FIDIC: When can the contractor receive a fee higher than stated in the contract?
In complicated construction projects, the amount the contracting authority must ultimately pay the contractor in the final settlement is often higher than the originally agreed fee. The final amount will largely depend on the allocation of risks between the parties to the contract.
Because FIDIC contract terms are intended for use mainly on complicated construction projects, a distinction is drawn from the start between the value of the contract originally agreed by the parties and the final amount of the fee.
In the FIDIC Red Book and Yellow Book, there are two items in the definitions concerning the contractor’s fee: the “Accepted Contract Amount” and the “Contract Price.”
According to clause 1.1.4.1, “‘Accepted Contract Amount’ means the amount accepted in the Letter of Acceptance for the execution and completion of the Works and the remedying of any defects.” Under clause 1.1.1.3, “‘Letter of Acceptance’ means the letter of formal acceptance, signed by the Employer…. If there Is no such letter of acceptance, the expression ‘Letter of Acceptance’ means the Contract Agreement….” Under Polish conditions no letter of acceptance is prepared, and the definition of letter of acceptance is often deleted as irrelevant, or it is indicated—as in the original wording of the FIDIC terms—that any reference to “Letter of Acceptance” should be replaced by the term “Contract Agreement.”
The Accepted Contract Amount is typically just the price offered by the contractor in its bid in the procurement proceeding. But the Contract Price, as defined in FIDIC clause 14.1, is subject to adjustments in accordance with the contract. The Contract Price is the final amount the contracting authority will have to pay the contractor after resolving any claims raised during performance in accordance with the procedure provided for in the contract. It should be borne in mind that under FIDIC terms, a “claim” does not necessarily refer to a dispute; it is rather understood as a right arising under the contract and raised with the other party.
Lump-sum or quantity-based settlements
It should be stressed that the contractor’s fee may change regardless of whether the contract provides for a quantity-based or lump-sum method of calculating the fee. This element of the parties’ agreement refers only to one of many risks associated with a construction contract: the risk of an unanticipated increase in the amount of the work or the cost of materials.
As indicated in the case law, if the parties agree to establish the contractor’s fee on a lump-sum basis, the contractor will not have the right to increase the amount it is owed regardless of whether it was possible to predict the amount or costs of the work at the time the contract was signed. The contractor then bears the risk of a possible loss connected with an unexpected increase in the amount of the work (and thus failure to consider certain actions or materials) or the costs of the work (including price increases and other costs elements affecting the amount of the fee).
However, the essence of a quantity-based fee is that the contractor’s fee is calculated on the basis of a schedule of planned works and the anticipated costs (known as a Bill of Quantities), as well as unit prices and rates. The amount of the final fee is thus not fixed at the time the contract is signed, but only determined through an evaluation after completion of the work. In the case of the quantity-based method, the estimated fee at the time of contract signing is always subject to verification after completion, and will reflect changes in the amount of work actually performed as against the estimated amount of work.
Procedure for pursuing additional payments
Regardless of the method for establishing the fee, which covers only the risk of an increase in the scope of the work or the quantities and prices of materials, the FIDIC contract conditions provide for a number of formal grounds for awarding the contractor an additional fee.
The procedure for pursuing additional payments beyond the Accepted Contract Amount (and for obtaining an extension of time for completion) is set forth in FIDIC clause 20.1, which provides, “If the Contractor considers himself to be entitled to any extension of the Time for Completion and/or any additional payment, under any Clause of these Conditions or otherwise in connection with the Contract, the Contractor shall give notice to the Engineer, describing the event or circumstance giving rise to the claim.”
When pursuing a cost claim, it thus must be demonstrated that the contract provides grounds for asserting the claim. In the FIDIC contract conditions, certain clauses give the contractor the right to demand additional payment. In some situations the contractor is entitled only to the cost, but in other situations the contractor may demand both the cost and a “reasonable profit.”
Under clause 1.1.4.3, “‘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.” As the FIDIC terms do not define the notion of “reasonable profit,” the amount must be determined under the specific circumstances.
It should also be accepted that the list of clauses under which the FIDIC terms entitle the contractor to receive additional payment is not fixed. This means that the contractor may base its claim for additional payment on other circumstances not expressly provided for in the contract, if they are nonetheless related to the contract.
As the foreign literature indicates, if the contractor receives an extension of time for completion, it may also be entitled to additional payment connected with the extended time on the building site, even though there is no direct connection between clause 8.4 (Extension of Time for Completion) and additional payments (J.P. Frics, “Claims Under the New FIDIC Conditions of Contract”). The range of the costs the contractor may seek will then depend in each case on the specifics of the project and the circumstances surrounding the cost claim (A-V Jaeger & G-S Hök, FIDIC: A Guide for Practitioners, p. 367).
Allocation of risks in FIDIC, and modifications
The FIDIC contract terms display a balanced division of risks. Essentially each party is assigned responsibility for circumstances over which it is assumed to have the greatest control. The division of risks provided in the general conditions is based on long-term observation of construction practice. In each of the FIDIC “books,” the division is adjusted to suit the scope of the obligations assigned to each party in that type of contract.
But the standard allocation of risks will not always be appropriate for the specific project. To establish an optimal allocation of risks, it is always necessary to analyse in detail the threats that may arise in the project. In other words, reliance on the available standards does not take the place of due diligence by the contracting authority in preparing the procurement procedure and contract documentation, including establishment of the priorities for the project such as speed, time, or the like (L. Klee & A. Wybranowski, “Approach to Contracts and Disputes in Transport Projects in Post-Communist and Developed Countries,” Biuletyn Konsultant No. 34–35).
It is not just desirable but essential to make appropriate modifications to the FIDIC general conditions reflecting the specifics of the project. In Polish contract practice, however, often the changes to the FIDIC general conditions are not designed to adjust the general conditions to suit the characteristics of the specific project. Instead, the conditions as formulated by contracting authorities often shift responsibility to the contractor for events over which the contractor has no influence.
In that situation, the logical consequence should be to raise the contractor’s fee. The contractor can protect itself only by factoring all risks into the price it offers. But contractors who are eager for their offer to be selected often do not protect themselves in this way and accordingly propose an unrealistic price. Ultimately this hurts the interests of the contracting authority as well, if it receives delivery of a structure of unsatisfactory quality or late, or the contractor is unable to deliver at all.
Shifting cost risks to the contractor
The clauses of the FIDIC Yellow Book and Red Book concerning claims for damages generally have the same construction. They assume that if there is delay for reasons not attributable to the contractor, the contractor has a right to an extension of time for completion (point a) and to cover the cost or the cost plus a reasonable profit (point b).
In contracts prepared by Polish contracting authorities, point b is often deleted from clauses concerning the contractor’s rights. This significantly alters the division of risks included in the FIDIC general conditions.
According to the case law from Polish courts and the National Appeal Chamber, the effect of this deletion is assumption by the contractor of the cost risk of that occurrence. The contractor’s claim for additional payment could then be upheld only if the contracting authority caused the loss by its intentional fault, under the general rule of Civil Code Art. 473.
Therefore, including in the particular conditions a statement that “Point b shall not apply,” when the other general conditions are not modified, has deeper significance than simply that the parties concluded the contract without those specific provisions (rulings by the Warsaw Regional Court of 6 June 2012 (Case XXV C 1215/10), the Warsaw Court of Appeal of 14 March 2013 (Case VI A Ca 1151/12), and the National Appeal Chamber of 7 February 2008 (Case KIO/UZP 35/08)).
In conclusion, it should be stated that if the right to demand additional payment in certain events is removed from the general conditions, the contractor will only be entitled to seek an extension of time, and this risk should be factored into the price of the offer.
Hanna Drynkorn, Infrastructure, Transport, and Public Procurement & Public-Private Partnership practices, Wardyński & Partners
