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
Position:Bucharest University of Economic Studies, Romania - Technical University of Civil Engineering of Bucharest
Pages:165-181
SUMMARY

Construction projects are characterized by risks and uncertainties mainly due to technical and economic 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... (see full summary)

 
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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 c ontractor is the
allo cation of risk . The distribu tion 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 analy ze 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.
Keywords: 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
4
,
5
,
6
,
7
, 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.
6
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.

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