DESIGN RISK IN

FIDIC CONTRACTS

A paper based on a talk given to a meeting

of the King’s College London
Construction Law Association
in London on 11th November 2004

Michael Black QC

March 2005

www.scl.org.uk
 DESIGN RISK IN
FIDIC CONTRACTS

Michael Black QC

Introduction
This paper examines the legal and commercial considerations affecting one of
the principal matters of concern to owners – quality of design in the context of
the identification, allocation and management of risk. In order to illustrate
problems of more general application, the focus of this paper will be on the
provisions of three FIDIC1 forms: the Contract for Building and Engineering
Works Designed by the Employer (the Red Book), Conditions of Contract for
Plant & Design-Build (the Yellow Book) and Conditions of Contract for
EPC/Turnkey Projects (the Silver Book). All were published in their first
editions in 1999.2

The views expressed in this paper are based on English law and do not
necessarily represent the views of the writer, but rather are intended to raise
discussion points. Parties wishing legal advice on specific contracts should
consult their own advisors.

Design risk
‘Design risk’ may be defined as: ‘The risk that design cannot deliver the
services at the required performance or quality standards’.3

Professor Nael Bunni has said that:

The theory of risk has developed in the past twenty years or so to such
an extent that it is now common knowledge that for a contract to be
performed in an effective manner, the inherent risks must be allocated to
the contracting parties on some logical basis, which should be made
known to them. Thus, it has been said that the main purpose of a
contract is to identify the principles of allocating the risks facing the
contracting parties.4

1 Fédération Internationale des Ingénieurs-Conseils (the International Federation of

Consulting Engineers).
2 Extracts from the forms of contract are reproduced by kind permission of FIDIC. The
original documents can be bought from FIDIC online at www1.fidic.org/bookshop.
3 HM Treasury, The Green Book: Appraisal and Evaluation in Central Government –
Treasury Guidance (2003), downloadable from
www.hm-treasury.gov.uk./media/785/27/Green_Book_03.pdf.
4 Nael Bunni, FIDIC’s New Suite of Contracts – Clauses 17 to 19, downloadable from
www1.fidic.org/resources/contracts/bunni_0601.asp, following Christopher R Seppala,
‘FIDIC's new standard forms of contract – force majeure, claims, disputes and other
clauses’ [2000] ICLR 235.

1
The issue of risk allocation in construction contracts has occupied the courts
on several occasions in recent years, particularly in the context of damage
caused by fire and of insurance obligations.5 The importance of the
availability of insurance cover and its commercial relevance to the allocation
of risk will be reverted to below.

The contract terms

Fitness for purpose

The Red Book provides at clause 4.1:

The Contractor shall design (to the extent specified in the Contract),
execute and complete the Works in accordance with the Contract and
with the Engineer’s instructions, and shall remedy any defects in the
Works …
If the Contract specifies that the Contractor shall design any part of the
Permanent Works, then unless otherwise stated in the Particular
Conditions:
(a) the Contractor shall submit to the Engineer the Contractor’s
Documents for this part in accordance with the procedures
specified in the Contract; …
(c) the Contractor shall be responsible for this part and it shall, when
the Works are completed, be fit for such purposes for which the
part is intended as are specified in the Contract;

The Guidance for Preparation of Particular Conditions (included in the Red

Book) does not refer to these provisions. Similar words are to be found at
clause 4.1 of the Yellow and Silver Books:
When completed, the Works shall be fit for the purposes for which the
Works are intended as defined in the Contract.

Site conditions

Clause 4.10 of the forms of contract deals with site data. There are common
terms:
The Employer shall have made available to the Contractor for his
information, prior to the Base Date, all relevant data in the Employer’s
possession on subsurface and hydrological conditions at the Site,
including environmental aspects. The Employer shall similarly make
available to the Contractor all such data which come into the Employer’s
possession after the Base Date.

The Red and Yellow Books impose on the contractor the obligation to
interpret the data. In addition, the contractor’s investigation of the site and
receipt of necessary information is deemed sufficient only to the extent which

5 See Co-operative Retail Services Ltd v Taylor Young Partnership [2002] UKHL 17,
[2002] 1 WLR 1419, [2002] 1 All ER (Comm) 918, [2002] BLR 272, HL; applied in
Scottish & Newcastle plc v GD Construction (St Albans) Ltd [2003] BLR 131, CA.

2
was practicable. The Red and Yellow Books do not specifically state the
employer’s responsibility for the site data supplied. The Silver Book however
provides:
The Contractor shall be responsible for verifying and interpreting all
such data. The Employer shall have no responsibility for the accuracy,
sufficiency or completeness of such data, except as stated in Sub-Clause
5.1 [General Design Responsibilities].

In the Red and Yellow Books, by clause 4.12, if the contractor encounters
adverse physical conditions he may give notice to the engineer setting out the
reasons why he considers the conditions to be ‘unforeseeable’. If the engineer
agrees, he may grant an extension of time and award the additional costs. The
Silver Book provides:
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.

‘Employer’s Requirements’

Clause 5.1 of the Silver Book provides:

The Contractor shall be deemed to have scrutinised, prior to the Base
Date, the Employer’s Requirements (including design criteria and
calculations, if any). The Contractor shall be responsible for the design
of the Works and for the accuracy of such Employer’s Requirements
(including design criteria and calculations), except as stated below.
The Employer shall not be responsible for any error, inaccuracy or
omission of any kind in the Employer’s Requirements as originally
included in the Contract and shall not be deemed to have given any
representation of accuracy or completeness of any data or information,
except as stated below. Any data or information received by the
Contractor, from the Employer or otherwise, shall not relieve the
Contractor from his responsibility for the design and execution of the
Works.
However, the Employer shall be responsible for the correctness of the
following portions of the Employer’s Requirements and of the following
data and information provided by (or on behalf of) the Employer:
(a) portions, data and information which are stated in the Contract as
being immutable or the responsibility of the Employer,
(b) definitions of intended purposes of the Works or any parts thereof,
(c) criteria for the testing and performance of the completed Works,

3
 and
(d) portions, data and information which cannot be verified by the
Contractor, except as otherwise stated in the Contract.

Clause 5.1 of the Yellow Book gives the contractor a period of grace within
which to notify the engineer of any error, fault or defect in the employer’s
requirements:
[W]ithin the period stated in the Appendix to Tender, calculated from
the Commencement Date, the Contractor shall give notice to the
Engineer of any error, fault or other defect found in the Employer’s
Requirements or these items of reference. After receiving this notice,
the Engineer shall determine whether Clause 13 [Variations and
Adjustments] shall be applied, and shall give notice to the Contractor
accordingly. If and to the extent that (taking account of cost and time)
an experienced contractor exercising due care would have discovered the
error, fault or other defect when examining the Site and the Employer’s
Requirements before submitting the Tender, the Time for Completion
shall not be extended and the Contract Price shall not be adjusted.

The legal context

Fitness for purpose

These forms of contract were initially developed from English standard forms6
although, as will be seen below, perhaps they no longer reflect current UK
practice.

Under English law and the law of other common law jurisdictions, in the
absence of provisions to the contrary, where a contractor undertakes design he
will be responsible for the fitness for purpose of that design.

In the well-known case of IBA v EMI and BICC7 the House of Lords held that
a design and build contractor was responsible for the suitability of the design.
This was most succinctly expressed by Lord Scarman:
The extent of the obligation is, of course, to be determined as a matter of
construction of the contract. But, in the absence of a clear, contractual
indication to the contrary, I see no reason why one who in the course of
his business contracts to design, supply, and erect [a television aerial
mast] is not under an obligation to ensure that it is reasonably fit for the
purpose for which he knows it is intended to be used.8

The judgment of Judge John Davies QC in the first-instance Viking Grain

Storage case9 is generally regarded as authoritative (though referring to the
IBA case in the Court of Appeal, rather than the House of Lords). Here the
judge held as follows:

6 See Nael Bunni, The FIDIC Form of Contract: The Fourth Edition of the Red Book, 2nd
edition, 1997, pp 3-20.
7 IBA v EMI and BICC (1980) 14 BLR 1, HL.
8 See note 7 above, at p47.
9 Viking Grain Storage Ltd v T H White Installations Ltd (1985) 33 BLR 103, QBD (OR).

4
 The suggestion that matters of design should be regarded as involving
no higher duty than that of reasonable care was put forward and rejected
in IBA v EMI (1978) 11 BLR 38, where the judgment was delivered by
Roskill LJ, where the Court of Appeal could see no good reason for
importing into a contract of this nature a different obligation in relation
to design from that which plainly exists in relation to materials. To find
otherwise in this particular case, where Viking clearly relied, in all
aspects, including design, on the skill and judgment of White to produce
an end result would, in my view, be to destroy the whole basis of the
bargain. The obligation to design a product fit for its purpose is already
tempered by the fact that only ‘reasonable’ fitness is demanded; to add
to that a requirement of proof of lack of due care seems to me to
emasculate, and magnify the uncertainty of, the obligation to such an
extent as would be neither acceptable nor realistic in a commercial
transaction.10

This is to be contrasted with the responsibility of an architect or engineer who

undertakes design. The ordinary obligation is to ‘exercise due care, skill and
diligence’.11

Other approaches to design risk

English domestic contract forms have assimilated the obligation of a designing

contractor with that of a professional:12
[T]he Contractor shall have in respect of any defect or insufficiency in
such design the like liability to the Employer, whether under statute or
otherwise, as would an architect or, as the case may be, other appropriate
professional designer holding himself out as competent to take on work
for such design who, acting independently under a separate contract with
the Employer, had supplied such design for or in connection with works
to be carried out and completed by a building contractor not being the
supplier of the design.13

and
The Contractor shall exercise all reasonable skill care and diligence in
designing any part of the Permanent Works for which he is
responsible.14

10 See note 9 above, at p118.

11 See the Australian case Voli v Inglewood Shire Council [1963] ALR 657, High Ct
Australia, at p 661 (Windeyer J). The position is similar under US law – see Surf Realty
Corp v Standing 78 SE2d 901 (1953), cited in Gravely v Providence Partnerships 549
F2d 958 (US Ct of Appeals, 4th Circ).
12 The Engineering & Construction Contract, 2nd edition, 1995, makes a ‘reasonable skill
and care’ obligation an option (Option M). The ‘Be Collaborative’ contract provides both
approaches as alternatives in clause 3.4.
13 Standard Form of Building Contract, With Contractor’s Design, 1998 edition, The Joint
Contracts Tribunal Ltd, clause 2.5.1.
14 ICE Conditions of Contract, Measurement Version, 7th edition, The Institution of Civil
Engineers, September 1999, clause 8(2).

5
Indeed, a similar position is reflected in a number of international forms:
(i) The Engineering Advancement Association of Japan (ENAA) Contract
Model Form states at clause 9.1 that the Contractor must undertake all
the works (including design) with ‘due care and diligence’;
(ii) Under the European International Contractors (EIC) Turnkey Contract,
by clause 4.2 the Contractor must use the ‘proper skill and care of
professional designers experienced in that type of design’;
(iii) The Design-Build Institute of America (DBIA) Standard Form of
Agreement Between Design-Builder and Designer, Document No. 540
(1999) provides at clause 2.3.1 that: ‘The standard of care for all design
professional services performed by Designer and its Design Consultants
pursuant to this Agreement shall be the care and skill ordinarily used by
members of the design profession practising under similar conditions at
the same time and locality of the Project.’

While this paper is not intended to be a treatise on comparative law, it is useful

in trying to understand the international matrix within which the FIDIC forms
were drafted to have regard to the approach taken to design risk in other major
jurisdictions. Two very different approaches are taken in France and the USA.

French lump sum private works contracts require the owner to define clearly
the nature of the works, with plans and specifications. The contractor is bound
by these plans and specifications and is responsible for the design risk.
Article 1793 of the French Civil Code provides that the contractor is not
entitled to any increase in price if variations are not authorised in writing and
the price agreed with the owner. However, in the event of significant
modification to the design requested by the owner disrupting the object of the
contract beyond recognition, the contract loses its lump sum character and the
owner may be ordered to pay the contractor the cost incurred by the changes.

In the USA, the Spearin Doctrine15 implies two warranties in relation to

owner-provided or owner-endorsed information:
(a) Under the warranty of accuracy, the owner warrants that ‘the natural
condition of the site is as the owner states,’ even if the misrepresentation
concerns a ‘concealed condition of which neither the owner nor the
contractor had knowledge’; and
(b) Under the warranty of suitability, the owner warrants that ‘the contractor
will be able to complete his contractual obligations by following the
[owner-provided] plans and specifications.’
The owner’s implied warranty of the adequacy of the plans and specifications
has been adopted in nearly all US jurisdictions and applied to both private and
public contracts.16 A contractor may invoke the doctrine either offensively to
obtain resulting costs and expenses or defensively to avoid liability from
claims by owners or third parties for damages resulting from the defect,

15 US v Spearin, 248 US 132 (1918), US Supreme Ct (Mr Justice Brandeis).

16 Philip L Bruner and Patrick J O’Connor Jr, Bruner & O’Connor on Construction Law,
2002, §9.81.

6
provided the contractor followed the owner specifications.17 Courts do not
impose the implied warranties on ‘performance’ specifications, where the
owner: ‘simply set[s] forth the performance characteristics of the end product,
and leave[s] to the contractor how to achieve those results.’18 Bruner &
O’Connor note that as ‘the liability of design professionals is based on
negligence and not implied warranty,’ an owner may be held liable ‘for breach
of its implied warranty of design adequacy, even though the owner may have
no recourse against the design professional for negligence.’19

On the closely associated issue of unforeseen ground conditions, Peter Fenn

undertook a survey of the international practice on the allocation of risk of
unforeseen ground conditions in standard forms of construction contract.20 He
found that:
(a) In Australia, Germany, Italy, Japan and Romania the owner bore the
risk;
(b) In France in the public sector the doctrine of unforeseeability (théorie de
l’imprévision) covered ground conditions, so the owner was allowed to
rescind the contract but was obliged to compensate the contractor;
(c) In Canada, China, India, Indonesia, Ireland, New Zealand, Portugal, Sri
Lanka, Sweden, United Kingdom and United States the risk was shared;
(d) Only in Hong Kong and Malaysia did the contractor bear the risk.

FIDIC thus allocates considerably more design risk to the contractor as its
‘default position’ than have the draughtsmen of English and other standard
forms.

Discussion
Distinction between fitness and skill and care obligations

The importance of the distinction between the two approaches cannot be over-
emphasised. Where the obligation is to use reasonable skill and care, design
liability will depend on proof of the requisite standard of care, proof of
culpable breach of that standard (not all errors are negligent) and causation of
loss. It may also admit of defences such as reasonable delegation of duties to
independent contractors and the ‘state of the art’.21 On the other hand, a
‘fitness for purpose’ obligation is, once the purpose is communicated to the
contractor and there is reliance on his design, absolute.22

17 Steven GM Stein (editor-in-chief), Construction Law, 2001, §18.02.

18 Edward B Lozowicki and Erik Hanshew, The Spearin Doctrine: Defective Specifications,
Coudert Brothers Briefing, 2001, downloadable from
www.coudert.com/publications/articles/020615_15_spearin_cb.pdf.
19 See note 16 above, at §9.81.
20 Peter Fenn, ‘Review of international practice on the allocation of risk of ground
conditions’, [2000] ICLR 439.
21 See generally John L Powell & Roger Stewart (general editors), Jackson & Powell on
Professional Negligence, 5th edition, 2002 and second cumulative supplement 2004,
paras 8-131 to 8-179.
22 See IN Duncan Wallace, Hudson’s Building & Engineering Contracts, 11th edition, 1995.
paras 4·071 to 4·072.

7
In the context of the Silver Book, the fitness for purpose obligation must be
read with clause 5.1, which makes the contractor responsible for the design of
the work and for the accuracy of ‘the employer’s requirements’, including
design criteria and any calculations. Making the contractor responsible for the
employer’s own errors could make the fitness for purpose obligation even
more onerous.23

Rationale for FIDIC’s position

The Introductory Note to the first edition of the Silver Book seeks to explain
FIDIC’s position:
During recent years it has been noticed that much of the construction
market requires a form of contract where certainty of final price, and
often of completion date, are of extreme importance. Employers on such
turnkey projects are willing to pay more – sometimes considerably more
– for their project if they can be more certain that the agreed final price
will not be exceeded ...
For such projects it is necessary for the Contractor to assume
responsibility for a wider range of risks than under the traditional Red
and Yellow Books. To obtain increased certainty of the final price, the
Contractor is often asked to cover such risks as the occurrence of poor or
unexpected ground conditions, and that what is set out in the
requirements prepared by the Employer actually will result in the desired
objective. If the Contractor is to carry such risks, the Employer
obviously must give him the time and opportunity to obtain and consider
all relevant information before the Contractor is asked to sign on a fixed
contract price. The Employer must also realize that asking responsible
contractors to price such risks will increase the construction cost and
result in some projects not being commercially viable ...
[I]t has long been apparent that many employers, particularly in the
public sector, in a wide range of countries have demanded similar
contract terms, at least for turnkey contracts. They have often
irreverently [sic] taken the FIDIC Red or Yellow Books and altered the
terms so that risks placed on the Employer in the FIDIC Books have
been transferred to the Contractor, thus effectively removing FIDIC’s
traditional principles of balanced risk sharing. This need of many
employers has not gone unnoticed, and FIDIC has considered it better
for all parties for this need to be openly recognised and regularised. By
providing a standard FIDIC form for use in such contracts, the
Employer’s requirements for more risk to be taken by the Contractor are
clearly stated. Thus the Employer does not have to attempt to alter a
standard form intended for another risk arrangement, and the Contractor
is fully aware of the increased risks he must bear. Clearly the Contractor
will rightly increase his tender price to account for such extra risks …
Employers using this form must realise that the ‘Employer’s
Requirements’ which they prepare should describe the principle and

23 Nicholas DJ Henchie, ‘FIDIC conditions of contract for EPC turnkey projects – the Silver
Book problems in store?’ [2001] ICLR 41, at p47.

8
 basic design of the plant on a functional basis. The Tenderer should
then be permitted and required to verify all relevant information and data
and make any necessary investigations. He shall also carry out any
necessary design and detailing of the specific equipment and plant he is
offering, allowing him to offer solutions best suited to his equipment and
experience. Therefore the tendering procedure has to permit discussions
between the Tenderer and the Employer about technical matters and
commercial conditions. All such matters, when agreed, shall then form
part of the signed Contract.
Thereafter the Contractor should be given freedom to carry out the work
in his chosen manner, provided the end result meets the performance
criteria specified by the Employer. Consequently, the Employer should
only exercise limited control over and should in general not interfere
with the Contractor’s work. Clearly the Employer will wish to know
and follow progress of the work and be assured that the time programme
is being followed. He will also wish to know that the work quality is as
specified, that third parties are not being disturbed, that performance
tests are met, and otherwise that the ‘Employer’s Requirements’ are
being complied with ...
These Conditions of Contract for EPC/Turnkey Projects are not suitable
for use in the following circumstances:
• If there is insufficient time or information for tenderers to
scrutinise and check the Employer’s Requirements or for them to
carry out their designs, risk assessment studies and estimating
(taking particular account of Sub-Clauses 4.12 and 5.1).
• If construction will involve substantial work underground or work
in other areas which tenderers cannot inspect.
• If the Employer intends to supervise closely or control the
Contractor’s work, or to review most of the construction drawings.
• If the amount of each interim payment is to be determined by an
official or other intermediary.

Criticism of FIDIC’s position

If the experience of the writer is common, it is unlikely that any contractor

believes that he has been given sufficient time or information before tendering.
This is particularly so where (which is far from unusual) considerable design
work has been undertaken by the employer’s consultants pre-tender. Further,
it is likely in any major infrastructure project that the three other contra-
indications in the quotation above will also apply.

The FIDIC approach has therefore come in for criticism: at the most basic
level, Hazel Fleming has argued that the juridical basis for the implication of a
fitness for purpose term in design and build contracts under English law is
‘obscure’.24 The EIC have said of clause 4.12 of the Silver Book that ‘it is

24 Hazel Fleming, ‘Fitness for purpose: the implied design obligation in construction
contracts’ (1997) 13 Const LJ 227, at p241.

9
difficult to imagine a clause which would be more threatening to contractors
and which would leave them more open to unscrupulous employers’.25

It has also been pointed out that a contractor may not be able to insure the
risk.26 A contractor may have no ‘state of the art defence’ and may be liable
even if the state of knowledge across the industry is such that a particular
design fault would remain undetected by other competent contractors.27 Even
where the contractor’s design meets the employer’s requirements, as formally
stated, the contractor may be liable if the requirements are themselves
insufficient to meet the purpose.28

The allocation of risk has even been criticised from within the ranks of
FIDIC’s own Task Groups:
The concept of turnkey in its pure form is that the employer goes away
entirely and returns when the contractor has a completed project ready to
meet the performance specification. This form seems to be a long way
from that concept. Although the employer has a legitimate interest to
ensure that the stage payments being made are not being wasted, the
ability to instruct, vary and condemn may go too far here.
Responsibility for the result is not diminished if the employer does
choose to interfere and instruct how the work is to be done, although the
contractor can record his objections to a variation.
The Silver Book appears to be taking a position in the market, less as a
pure turnkey contract but rather as a design-build form with increased
risk on the contractor. Neither contractors nor employers think that the
mix is right for a true turnkey, although we will no doubt see it adapted
to suit particular requirements. FIDIC encourages the use of the form
whenever price certainty takes high priority in the thinking of the
employer, and this is likely to be the approach in practice.29

Joseph A Huse and Jonathan Kay Hoyle observe:

The Silver Book itself is largely based on the new Yellow Book. One
major difference is that the engineer has been removed in order to make
the contract a ‘two-party’ contract – although in the event that the
employer chooses to use a representative he presumably could have
powers similar to those of the representative under the Orange Book.
Another major difference is that additional risk has been placed on the

25 European International Contractors, The EIC Contractor’s Guide to the FIDIC Conditions
of Contract for EPC Turnkey Projects, 1st edition, 2000, at p15, discussed by Frank M
Kennedy, EIC chairman, at [2000] ICLR 505. The Guide is now in a 2nd edition, 2003,
retitled The EIC Contractor’s Guide to the FIDIC Silver Book; it can be bought online
from EIC at www.eicontractors.de/seiten/publikations/main.php and from the FIDIC
website bookshop (see note 2 above).
26 See note 24 above, at p238.
27 See note 24 above, at p237.
28 Joseph A Huse, Understanding and Negotiating Turnkey and EPC Contracts, 2nd edition,
2002, para 8-16.
29 Edward Corbett, Delivering Infrastructure: International Best Practice FIDIC’s 1999
Rainbow: Best Practice? August 2002, published by the Society of Construction Law and
available at www.scl.org.uk (D23).

10
 contractor. However, FIDIC are also apparently keen to promote the
Silver Book as a fixed price turnkey contract on a two-party basis not
limited to project financing. From this it would appear that FIDIC have
not decided whether these changes regarding additional risk constitute
‘best practice’ or constitute necessary modifications purely in a project
financing context. If FIDIC believe that such changes constitute best
practice, it should also have made corresponding changes to the new
Yellow Book and the Orange Book. However, it is unlikely that
contractors will agree that such changes should in fact be characterised
as best practice, particularly when they are imposed outside a project
finance context.
[T]he Silver Book places completion risk on the contractor additional to
that contemplated by the new Yellow Book and the Orange Book.
FIDIC state that the Silver Book is suitable for all fixed-price turnkey
projects (with a two-party approach). FIDIC apparently believe that the
provisions regarding allocation of additional risk to the contractor
constitute best practice for all such projects, and not just projects
financed on a ‘project finance’ basis. If this is the case, the authors do
not share FIDIC’s view.30

Support for FIDIC’s position

But the attractions of the FIDIC approach to an employer are obvious. Huse
gives the following example:
[I]n the construction of a thermal power plant the employer can set out
in the employer’s requirements the size and nature of the plant desired,
as well as its operational output and the consumption necessary to reach
such output. Therefore, if the employer’s original conception of the
works lacked some element necessary for it to be fit for the purpose
intended, the contractor would be responsible for ensuring that the
finished works contained the missing element.31

In a characteristically staunch defence of the ‘fitness for purpose’ position, Ian

Duncan Wallace QC has argued that a ‘best endeavours’ style basis of liability
may lead to no liability to pass down the line to specialist sub-contractors. He
asserts that where the relevant part of the design has emanated from the
contractor, there is every reason to insist on strict liability – to balance the
inherent disadvantages to owners in design and build contracts, such as
designing down to a price and the absence of control.32

Problems with ‘pure’ turnkey contracts

However, even though Professor Duncan Wallace considers that a contractor’s

design liability should be absolute, he does not consider that a turnkey contract
is invariably in the interests of the employer. He summarises its potential
disadvantages:

30 Joseph A Huse and Jonathan Kay Hoyle, ‘FIDIC design-build, turnkey and EPC
contracts’ [1999] ICLR 27, at p37-8.
31 See note 28 above, at para 2-06.
32 Ian Duncan Wallace QC, ‘Letter to the Editor’ [1999] ICLR 312.

11
(i) there can be little or no check on the reasonableness of prices when
tenderers’ designs differ;
(ii) the cost of tendering will be high where the contractor will have to
develop the design and all tenderers will seek to pass this on to the
employer;
(iii) there is a pressure to under-design;
(iv) the cost of checking tenderers’ designs will erode the cost benefits;
(v) it will be difficult for employers to contest variations;
(vi) the employer will lose control during the construction process;
(vii) design and build contracts typically contain limitations of liability.33

These views reflect the survey findings of the Construction Industry Institute
(CII) of Austin, Texas, who take the view that clauses placing inequitable
burdens of differing conditions are not cost-effective for the owner. In the
CII’s view, such clauses:
(i) increase prices;
(ii) restrict competition;
(iii) create adversarial relationships;
(iv) create situations which contractors cannot bear because they cannot
control;
(v) have a negative impact on project performance; and
(vi) increase claims and disputes.34

The CII report, however, reached conclusions diametrically opposed to those

of Professor Duncan Wallace: in particular, it concluded that the risk of
differing ground conditions can be assumed most effectively by the owner.

Current UK ‘best practice’

FIDIC’s apparent views as to best practice do not seem to be shared by the UK

Government. The Treasury Green Book states:
The governing principle is that risk should be allocated to whichever
party from the public or private sector is best placed to manage it. The
optimal allocation of risk, rather than maximising risk transfer, is the
objective, and is vital to ensuring that the best solution is found.
Accordingly, the degree to which risk is transferred depends upon the
specific proposal being appraised.
Successful negotiation of risk transfer requires a clear understanding by
the procuring authority of the risks presented by a proposal, the broad

33 IN Duncan Wallace, Construction Contracts: Principles and Polices in Tort and Contract
volume 1, 1986, at para 24-07ff.
34 Construction Industry Institute Research Report SD-44, Impact of Risk Allocation and
Equity in Construction Contracts, 1989; can be bought online from the CII at
www.construction-institute.org/index.cfm.

12
 impact that these risks may have on the suppliers’ incentives and
financing costs, and the limits to risk transfer which might still be
considered for value for money.
Where the private sector has clear ownership, responsibility and control,
it should be encouraged to take all of those risks it can manage more
effectively than the procuring authority. If the public body seeks to
reserve many of the responsibilities and controls that go hand-in-hand
with service delivery and yet still seek to transfer significant risk, there
is a danger that the private sector will increase its prices.
Appropriate transfer of risk generates incentives for the private sector to
supply timely cost effective and more innovative solutions. As a general
rule, PFI schemes should transfer risks to the private sector when the
supplier is better able to influence the outcome than the procuring
authority …
A risk allocation table can be a useful tool to identify the bearer of each
risk relevant to a proposal.35

The Office of Government Commerce’s (OGC’s) Effective Partnering36

suggests that a shared risk register ensures complete understanding for both
parties about risks to implementation and ongoing service delivery, and
enables a joint approach to managing risks. Examples of Government projects
adopting such an approach include: the Prison Service keeping a joint risk
register with EDS (its IT services provider) for all major projects; the UK
Passport Agency and Siemens Business Services maintaining a joint risk
register covering shared risks to successful implementation of the passport-
issuing system; and the Criminal Justice System Risk Forum being established
to agree approaches to managing shared risks to delivery of the Criminal
Justice IT Programme.

The risk register approach is also adopted in the private sector in the new ‘Be
Collaborative’ contract, which provides in clause 4 for the preparation of the
Risk Register, its updating, the completion of a Risk Allocation Schedule and
the definition and administration of Relief Events.

On 15 October 2004, the Treasury and the OGC released Managing risks with
delivery partners.37 One of its fundamental recommendations is that risk
management ‘needs to be fully integrated in day-to-day management’. This
emphasises a proactive involvement on the part of the client in the
management of identified risks, already reflected in the OGC’s Procurement
Guide 09: Design Quality:
Design must always be managed with a view to achieving the best
possible value for money. The way this is done will depend on the
selected procurement route. Development of the full design brief,

35 See note 3 above, at Annex 4, paras 13-17.

36 OGC, Effective partnering – an overview for customers and suppliers, 2003, from
www.ogc.gov.uk/sdtoolkit/reference/ogc_library/generic_guidance/EffectivePartneringpu
blish.pdf.
37 HM Treasury/OGC, Managing risk with delivery partners, 2004, downloadable from
www.ogc.gov.uk/sdtkdev/new_content/ManaginRisksDeliveryPartners.pdf.

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 outline design, detailed design and their transformation into production
drawings and specifications is done at different times in the process, and
by people with different relationships to the client and to other team
members. Effective design management should ensure that:
• the client has communicated aspirations for quality and made the
corresponding financial commitment;
• designs comply with the brief;
• the brief itself does not alter (except through formal change control
procedures);
• changes are strictly controlled (a cost estimate, time estimate and
review of risks must be presented before the agreement of any
changes);
• designs are well co-ordinated and communicated at all levels;
• design is completed to programme;
• cost and progress reports are issued at suitable intervals with a
minimum of one at outline design and one at detailed design;
• the project sponsor and user group/s are kept involved through
meetings and presentations.38

Conclusions
All construction contracts involve a balancing exercise between risk and price.
There may be a superficial attraction to an owner in transferring the totality of
the design risk to the contractor under a turnkey or EPC contract, but it must
be recognised that this may increase the price and expose the owner to an
increased probability of claims during the course of the project that may be
both difficult to avoid and difficult to contest. Steps taken to ameliorate these
problems by substantial involvement in the design, either pre-tender or
checking drawings, or in the supervision of the works, may negate the cost
advantage over other forms of procurement.

Current UK practice with regard to risk management may be summarised as

follows:
(a) risks should be identified and defined as far as possible during the
design and procurement process and the consequences of the occurrence
of such risks should be agreed in advance;
(b) each party to the contract should share the responsibility to manage the
contract so far as possible to avoid the occurrence of risk events. This
should include a regular review of anticipated risk events. Sharing
financial pain and gain may provide incentives to effective management;
(c) the responsibility to manage the occurrence of risk events should be
allocated to the party best able to do so. Conversely risks should not be

38 OGC, Achieving Excellence in Construction, Procurement Guide 09: Design Quality,

2003, downloadable from www.ogc.gov.uk/sdtoolkit/reference/achieving/ae9.pdf.

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 allocated to parties who are unable to manage their consequences. The
availability and terms of insurance cover may be determinate as to
whether the consequences of risk are allocated to one party or another or
shared.39

The draftsmen of the FIDIC terms have chosen, in the case of the Silver Book,
to take a different approach. While ostensibly favouring the owner, it would
not be universally regarded as according with current best practice nor
necessarily in the owner’s best interests. It is doubted that in its unamended
form the Silver Book is likely to achieve its stated aim of certainty as to price.
It is suggested that it is unlikely that the form will be used frequently without
substantial amendment.

Michael Black QC is a practising barrister, arbitrator and Visiting

Professor of Construction & Engineering Law at the School of Mechanical,
Aerospace and Civil Engineering, University of Manchester.

© Michael Black 2005

The views expressed by the author in this paper are his alone, and do not necessarily
represent the views of the Society of Construction Law or the editor, neither of whom
can accept any liability in respect of any use to which this paper or any information
in it may be put, whether arising through negligence or otherwise.

39 The current best example is Heathrow Terminal 5. There is a legally binding contract
between Heathrow Airport Ltd and its key suppliers. British Airports Authority Ltd holds
the overall delivery risk. Suppliers take their share of the financial consequences of any
risk to the project and also share in the financial rewards of success. Risk payments,
which would normally be costed into a supplier’s quote, have instead gone into an
incentive fund. Key project risks have been insured, in particular professional indemnity
for the project as a whole.

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is to promote the study and understanding of
construction law amongst all those involved
in the construction industry’

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