FIDIC contracts: analysis of the impact of general and particular conditions on the financial risk management in Romanian infrastructure projects

• Author: Constanta-Nicoleta Bodea/Augustin Purnus
• Pages: 165-181

FIDIC contracts: analysis of the impact of general and particular

conditions on the financial risk management in Romanian

infrastructure projects

1

Professor Constanţa-Nicoleta BODEA

2

Associate professor Augustin PURNUŞ

3

Abstrac t

Constru ction p rojects are characterized by risk s and un certaintie s main ly due to

techn ical and econ omic complexity. Risk ma nagement is an important tool in making

decisio ns invol ving the ident ification and re duction, a voidance or transfer risk and

uncert ainties c onsequence s of event s that o ccurs duri ng project implementati on. For this

reason, the o bjective of the contra ct bet ween the b eneficiary and the contractor is the

allo cation of risk . The distrib ution of risk in co ntracts for the execu tion of c onstructio n

work s was and is an ongoi ng challenge faced by pa rties having a sig nificant impa ct on the

type of contra ct is used . On the on e hand, t he beneficiaries te nd to transfer to the

contra ctors a s many of the project ri sks and uncertain ties, on t he other h and, the

contra ctors l ook to exploit any weak ness con tract, so as to reduce their impa ct on the

expect ed profit. One of the most important risks a ssumed by the co ntractor by sig ning the

contra ct which is also inc reasingly common in t he current econo mic situ ation is the

reduced fin ancial cap acity to suppo rt the project. A purely lega l o r p urely technical

interp retation is not meant to desc ribe th e complexity of issues rel ated to implementat ion of

constru ction pro ject s. Fo r this reaso n the authors ha ve a dopted a mult i-discipl inary

approach , which inclu des th e legal issues rela ted to the na ture of the contra ct, but also th e

financi al an d te chnical aspects of const ruction projects. The p aper aims t o anal yze how

specia l contrac t clauses can influ ence the implementat ion of constru ction pr ojects and in

partic ular the financi al management of cont ractors. The authors pro pose a model for

anal yzing the impact of FIDIC con tract conditio ns app lied on a case stud y of five tra nsport

infrastruct ure projects.

Keyword s: risk, con tract, FIDIC, time, cost .

JEL Cla ssification: K12, K23

1

This article was submitted to 6th International Conference “Persp ectives of Business Law in the

Third M illennium”, 25 -26 November 2016, the Bucharest University of Economic Studies,

Bucharest, Romania.

2

Constanţa-Nicoleta Bodea – Bucharest University of Economic Studies, Romania,

bodeaconstanta@gmail.com

3

Augustin Purnuş – Technical University of Civil Engineering of Bucharest, purnus@utcb.ro

Volume 6, Issue 2, December 2016 Juridical Tribune

166

1. Introduction

Construction projects are characterized by a high level of risk and

uncertainty, due to their complexity. Risk management is an important tool in

making decisions involving the identification and reduction, avoidance or transfer

risk and uncertainties consequences of events that occurs during project

implementation. For this reason, the objective of the contract between the

beneficiary and the contractor is the allocation of risk.

The distribution of risk in contracts for the execution of construction works

was and is an ongoing challenge faced by the contracting parties having a

significant impact on the type of contract that will be used. On the one hand, the

beneficiaries tend to transfer to the contractors as many of the project risks and

uncertainties, on the other hand, contractors look to exploit any weakness contract,

so as to reduce their impact on the expected profit.

Projects risks can be classified on the basis of two factors: natural risks and

hazards due to human factor. Natural risks may be due to exceptional adverse

weather conditions, unpredictable forces of nature and unforeseeable physical

conditions. Risks due to human factor causes are determined, above all, the main

actors involved in the contract (employer, contractor, engineer or third parties), the

social or political events, economic dynamics and regulatory changes.

The authors analyze risks and contractual clauses 8:14 influence of FIDIC

contract conditions on the financial relationship between the beneficiary and

entrepreneur focusing on the effects of special conditions have on the financial

management of the contractor. Continuing a series of previous work

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,

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,

6

,

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, the

authors propose a practical approach to quantify risk by defining a model for

analyzing the impact FIDIC contract conditions, which is applied in a case study of

five transport infrastructure projects.

2. FIDIC Conditions of Contract

The adoption of FIDIC contract conditions in infrastructure projects is

widely accepted around the world, being recommended or required in international

agreements mainly by the financing banks. These conditions were tested more than

50 years, they are flexible, reflect the market requirements and distribute balanced

the risks, rights and obligations of the parties by the terms contained therein.

4

Purnus, A ., Bodea, C. N. (2015). Financial management of the construction projects: a proposed

cash flow analysis m odel at pr oject portfolio level, „Organization, Technology & M anagement in

Construction: An international Journal”, Volume 7, Issue 1, 2015, p p. 1217 -1227,

http ://www .grad.hr/otmcj/clanci/vol%207_1/OTMC_6.p df (accessed 30 August 2016).

5

Purnus, A., Bodea, C. N. (2014). Correlation between Time and Cost in a Quantitative Risk Analysis

of Construction Projects, „Procedia Engineering”, Elsevier Ltd, vol. 85, 436-445.

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Purnus, A ., Bodea, C. N. (2016). Influența condițiilor de contract FIDIC asupra managementului

financiar al proiectelor de construcții, „Revista Română de Inginerie Civilă”, Vol. 7 (2016), No. 1.

7

Sararu, C.-S. (2014). The interpretation of administrative contracts, „Juridical Tribune – Tribuna

Juridica”, Volume 4, Issue 1, June 2014, pp . 152-156.