk of changes in cost arising from his design and he shall be deemed to have obtained all necessary information as to risk, contingencies and other circumstances which may influence or affect the works. Thus all FIDIC Books do not provide for an overall lump sum price or fixed lump sum price, which is not intended to be adjusted in any way either by variation or re-measurement. All FIDIC Books reflect the idea that the contractor should not be bound to carry out any additional or different work without any additional payment. Comments on Entitlement to Additional Payment as per FIDIC The entitlement to any additional payment depends mainly on the risk allocation within the contract. Risks may result in cost and the entitlement to additional profit.

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Understanding Clauses in FIDIC Conditions of Contract for EPC/ Turnkey Projects First Edition 1999

However, it is an erroneous assumption that an extension of time is automatically linked to additional payment. In any case cost must be distinguished from profit. Both elements are usually defined by the contract. These definitions may have a significant impact on the performance of the contract when it comes to valuation of claims. Cost, costs, losses and claims and the amount to be added to or deducted from the contract price or the valuation of new prices within the conditions of contract, other than prices that can be valued from the schedule of prices or based on the schedule of prices shall be valued in accordance with the schedule of cost components. In any case FIDIC Books provide for a considerable number of cost claims, such as: (Under FIDIC Red Book 1999 and Silver Book 1999 editions) A contractor prevented from access to or possession of the site will have 28 days to provide written notice after becoming aware of the event (FIDIC Red Book). Same is applicable in FIDIC Silver Book as per subclause 2.1. A contractor encountering unforeseeable physical conditions will have 28 days to provide written notice after becoming aware of the possibility of additional cost. (FIDIC Red Book, subclauses 4.12, 20.1) However, a contractor shall not be eligible to adjust the contract price on account of unforeseeable difficulties. (FIDIC Silver Book subclause 4.12). A contractor encountering fossils will have 28 days to provide written notice after becoming aware of the possibility of additional cost (FIDIC Red Book, subclauses 4.24, 20.1). Same is applicable in Silver Book as per subclause 4.24. A contractor incurring cost from complying with instructions concerning any tests will have 28 days to provide written notice after becoming aware of the instruction (FIDIC Red Book, subclauses 7.4, 20.1). Same is applicable in Silver Book as per subclause 7.4. A contractor incurring cost as a result of changes in the laws will have 28 days to provide written notice after becoming aware of the change. Same is applicable in Silver Book as per subclause 13.7. A contractor incurring cost from rectifying loss or damage as a result of an employers risk will have 28 days to provide written notice (FIDIC Red Book, subclauses 17.4, 20.1) after becoming aware of the cost. A contractor encountering a force majeure event will have 28 days to provide written notice after becoming aware of the cost (FIDIC Red Book, sub-clauses 19.4, 20.1). There are similar such clauses which entitles contractor under contractors claim, for addition of payment of costs to the contract price. Cost Entitlement of the Contractor (Excluding or Including Profit) According to FIDIC conditions the contractor is entitled to additional costs including overhead but excluding profit for the following expenses: Encountering unforeseeable physical obstructions or conditions. Encountering fossils or other specified objects of archaeological or geological interest. Suspensions ordered by the engineer for reasons other than contractors default or because needed for proper execution of works or by reason of climatic conditions, termination upon outbreak of war. In other cases the Contractor is entitled to additional costs plus reasonable profit as mentioned hereunder: Resulting from tests required by engineer but not provided for in the contract. Uncovering work where no defect exists. Termination or suspension upon employers default. Employers failure to give contractor possession. Damage to works or contractors equipment. Expenses arising from specified employers risks. Rise in costs of labour or materials and subsequent legislation. Determination of Cost related Risks Cost related risks can be defined as those which can result in changes to the contractors project cost, hence having an influence on his profit margin.
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Understanding Clauses in FIDIC Conditions of Contract for EPC/ Turnkey Projects First Edition 1999

Such risks includes for example: Variation orders. Cost escalation (related to wages, materials, etc.) Changes in laws and regulations. Tax rate increases. Insurance premium increases. Exchange rate fluctuations. Embargos. Shipping and transportation risks, etc. Physical Risks Events or occurrences which prevent or delay physical completion of the works such as: Access to the site issues. Site conditions. Earthquakes. Exceptional adverse climatic conditions, etc. Ability Risks Events or occurrences that prevent or delay completion of the works other than physical obstructions, such as: Defective work. Inadequate labour. Strikes and lock-outs. War. Riots. Shortcomings as to materials and equipment, etc.

FIDIC contracts define the term Cost as follows (sub-clause. 1.1.4.2): Cost means all expenditure reasonably incurred (or to be incurred) by the contractor, whether on or off the site, including overhead and similar charges, but does not include profit. Changes and occurring events may cause direct and indirect financial consequences. The evaluation of such consequences is subject to a determination by the engineer (subclause 3.5 Determinations) who shall make a fair determination with regard to all relevant circumstances and in accordance with the contract. Thus it is the engineer who shall consider the meaning of cost. Definitions of the term cost are quite difficult to find. Economically Cost can be classified as direct costs (raw materials and direct labour) and indirect costs (or overheads). The definition in subclause 1.1.4.3 specifically excludes profit but includes overheads and similar charges. Usually cost means all expenditure properly incurred by the contractor, whether on or off the site, including overhead and similar charges. Cost should therefore be understood as reasonable market rates for services provided. In addition the term cost should be read together with subclause 17.6 Limitation of Liability according to which neither party shall be liable for loss of profit, loss of any contract or for any other indirect and consequential loss or damage. Profit Entitlement of the Contractor The definition of Profit or Reasonable Profit is certainly open to interpretation. Profit is either economic profit or accounting profit. Economic profit is the residual return after all costs have been met, not including return to land or capital. Accounting net profit means the profit [before or after tax] the residual after deducting all money costs. Pg. 5/6 Compiled by Divyanshu Dayal. dayal1005@gmail.com Portfolio-FIDIC

Understanding Clauses in FIDIC Conditions of Contract for EPC/ Turnkey Projects First Edition 1999

Profit margin mark-ups are not necessarily those included in the original tender. It is presumed that reasonable profit should be foreseeable and capable of justification. Clear guidance as to this issue is difficult. The calculation of profit margin mark-ups is often subject to applicable law and court practice. The FIDIC example states that reasonable profit would be 1/20 or 5% of the cost. However, which heads of claims are covered by the term profit is subject to further discussion.

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