Prolongation costs are difficult to calculate accurately, and the time and effort to do so may be disproportionate to the sum recovered. The FIDIC Green Book 2021 contains a new mechanism for calculating prolongation costs. Could or should this mechanism be incorporated into the FIDIC Red Book 1999^[1]?

Introduction

FIDIC broke new ground when it introduced a mechanism for calculating prolongation costs in the FIDIC Green Book 2021. Whilst similar clauses have been in use in other forms of construction contracts for many years, it was a first for the FIDIC suite of contracts.

The FIDIC Green Book 2021 defines Prolongation Cost^[2] in Sub-Clause 1.1.35 as:

“…on-Site and off-Site overheads associated with compensable EOT, as stated in the Contract Data“

Where a project has been critically delayed by an event for which the Employer is responsible under the contract, the Contractor may claim compensation for prolongation costs. The claim may form part of a larger claim for items such as disruption or increased costs.

Claim mechanisms

The mechanism for claiming prolongation costs under the FIDIC Green Book 2021 is in summary as follows:

The Contractor submits to the Engineer a Notice of the event or circumstance giving rise to the claim within 28 days (Sub-Clause 13.1(i)), and within 56 days submits a fully detailed claim supported by particulars and contemporary records (Sub-Clause 13.1(ii)). The Engineer then proceeds to make a determination (Sub-Clause 3.5) as to whether an event has occurred giving rise to a claim for prolongation costs per Sub-Clause 11.1.1. If the Engineer considers the event qualifies, the level of prolongation costs will be set in line with the mechanism defined in Sub-Clause 1.1.35 and calculated using the formula in the Contract Data.

This can be compared with the position regarding prolongation cost claims in the FIDIC Red Book 1999.^[3] Unlike the FIDIC Green Book 2021 the Contractor will have to evidence the level of prolongation costs.

This article considers these different positions and whether (and if so in what circumstances) it might be beneficial to incorporate the new prolongation costs mechanism from the FIDIC Green Book 2021 into a contract based on the FIDIC Red Book 1999.

Employer’s Risks

In the FIDIC Green Book 2021, Sub-Clause 11.1.1 provides that if the Contractor suffers delay or incurs cost due to an Employer’s Risk, it shall be entitled to listed entitlements (as long as it complies with the claims procedure in Clause 13).  FIDIC usefully tabulate the Employer’s Risks in Sub-Clause 11.1.3.

Parties intending to import the prolongation costs mechanism into a contract based on the FIDIC Red Book 1999 will have to consider whether to tailor and incorporate this table as well as the definitions of Exceptional Events (Sub-Clause 1.1.23), as expanded upon in the Guidance Notes (Sub-Clause 6.6), and the table of Employer’s Risks (Sub-Clause 11.1.3).

Causal link

If a Contractor wishes to claim prolongation costs in connection with a contract based on the FIDIC Red Book 1999, it will have to establish (among other things) causation and provide evidence of the prolongation. The process can be protracted and can give rise to lengthy and expensive disputes but should establish a final figure which is supported with evidence.

In contrast, in the FIDIC Green Book 2021, so long as the Contractor can demonstrate that an event has taken place for which it is entitled to claim prolongation costs, the Contractor is not required to demonstrate a link between (a) the Cost, and (b) the delay and event. Instead, prolongation costs are calculated by reference to a pre-agreed formula. Consequently, it is a far simpler and quicker way of calculating prolongation costs, but necessarily imprecise. The rough and expedited nature of the calculation is perhaps more appropriate for the types of projects on which the FIDIC Green Book 2021 is intended to be used, namely projects which are shorter in duration, simple and lower in value than those on which the FIDIC Red Book 1999 conditions are typically used.

Notices and claims

Both sets of conditions incorporate a contractual notice regime.

A Contractor using the FIDIC Red Book 1999, making a claim in respect of prolongation costs, must give a notice of claim within a specific time period followed by a fully detailed claim with supporting particulars – see Sub-Clause 20.1. Late submission of the initial notice of claim can be fatal to the claim, particularly in common law jurisdictions.

The FIDIC Green Book 2021 also requires the Contractor to give a notice of claim within a specific time period followed by a fully detailed claim with supporting particulars – see Sub-Clause 13.1. However, late submission of a notice should not be fatal to the claim, because the Green Book 2021 does not contain the sanction for failure to submit a timely notice which appears in the Red Book 1999. This reflects the changes made in the FIDIC Red Book 2017 and is perhaps a recognition by FIDIC that barring a claim for lack of a timely notice is draconian and runs contrary to the principle of an economically balanced contract.

Formula

The Contract Data section of the Particular Conditions of FIDIC Green Book 2021 sets out a formula for the calculation of prolongation costs by reference to a percentage of a Daily Rate which is multiplied by the days of delay. The writer has simplified the calculation in the table below:

The Daily Rate is a percentage of the Contract Price, set as a default to 20%, but capable of amendment by the parties.

The percentage of the Daily Rate to be applied is pegged against the value of the works certified as complete, expressed as a percentage, as at the time of the prolongation event. FIDIC have applied a Gaussian curve, but the parties can agree their own benchmarks.

If the prolongation cost mechanism is incorporated into a contract based on the FIDIC Red Book 1999, the parties will have to give careful consideration as to how the Daily Rate is calculated across the continuum of the contract.

Agreement on weightings

It will be important to retain records of the agreement reached by the parties in respect of the weightings used in the formula, as this information may assist in demonstrating (if this is permitted by the relevant laws) the basis for the parties’ agreement regarding weightings and (if this is the case) that they are not penal.

Engineer

Contractors sometimes allege that the Engineer in a FIDIC Red Book 1999 project is biased in favour of the Employer and, as consequence, claims are not being determined fairly.

The fact that prolongation costs in the FIDIC Green Book 2021 are liquidated might suggest that the role of the Engineer in determining prolongation cost claims is reduced but in fact this is not entirely the case.

The Engineer will have to determine (among other things) whether an Employer’s Risk (as tabulated in Sub-Clause 11.1) has occurred, whether this has caused the Contractor to suffer delay or incur Cost, the level of work completed and the Contract Price.

Disputes can arise in respect of each aspect but particularly as to the work completed by the Contractor and whether a variation has been instructed (which in turn would affect the Contract Price).

Concurrency

Neither set of conditions presents a solution to the issue of concurrent delay, that is where two or more delay events occur at the same time (one a contractor risk event and one an employer risk event), the effects of which are felt at the same time.

Edward Corbett (2024) observes in his article FIDIC Green Book 2021 – Short and Simple? that, rather than present a solution to the issue, FIDIC directs contracting parties to the governing law of the contract. He regards this as a “cop-out” which may lead to situations where automatic payment will run against the industry consensus that, in the event of concurrency, time should be awarded, but not money.

True concurrency is rare and disputes on this issue will inevitably arise. However, where the Employer has initially paid out, the Contractor will have the benefit of funds until the issue is resolved.

Disruption costs

A claim for prolongation costs does not restrict the Contractor’s rights to other costs, including disruption costs, if any. The Contractor will have to take care to ensure that there is no overlap between the prolongation cost claim and any disruption claim by wrongly claiming for indirect costs. This is an issue for both sets of conditions and is not a reason to preclude incorporating the prolongation costs mechanism from the FIDIC Green Book 2021.

Disputes

Both sets of conditions include tiered dispute resolution provisions.

The FIDIC Red Book 1999 provides for a 1- or 3-person DAB (Sub-Clause 20.2), notices of dissatisfaction (Sub-Clause 20.4), a period for amicable settlement (Sub-Clause 20.5) and arbitration under the ICC rules with a 3-person arbitral tribunal (Sub-Clause 20.6).

In contrast the FIDIC Green Book 2021 provides for a decision from a single adjudicator (Sub-Clause 14.1.3), notices of dissatisfaction (Sub-Clause 14.1.4) and arbitration under the expedited procedure provisions of the ICC rules (irrespective of the amount in dispute) with a single arbitrator (Sub-Clause 14.2). There is also provision for enforcement of the adjudicator’s decisions by arbitration including by summary or expedited procedure (Sub-Clauses 14.1.6 and 14.1.7). This streamlined claim procedure may be appropriate for simple claims of low value but query whether it is suitable for larger, complex matters with significantly greater value.

Incorporation of the prolongation costs mechanism and associated clauses into a contract based on the FIDIC Red Book 1999, but not the dispute resolution clauses, would mean losing the potential benefit of the slimmed down dispute resolution procedures from the FIDIC Green Book 2021.

FIDIC note in the Guidance to the FIDIC Green Book 2021 that:

“[o]wing to the capital value of projects which are envisaged to be covered by the [FIDIC] Green Book [2021], a three-member dispute board was not seen as economically viable for parties.

If the parties think it economically viable and beneficial, they can incorporate a three-member dispute board. Here FIDIC reference for consideration the Dispute Avoidance / Adjudication Board (DAAB) provisions in the FIDIC 2017 suite of contracts and by specific example the FIDIC Red Book 2017.

Similarly, FIDIC considered that the expedited procedure provisions of the Rules of Arbitration of the International Chamber of Commerce (ICC) with a sole arbitrator were well adapted for the FIDIC Green Book 2021. FIDIC acknowledge that the parties may, depending on the project, want to amend Sub-Clause 14.2 to include 3 arbitrators, non-expedited procedural provisions, alternatives to the ICC arbitration rules and even domestic arbitration (if the parties are in the same country).

Parties may be better served retaining the dispute resolution procedures set out in the FIDIC Red Book 1999, as the projects where it is likely to be used are often of long duration, complex and of high value, meaning that a more rigorous dispute resolution process may be appropriate.

Waiver

Both forms of contract require the Contractor’s initial claim notice to be followed, within a set number of days of the event or occurrence, by a fully detailed claim with supporting particulars^[4].

Late submission of a fully detailed claim is permissible, but the Engineer will consider whether the delay has prevented or prejudiced their investigation^[5], and, in the case of the FIDIC Green Book 2021, whether the Contractor’s delay has prevented or prejudiced the Employer’s opportunity to mitigate the effects of the claim event or circumstance.

Contractors should ensure that they do not make representations to the Engineer or Employer that it does not intend to pursue a claim. If the Employer relies on the representation(s) to its detriment, then the Contractor may be considered to have waived its entitlement and be estopped from subsequently advancing the claim.

Untested by the courts or tribunal

It is, at present, uncertain how a court or arbitral tribunal would treat the prolongation cost mechanism in the FIDIC Green Book 2021 as no cases on the subject have, to the knowledge of the author, been published. This should not put contracting parties off from incorporating the mechanism into a contract based on the FIDIC Red Book 1999, but they should seek detailed legal advice if they are considering doing so.

Contract value

The foreword to the FIDIC Green Book 1999 states that it is intended for use on relatively low value projects, consisting of simple or repetitive works, where the duration is short without the involvement of specialist sub-contractors.

When the FIDIC Green Book 2021 was published FIDIC report in the foreword (about the FIDIC Green Book 1999) that:

“[m]arket feedback over the last two decades has shown a significant use of the Green Book on projects of over 10 million USD capital value and of Time for Completion exceeding 2 years“.

Whilst the FIDIC Red Book 1999 is designed for higher value and more complex projects, there is no reason why the FIDIC Green Book 2021 cannot also be used on such projects and anecdotal evidence is that it is in fact being used on such projects.

FIDIC’s Golden Principles

In 2019 FIDIC published five Golden Principles to deal with the reputational damage to FIDIC which it associated with parties heavily amending the FIDIC conditions.

The Golden Principles were prepared by FIDIC’s Task Group 15 and were considered by it to be those contractual principles which FIDIC considers to be inviolable and sacrosanct, when determining how to amend the General Conditions of Contract through the Particular Conditions of Contract.

Golden Principle One states^[6]:

“The duties, rights, obligations, roles and responsibilities of all the Contract Participants must be generally as implied in the General Conditions, and appropriate to the requirements of the project“.

It is arguable that the importation of the FIDIC Green Book 2021 prolongation cost mechanism into the FIDIC Red Book 1999 breaches Golden Principle One as the FIDIC Green Book 2021 was designed for contracts of lower value, shorter duration and less complexity than the FIDIC Red Book 1999.

As discussed above, the prolongation cost mechanism is imprecise. Other than demonstrating it has a genuine claim the Contractor’s obligation to particularise, evidence and substantiate a claim (in the FIDIC Red Book 1999) is removed, which in turn affects the Employer’s rights.

Parties who decide to incorporate the FIDIC Green Book 2021 prolongation costs mechanism should exercise caution when doing to so as to comply with the Golden Principle Two which states^[7]:

“The Particular Conditions must be drafted clearly and unambiguously“.

However, what are the consequences of any breach? The only sanction available to FIDIC is to request that the parties do not state that the contract is based on the FIDIC form^[8].

Unless funders mandate compliance with the Golden Principles as a condition for lending, this author considers that there is no sanction which FIDIC can invoke which might dissuade parties from amending the FIDIC conditions.

Final thoughts

Incorporating the prolongation costs mechanism in the FIDIC Green Book 2021 into the FIDIC Red Book 1999 may be beneficial, depending on the project and parties, and as long as it is done carefully and with detailed legal advice.

For incorporation to work most effectively, a level of cooperation between the contracting parties will be required, for example by the Employer not disputing the key elements such as the Contract Price or level of work completed or the Contractor advancing a claim which is not genuine. In doing so, it is less likely that acrimonious disputes will arise as a result which might affect the project.

The tabulation of Employer’s Risks in Sub-Clause 11.1.3 of the FIDIC Green Book 2021 and the formula for calculating prolongations costs, set out in Sub-Clause 1.1.35 and the Contract Data, are simple and easy to understand so that the implementation (if incorporated) should not represent a significant learning curve for contract users.

The weightings used in FIDIC’s formula will not suit all parties, but they can be adapted to suit specific requirements, and again this may work well for parties who have worked together previously. The adaptation will require discussion at the time that the contract is formulated. Energy invested in this task at the time of contracting will be minimal in contrast to that which the parties would otherwise spend dealing with a contested prolongation claim advanced under a contract based on the FIDIC Red Book 1999.

It will be interesting to see how the market reacts to the prolongation costs mechanism in the FIDIC Green Book 2021, whether parties will delete it, leave it untouched, or heavily amend it, and whether they will choose to incorporate it into other contracts such as those based on the FIDIC Red Book 1999.

Howard Kennedy’s International Construction Team has many years of experience in dealing with claims for prolongation costs. If you have issues relating to a claim for prolongation costs, whether in respect of the FIDIC Green Book 2021 or any of the other FIDIC conditions, then contact us for advice.

We would be interested to hear what you think. Please get in touch at james.reader@howardkennedy.com or on LinkedIn with your thoughts or to discuss any concerns.

 

 

[1] Article based on the writer’s dissertation submitted last autumn as part of his MSc in Construction Law & Dispute Resolution at King’s College London.

[2] Alternatively shortened to “PGC”

[3] For additional discussion see James Reader ‘As simple as it seems? An analysis of the prolongation costs clause in the FIDIC Green Book 2021‘ (November 2023)

[4] FIDIC Red Book 1999 – Sub-Clause 20.1 within 42 days unless otherwise proposed by the Engineer and agreed by the Contractor and FIDIC Green Book 2021 – Sub-Clause 13.1 within 56 days.

[5] And mitigation of the effects

[6] FIDIC Golden Principles 2019

[7] FIDIC Golden Principles 2019

[8] See Victoria Tyson’s article FIDIC’s Golden Principles – holding back the tide? (2020)