The new FIDIC Contract: Design Build Operate

By Edward Sunna
The long awaited FIDIC Design Build Operate Contract has finally been published by FIDIC. The purpose of this article is to provide readers with a general overview of the new build contract and its intended application.

The use of FIDIC based agreements in the Gulf formed the subject of some of our articles in our Law Up Date published in 2007. The growth of the public – private partnership model in infrastructure projects in the Gulf has strongly contributed to the introduction of a standardized yet sophisticated contract model produced by FIDIC to service the ever expanding range of projects in the Gulf region.

Characteristics of the new DBO Contract
As the title suggests, the contract is intended to govern the relationship between the Principal and the Contractor involved in a multidisciplinary contract: to design, build and operate as opposed to individual agreements to govern the different facets of a project. The Contractor in these arrangements is ordinarily a corporate entity specifically set up to reflect the interests, roles, obligations and liabilities of parties comprising the corporate entity e.g. a consortium. Each party will have a specific input into the consortium such as funding, design, construction, operation and maintenance.

The extent of the parties’ contribution will depend on the nature of the project and the commercial and legal terms agreed with the sponsor of the project i.e. the employer.

Contract Flexibility
The new form contract takes into account the possibility of the varying types of DBO arrangements, the agreement itself is designed on what is commonly known as the ‘green field approach’ which essentially follows the traditional structure of the build operate, whereas the ‘brown field approach’ of operate, design and build albeit not adopted by FIDIC as the standard format can still be utilized by following the instructions in the guidelines produced along with the agreement.

Similarities with other FIDIC
Contracts
The new agreement adopts the same format of existing FIDIC contracts (RED, Yellow, Silver, White Books) and further retains the style and most of the common definitions, paragraphs and structures that make FIDIC unique.

The core of the new agreement and its function is found in clause 9 entitled ‘Design Build’ which specifically provides for necessary elements to administrate the design and build component.

The reader should note new definitions specific to DBO projects have been included in the new form. An example is the definition of the ‘License Agreement’ to regulate the operation component of the agreement and corresponding authority of the Contractor. Another noteworthy definition is that of ‘Cost plus Profit’, although FIDIC provides for such a definition, we suspect that in its practical application, we would define parties amending such definitions to account for project specific definitions and exhaustive itemisation of the costs component to avoid doubt or miscommunication.

The Operate Component
The striking feature of the DBO agreement is the usual intention of the parties to define the length of operation, which in utilities or infrastructure type projects involves a relatively more extensive duration than civil engineering projects to reap the return on the capital investment and ensure the project is viable to the Principal, the Contractor and investors. The new agreement accommodates long term operation, however it is needless to say that each project needs to be considered on its known requirements particularly in addressing issues such as early termination or the transfer of the asset at the end of the term or following early termination.

Advantages of a DBO
The combination of a number of disciplines and the reliance on a consortium or a joint venture to deliver a project has its obvious advantages in saving time and simplifying contract administration.

Multiple tasks can be undertaken simultaneously without reliance on parties out side the project team and with the operation period, it is likely that the Contractor will be the most suited to operate and maintain, if necessary, the facility it has designed and built. In this respect, it is in the interests of the contract to produce a low maintenance quality design and operation given its long term commitment to operate the project on completion, which mutually serves the Employer’s interests of having a quality built and designed low cost maintenance project.

Conclusion
The new form FIDIC DBO is a welcomed addition to the FIDIC suite of agreements which can be credited with introducing a structured regime for DBO projects which are often complicated or disjointed. The growth in popularity of DBO type projects are expected to increase in the Gulf and FIDIC is likely to again be the preferred model for DBOs in the future. However caution should always be had with drafting the project specific terms and conditions of the DBO, particularly during the operation phase and the consequences of the Parties rights following early termination, transfer or closure of any Project at any particular phase. In the Gulf, market it is always importance to reconcile the contract provisions with the local laws, particularly of government which may often contain implied provisions unknown at the time of execution of an agreement.

Zawya