I’ve recently had the pleasure to be exposed recently to the FIDIC contracts structure. Therefore I want to share with you my impression regarding the possibility of using this type of contract in wind farm EPC tenders.
The first FIDIC contract was released in the fifties. After half a century, the FIDIC contract family is expanding over the years to match the necessity of the market.
As you probably are aware, the different types of contracts are commonly referred to with different colors (red, green, yellow, etc.) from their cover. For instance “red” is for construction (of projects designed by the Employer), and “green” is for small work (maybe less than 500.000 USD).
The three types more appropriate to my particular sector would be the red, yellow or silver book.
Although there is obviously much more, I will resume the main characteristics of each of these 3 contracts type in the following table. I’ve not included the other books because they are not applicable to the wind farm sector.
|Design||Employer||Contractor||Contractor carries the risks|
|Design Approval||Engineer may approve changes or ask for variations||Engineer approves or rejects before executions||N.A.|
|Proposal||Unit Prices||Lump-sum Price||Lump-sum Price|
|Payment Schedules||Measured quantities||Payment percentages||Payment Calendar / Payment percentages|
|Risk Distribution||Employer carries design risks||More Distributed||Contractor carries the risks|
So, which contract type makes sense in a wind farm EPC?
Let’s start to the easiest contract to discard: the silver book.
This typology of contract would be a full EPC where almost the full risk is suffered by the contractor. There is no engineering available, therefore quantities are estimated and risk such as subsoil quality must be included in the contractor price.
Obviously, this made the contract not operative for projects such as tunneling, wind farms or other “high geotechnical risk” activity.
Theoretically, it is possible to include in foundation price this risk. We even have done it in the past, for clients not willing (or not able) to pay even for a preliminary geotechnical survey. But the price of a piled foundation can be 2 times the price of a standard, shallow foundation. Therefore numbers become huge quickly, and this approach kills the majority of the projects.
Also, the client is not really willing to pay for something that it might never get (that is, major civil works). This basically eliminates the possibility to use the silver book, a contract that makes sense in situation where both party knows that little deviations are to be expected (maybe some type of plant).
These leave us with the yellow and red books.
In the red, engineering is made by Employer and payments are made on the basis of the real quantities executed. Employer carries the risk for contract amount increases: as you might guess, this point is not particularly welcome by banks or by companies such as Vestas.
In the yellow, Employer prepares only the «Employer’s Requirements», including Draft layout, Operational Parameters, Technical Specifications and Financial Proposal.
Tenderers submit their technical proposals together with their financial proposals, including at least methodology, basic design and drawings, bill of and similar supporting documents.
So maybe you think that finally we’ve found of dream contract, the FIDIC yellow book.
Well, no. The problem is that contractors are unwilling to give a real closed price: basically, construction companies don’t have an engineer department big enough to properly follow each tender and give a good price. Being a really specialized business, often you ask price to good local companies with no wind experience.
This lead to misunderstandings, unreasonably low or high prices and (even worst) discussion during execution, when you already have a closed price with your client and accept a reclamation of the subcontractor would go against contract margin.