Construction Law/Unquantifiable Risks in Contracts
I am currently working on a Project in KSA, which is to build a hospital campus (i.e. 300 bed-hospital, supporting facilities & staff housing). The General Conditions of Contract are the Saudi Governmental Contract's Forms – Arabic language (it could be seen that it was based on FIDIC Red Book, but it allocates more risks on contractors).
The Project Contractual set-up is similar to EPC Contracts, whereby the Project is awarded under a lump-sum contract and is tendered based on concept/schematic design that would be developed during the Post-Contract Stage. However, in this Contract, the Employer is the one who is responsible for developing the design in the Post-Contract Stage to allow for fully functional and fit for the purpose Project. Nonetheless, the Contractor is requested to review the concept design at the Tendering Stage and allow in his Tender Price for the additional construction/procurement costs that would result from the design development that is based on the concept/schematic drawings, basis of design document and the design necessities to comply with applicable codes, regulations and standards and to allow for fully functional and fit for the purpose Project.
As per the Contract Drawings, the hospital comprises 11 floors and is located nearby an international airport. As such, it was expected to have an issue with the civil aviation authorities, whereby they would reject having such high building in proximity of the airport.
Accordingly, the Particular Conditions of Contract, included a clause that allows for reducing the height of the hospital (keeping the same functions, capacity and built-up area), or relocating the Project into a new Site, whereby the Contractor was requested to take account of having one the above events in his Tender Price (i.e. include such risk in his Tender Price), and informed that he will not entitled for additional compensation (i.e. changing the design or relocating the Project - and the consequent additional works related to the relocation - does not call for variations to the lump-sum price of the contract). In this regard, it is to be noted that the new Site location was not specified in the Contract Drawings, whereby the only indication on where the new Site would be was: that the new Site will be selected within area within the radius of 5 km of the original Project Site.
In Post Contract Stage the Employer decided – based on the above mentioned Particular Condition – to relocate the Project into a new Site, 3 km away from the original Site in order to evade the civil aviation authorities’ requirements.
The new Site included several small existing buildings that need to be demolished in order to execute the Project’s permanent works, and the Contractor is claiming for additional compensation to demolish them. Also, the new Site includes existing utilities that need to be rerouted.
In this regard, the Particular Conditions of Contract also indicated that the Contractor’s scope and Tender Price include the demolition and rerouting of whatever existing buildings/utilities that are encountered in the Project Site, without specifying whether this applies only for the original Site location or is also applicable at the new Site location.
Noting the above, the question is:
Is the Contractor entitled for additional compensation to demolish or reroute existing building/utilities (i.e. is it a variation)?
In another matter, I have a project that has the same contractual set-up, except for the relocation of the Project. In this Project, which I kept its original location, the Particular Conditions of Contract also indicated that the Contractor’s scope and Tender Price include the demolition and rerouting of whatever existing buildings/utilities that are encountered in the Project Site. However, the Contractor was only given drawings that show the existing buildings, and no drawings were provided for underground utilities.
Based on the above, the Contractor is claiming for additional compensation as a result of encountering and rerouting numerous underground utilities. In his claim, the Contractor is arguing that the encountered utilities are considered as unforeseen events, because he didn’t have enough info on them (i.e. no drawings), and that he could not see them visually. Now we are arguing with him, that given that the Contract Drawings indicated that the Site includes existing buildings, it is reasonable to foresee/expect having underground utilities; therefore they are not considered unforeseen events.
Please advise whether the above argument from our side against the Contractor is correct.
Moreover, and although these utilities could not have been quantified at the Tendering Stage, we considered the variance in their quantities as part of the Contractor’s risks under the contract (i.e. the intent of the person who drafted the contact was to shift such risk from the Employer to the Contractor). Although it seems unfair to put such unquantifiable risk on the Contractor, we adopted the above approach because the Contractor did not object to this risk allocation in the negotiations stage, and did not issue any related query in the Tendering Stage. Therefore, we assumed that he included such risk is his Tender Price, notwithstanding the fact that his Tender Price had to be competitive.
Please advise whether the above approach from our side is correct.
Thank you for your question.
Based on provided information, as long as the Contract concept is EPC, it seems the Contractor has no entitlement and should have included for any such allowance in their offer.
Obviously, one might need to deeply scrutinise the Contract Conditions, Bidding Documents, Tender, etc, to give a fully fledged answer, which would exceed the possibilities under this site.
But again, based on provided information, it seems you have no entitlement.
Hope that clarifies the matter.