Construction Law/Value Engineering


QUESTION: Hello Peter,

I am temporarily working on a Highway project in Serbia operating under the FIDIC Red Book (MDB harmonised edition 2005).

The Contractor submitted a Value Engineering proposal (VEP) that realigns a section of the road which has various benefits including reduced cost of execution and maintenance and improved safety. This VEP has been approved in principle and the works have commenced on site.

I have a number of questions regarding payment -

1) Sub-Clause 13.2 states the proposal is prepared at the Contractor's Cost and therefore I assume he cannot claim for any of the VEP proposal  design cost, is this correct?

2) No guidance is given regarding payment of the fee. It would surely be unreasonable to withhold payment of the fee until the final value of the cost savings are known - ie when the physical works are completed and on the other hand paying the fee up front prior to carrying out the works would be equally unreasonable - it is our intention to pay the fee as a pro-rata percentage of the completed VEP works with adjustment when final costs are known. Is the Engineer (with the Employer's approval) free to determine the method of the VEP fee payment, or should it be agreed and stipulated in the VEP ?
3) Sub-Clause 13.8 Price Adjustment is applicable on the project, should this also be applied to the fee. It seems unreasonable to apply the adjustment multiplier to a payment for a cost saving fee , however I cannot find anything in the Contract that clearly excludes application of the price adjustment to the fee unless it can be considered as a Cost price (or a current price). Therefore does price adjustment apply to the fee?

Kind Regards,


ANSWER: Hallo Peter,

1) FIDIC says nothing about reimbursement of the cost of the proposal, if it is approved.  If the Contractor is reimbursed the cost of the proposal, then the savings will be less and the Employer will pay a reduced fee. It all depends on what the parties agree.  I suggest that the parties agree to the fee and to the design liability before the VO is issued.  

2) Payment of the fee pro rata to the work done seems fair to me.  I suggest that it should be included in the VEP.  

3)The price adjustment is applied to the net value of the IPC in any given month.  The fee is part of the value of the works so I suggest that, logically, it should be included in the indexation of the IPC.  I assume that the saving will increase with time due to the reduced quantities and hence the reduction in price.  

Remember time is of the essence, as the Contractor cannot delay the Works until agreement is reached.  

---------- FOLLOW-UP ----------

QUESTION: Peter Thank you very much for your answer.

I have one last question regarding the fee and application of the price adjustment formula:

In the theoretical event that the works in the Value Engineering Proposal  are new items or at cost items would the fee still be subject to the price adjustment even though the varied works in this case would not be.

Kind regards,


Dear Peter,

Interesting question, but then how do calculate the saving, and hence the fee, in this situation?  I guess you could calculate the new costs based on costs at the applicable date or calculate the old costs at the current date.  In the first case, the fee is escalated; in the second, it is escalated from the date of the variation order, or any combination of cases that both parties agree to.  

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Peter M. Elliott


First response to queries regarding extensions of time, variations orders, site instructions and payment using FIDIC and other forms of Conditions of Contract, based on English Law, and derivatives only. Anyone who needs advice about EoT should download and study the SCL Delay & Disruption Protocol before submitting a question.


Value . . .
It's unwise to pay too much, but it's unwise to pay too little. When you pay too much you lose a little money, that is all. When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing you bought it to do.
The common law of business balance prohibits paying a little and getting a lot. It can't be done. If you deal with the lowest bidder, it's well to add something for the risk you run.
And if you do that, you will have enough to pay for something better.
. . . John Ruskin (1819 - 1900)
"We are too poor to buy something cheap"
.Romanian Proverb 2002
A lean compromise is better than a fat lawsuit. George Herbert (English poet 1593-1633)
I said it in Hebrew, I said it in Dutch,
I said it in German and Greek:
But I wholly forgot (and it vexes me much)
That English is what you speak!" Hunting of the Snark - Lewis Caroll
Match your presentation to the reader!
The joy of food lasts but an hour, of sleep but a day, of a woman, but a month, but the joy of a building lasts a lifetime. Syrian proverb.
Comments and observations leading to improvements in the translation of FIDIC Red & Yellow books into Romanian prior to approval by FIDIC (reference 'Preface to the Romanian edition')

Institution of Civil Engineers, Association of Chartered and Certified Accountants, Society of Construction Law, Dispute Resolution Board Foundation

B Sc(Hons) in Civil Engineering

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