Oleksandr Nepomnyashchyy, ICEG President
Oleksandr Nepomnyashchyy, President of the Interstate Consultants Engineers Guild, tells how working with standard FIDIC contracts can improve construction quality and drastically change the construction market on the basis of European approach.
Let us assume that you head a construction company or are an investor and you are offered to participate in a profitable project in a foreign country. What contracts should you conclude abroad for reliable protection of your interests? The contract issue also arises in case you engage a foreign company to work in Ukraine. How can you reimburse losses if that company eventually fulfills the project improperly? And finally, a third example: your company wants to take part in a project of the World Bank or other major global or European financial institutions. But it turns out that your lawyers do not understand anything in hundred-page contracts in English, which these organizations propose to conclude, and there is no time to learn the ropes.
In Europe, they started to solve such problems a hundred years ago by developing specimens – FIDIC standard forms of contracts. Over the years, these forms have been improved for a countless number of times, and now they are counted in volumes. There are standard forms of ICE (Institution of Civil Engineers), NEC (The New Engineering Contract), IEE (Institution of Electrical Engineers), etc. The most common are the specimens, usually called standard forms, used by the World Bank, the European Bank for Reconstruction and Development, as well as the European Investment Bank. These forms were developed by the International Federation of Consulting Engineers (abridged FIDIC from French Fédération Internationale Des Ingénieurs-Conseils) uniting experts from Belgium, Germany, France, Italy, Switzerland, and other countries.
Oleksandr Nepomnyashchyy, President of the Interstate Consultants Engineers Guild, tells Focus why Ukrainian companies need working under FIDIC standard forms and what use they can make of them.
ICEG delegation visiting the Republic of Korea at the invitation of FIDIC President Jae-Wan Lee. Seoul (Korea), December 2016.
Consulting engineer – a lawyer or a builder?
I guess we were doing fine without these standard forms, we built a lot and not so bad, by the way. Are you sure that Ukrainian companies should add to their problems by trying to master a complicated system of international contracts?
If it wants to make a name for itself at the western market, there is no way it can escape from international standard contracts. FIDIC is the oldest and most widespread system of such contracts. Its occurrence was prompted by projects in countries with a poor regulatory basis. For example, French investors involved in a number of construction objects in Africa wanted to be protected not by local laws which were actually absent but by some international norms.
In what way do FIDIC contracts protect the investor and construction company?
In these contracts, risks and liabilities are shared by at least three parties: client, general contractor and consulting engineer. FIDIC is a huge system of rules and norms, which has been honed for decades. It is precise and perfect as a Swiss watch. Is has no ambiguities and gaps. What is more, disputes over FIDIC contracts are solved by the Court of Arbitration at the International Chamber of Commerce, whose decisions must be obeyed.
Engineering companies services are quite pricey: around 5-7% of the project cost. Yet, on the other hand, a professional consulting engineer can help save considerable amounts of money.
It is clear who the client and general contractor are. And who is a consulting engineer? Is this position similar to our technical supervision?
It is not really so. Technical supervision must be a structural unit or at least a representative of the client. That is why in this country the construction appears to be held solely in the client’s interests. Why do we have no quality roads in spite of enormous amounts being allocated for their renovations? One of the causes is there is no independent consultant who would be responsible for the quality of works execution. I would like to point out another issue. Pursuant to the current legislation, every client must have technical supervision. And what if the client is a local education or healthcare administration that does not have corresponding in-house specialists?
Does it mean that the western system comprising the trinity “client – general contractor – consulting engineer” is more perfect?
Of course! The third independent party – consulting engineer has a much broader scope of functions than technical supervision. First of all, a consulting engineer is employed by a separate commercial engineering company. Major engineering companies in the West employ 15-20 thousand people. I do not have to mention that all of them cherish their reputation, and using FIDIC contracts, they will never allow building something with deviations from or infringement of set norms. Ukraine is also starting to see development of engineering companies, and much credit for it goes to the organization chaired by me – the Intestate Consultants Engineers Guild.
In addition, a consulting engineer must also be a high-class lawyer?
Yes, and on top of that, a builder, otherwise he will not be able to grasp many contract nuances. Certainly, he has to know technical English language. As you can see, functions of a consulting engineer are much broader than those of a conventional technical supervision engineer. If you have got such professional working on your object and you conclude a construction contract according to the FIDIC standard form, any foreign company will be happy to deal with you, because it is familiar with this structure that makes the company feel protected.
Presidents of ICEG (Oleksandr Nepomnyashchyy) and KENCA (Jae-Wan Lee) signing a Memorandum of Understanding. Seoul (Korea), December 2016.
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Does application of FIDIC contracts affect the quality of construction objects?
It is the same thing as asking whether or not using expensive Japanese nails affects the quality of boxes their driven in. It is clear that the boxes’ quality depends not only on nails but primarily whose hands they are in. As well as importance of timber quality, storage conditions, etc. FIDIC forms are no panacea, but they can divide the risks between the construction company, consulting engineer, and client. In Ukraine, FIDIC standard forms have already been traded on by inserting their fragments in regular contracts, however this does not make such contracts FIDIC contracts.
“FIDIC is a huge system of rules and norms, which has been honed for decades. It is precise and perfect as a Swiss watch”
Who can help work out contracts based on FIDIC standard forms?
The Interstate Consultants Engineers Guild is ready to provide assistance in determining special provisions that take into account the Ukrainian legislation. One should keep in mind that such contracts envisage control over the project fulfillment on the part of the consulting engineer who bears part of responsibility and possesses corresponding authority. Our guild can also help to find such a specialist.
So it comes that working under FIDIC contracts goes together with signing a contract with an engineering company. How will it influence the project’s cost?
On the one hand, engineering companies’ services are quite pricey: around 5-7% of the project cost. Yet, on the other hand, a professional consulting engineer can help save considerable amounts of money by using less expensive and contemporary solutions of technical as well as organizational and economic nature. As of November 1, 2017 the profession of consulting engineer has been included in the national occupational classification, and as far as we know consulting engineers will be able to go through voluntary certification soon. FIDIC does not certify consulting engineers, it only provides contracts and legal support.
Left to right: Oleksandr Nepomnyashchyy, ICEG President; Gulnara Roll, Head of the Housing and Land Management Unit at the UN Economic Commission for Europe; Yuriy Prav, ICEG Vice President Participating in the UN Committee session, Rome, Italy, 2016.
Can we say that using FIDIC standard forms in a country is a certain indicator of its reliability for foreign investors?
Yes, of course! That is why we take an active part in synchronizing FIDIC forms with Ukrainian laws. This should speed up Ukraine’s progress toward Europe and make it much easier to Ukrainian construction companies to participate in tenders in the West and to foreign companies – in Ukrainian tenders.
Everything depends on color books
It is well known that two big projects were implemented in Ukraine under FIDIC contracts – renovation of N-01 Kyiv – Znamenka highway and reconstruction of M-03 Kharkiv – Dolzhanske highway, which were funded by international finance organizations. The mass media also reported about intention to apply FIDIC forms for bottom dredging works in Yuzhny sea port. Why are such projects so scarce?
There was also Boryspil Airport reconstruction, Beskidy tunnel building, and others. There are really not so many projects because using FIDIC forms is not that easy. FIDIC contracts make as much as a library – a voluminous book for every single type of construction works. For instance, the so called Blue Book is devoted to bottom dredging and land reclamation. Correspondingly, the FIDIC book is an integral part of a given contract. All the Blue Book norms will be considered during dispute resolution. These are globally accepted standards, understandable and clear. And no company working under them can evade responsibility.
Left to right: Volker Cornelius, VBI President; Lev Partskhaladze, Deputy Minister of Regional Development, Building and Housing of Ukraine; Rainer Bomba, State Secretary of the Federal Ministry of Transport and Digital Infrastructure; Maksym Malashkin, State Secretary of the Ministry of Regional Development, Building and Housing of Ukraine; Oleksandr Nepomnyashchyy, ICEG President at a joint enlarged meeting of VBI (Verband Beratender Ingenieure), a German consulting engineers union, and the Interstate Consultants Engineers Guild. Kyiv, Ukraine, February 2017.
It is not quite easy to comprehend FIDIC standards…
To promote them is one of the missions of the Interstate Consultants Engineers Guild. We hold trainings and workshops on a regular basis for all interested parties, we constantly keep in touch with Brussels about various complex issues in FIDIC contracts. We also furnish all kinds of consultations on them.
Thus, working under FIDIC forms is necessary only to those investors and construction companies, which either operate abroad or attract foreign companies to work in Ukraine?
It can also be interesting to the Ukrainian companies that want to participate in calls for tender by the World Bank, European Bank for Reconstruction and Development, European Investment Banks, and other major global and European finance structures. Do you know that the Ministry of Finance has recently expressed dissatisfaction with the pace of utilizing the funds allocated to Ukraine by the World Bank?
Why so? Are Ukrainian companies afraid to work under FIDIC contracts that are unknown to them?
That is it! And foreign companies are reluctant to work in Ukraine that is unknown and unpredictable to them. For the same reason Ukrainian companies have never won a big international tender for works in Ukraine. Incidentally, as of today, the deal is actually 12 billion dollars to be allocated to Ukraine for implementation of some programs. This is apart from the World Bank’s projects in other countries, where Ukrainian companies could take part. These funds can be utilized by those who are the first to use the working system new to Ukraine. And we are ready to help anyone willing to make use of these funds.