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INTRODUCTION
I INTRODUCTION

1.1 Background

1.1.1 The Need for Standard Conditions of Contract

The objective of the Conditions of Contract in a construction

contract is to set out the legal / contractual arrangements that will
apply to the contract. In order to complete a construction project
within the required time and budget it is essential that the
Conditions of Contract be formulated with precision, in order to
minimise delays, disputes and unforeseen additional costs. In the
majority of cases the contracting parties will respond favourably to
clearly stated obligations and this will do much to avoid
unsatisfactory performance of the contract.

There are obvious advantages of using well known standard

Conditions of Contract which holds a reasonable balance between
the requirements and interests of the parties concerned and in
particular allocate fairly the risks and responsibilities between the
contracting parties (Employer and Contractor). Such standard
Conditions of Contract drawn up by reputed independent
professional institutions rather than by one or other of the parties to
the contract are much more likely to gain the acceptance of all
concerned. Contractors believe, usually quite rightly, that the
employers' 'in house' Conditions of Contract are slanted in their
favour and similarly employers are suspicious of Conditions of
Contract prepared by contractors' organisations.

The use of standard Conditions of Contract will, in all

probability, result in lower tender prices, as tenderers will be
familiar with the conditions that will apply under the contract.
When 'in house' non-standard Conditions of Contract are used, the
tenderers will have to compare them with published standard
Conditions of Contract designed for use in conjunction with
projects of a similar nature, and assess the probable consequences
of any deviations, which is a time consuming and difficult task.
 H o w e v e r w i t h standard C o n d i t i o n s o f C o n t r a c t they w i l l not need to

m a k e f i n a n c i a l provisions f o r risks i n v o l v e d in contract conditions

w i t h w h i c h t h e y are not f a m i l i a r a n d w h o s e consequences they m a y

h a v e d i f f i c u l t y in assessing.

T h e use o f standard C o n d i t i o n s o f C o n t r a c t w o u l d promote

e f f i c i e n c y o f all parties i n v o l v e d by o b v i a t i n g o f the need to w o r k

w i t h d i f f e r e n t contract c o n d i t i o n s in respect o f each contract a n d

e n a b l i n g the a c c u m u l a t i o n o f experience gained f r o m their repeated

use.

A n o t h e r a d v a n t a g e o f u s i n g standard conditions is that d u e to

t h e i r w i d e s p r e a d use, n u m b e r o f publications e x p l a i n i n g their use

such as g u i d a n c e notes, m a n u a l s , digests, c o m m e n t a r i e s , flow

charts etc. are available. Also regular training programmes,

seminars, w o r k s h o p s are c o n d u c t e d for t r a i n i n g and e d u c a t i n g the

personnel responsible f o r contract m a n a g e m e n t .

1.1.2 Evolution of Conditions of Contract Internationally

( a ) RIBA form and JCT form

I n E u r o p e , a n d i n m o r e particularly in the U n i t e d K i n g d o m ,
the use o f a standard f o r m i n construction contracts dates back to
n i n e t e e n t h century. A standard f o r m w a s d e v e l o p e d by the R o y a l
Institute o f B r i t i s h A r c h i t e c t s f o r b u i l d i n g contracts at the e n d o f
nineteenth century, what became known as t h e 'RIBA form'.
Successive editions o f the R I B A f o r m w a s published u n t i l 1 9 5 7 a n d
subsequently it d e v e l o p e d into w h a t b e c a m e k n o w n as the J C T
f o r m ( Joint Contracts T r i b u n a l ) . T h e r e are a n u m b e r o f forms o f
contracts d e v e l o p e d b y J C T f o r d i f f e r e n t types o f contracts such as
R e - m e a s u r e m e n t , F i x e d p r i c e , S c h e d u l e o f rates, T a r g e t cost etc.
(Bunni, 1991)

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( b ) ICE form

D e v e l o p m e n t o f standard f o r m for c i v i l e n g i n e e r i n g contracts

w a s s o m e w h a t slower. The first standard d o c u m e n t w h i c h w a s

prepared j o i n t l y b y the Institution of Civil Engineers and the

Federation o f C i v i l E n g i n e e r i n g Contractors w a s p u b l i s h e d o n l y in

December 1945. This document titled ' G e n e r a l C o n d i t i o n s of

Contract and Forms o f Tender, A g r e e m e n t and B o n d for U s e in

Connection with W o r k s o f C i v i l Engineering Construction' became

k n o w n as ' I C E form'. I n January 1 9 5 0 it w a s r e v i s e d a n d issued

with the added agreement of the Association of Consulting

Engineers, U K . Subsequently revisions w e r e e f f e c t e d in M a r c h

1 9 5 1 ( T h i r d E d i t i o n ) ; January 1955 (Fourth Edition w h i c h was

later a m e n d e d in 1969); 1973 (Fifth Edition) and 1991 (Sixth

Edition). (Bunni, 1991)

( c ) ACE form

T h e I C E conditions w e r e d r a w n up w i t h the domestic UK

construction contracts in m i n d , a n d the need for a d o c u m e n t a i m e d
at overseas contracts w a s felt. In August 1956 the Association o f
C o n s u l t i n g Engineers U K , j o i n t l y w i t h the E x p o r t G r o u p f o r the
Construction Industries U K , w i t h the approval o f the I n s t i t u t i o n o f
C i v i l E n g i n e e r s , prepared a d o c u m e n t for use outside the UK,
which became known as the Overseas (Civil) Conditions of
Contract ( T h e A C E F o r m ) . T h i s w a s perhaps the first standard
f o r m o f international C o n d i t i o n s o f C o n t r a c t for c i v i l e n g i n e e r i n g
works. A l t h o u g h the concept a n d style o f this d o c u m e n t d i f f e r e d
only slightly from the I C E domestic f o r m , several a m e n d m e n t s h a d
been incorporated to .reflect the differences i n the a p p l i c a b l e l a w
a n d in the practice o f c i v i l e n g i n e e r i n g i n overseas countries. This
w a s the first d o c u m e n t to be p u b l i s h e d in n o w f a m i l i a r t w o parts,
part I as 'General C o n d i t i o n s o f C o n t r a c t ' a n d part U as ' C o n d i t i o n s
o f Particular A p p l i c a t i o n " . ( B u n n i , 1 9 9 1 )

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( d ) First Edition of the FIDIC Conditions

In August 1957 'Conditions o f Contract (International) for

W o r k s o f C i v i l E n g i n e e r i n g C o n s t r u c t i o n ' w a s published b y the

Federation I n t e r n a t i o n a l e des I n g e n i e u r s - C o n s e i l s ( t h e International

Federation o f C o n s u l t i n g E n g i n e e r s , F I D I C ) a n d the Federation

Internationale d u B a t i m e n t et des T r a v a u x Publics ( t h e I n t e r n a t i o n a l

Federation o f B u i l d i n g a n d P u b l i c Works, now known as the

International European Construction Federation, FEEC). This

document w a s based o n t h e A C E f o r m a n d especially designed for

use in international projects. ( F I D I C G u i d e , 1 9 8 9 )

( e ) Second Edition of the FIDIC Conditions

T h e second e d i t i o n o f t h e F I D I C C o n d i t i o n s w a s published i n

July 1969. A supplementary section c o n t a i n i n g C o n d i t i o n s of

Particular A p p l i c a t i o n to D r e d g i n g a n d R e c l a m a t i o n W o r k was

added as Part M. N o changes w e r e m a d e t o the text. (FIDIC

Guide, 1989)

(f) Third Edition of the FIDIC Conditions

The Third edition was published in March 1977,

incorporating s o m e s i g n i f i c a n t changes. A l t h o u g h i n f l u e n c e d by
the F i f t h e d i t i o n o f t h e I C E f o r m , the T h i r d E d i t i o n d i d not f o l l o w it
in all aspects. T h i s E d i t i o n p r o v e d to b e successful i n many
projects t h r o u g h o u t t h e w o r l d a n d fared w e l l for a l o n g t i m e .
C r i t i c i s m c a m e t o surface o n l y in recent years w h e n t h e n u m b e r o f
disputes e n d i n g i n a r b i t r a t i o n increased. ( F I D I C G u i d e , 1 9 8 9 )

( g ) Fourth Edition of the FIDIC Conditions

Revision o f the T h i r d E d i t i o n was undertaken by F I D I C and

the F o u r t h E d i t i o n w a s p u b l i s h e d i n S e p t e m b e r 1 9 8 7 . Extensive

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 r e v i s i o n s w e r e m a d e , a n d e v e n in the title o f t h e d o c u m e n t the w o r d

International' was deleted, as with slight modifications the

document is suitable f o r domestic contracts as w e l l . In some

clauses t h e r e a r e changes i n the w o r d i n g to i m p r o v e the language

a n d m a k e it simpler a n d m o r e c o m p r e h e n s i b l e , i n others there are

f u n d a m e n t a l a n d substantive changes. Part U o f the C o n d i t i o n s

referred to as the 'Conditions of Particular Application' was

e x p a n d e d a n d p r o d u c e d i n a separate booklet. T h e style o f the

l a n g u a g e a n d t h e layout o f t h e clauses has b e e n m o d e r n i s e d but the

n u m b e r i n g o f t h e clauses has b e e n preserved. ( F I D I C G u i d e , 1 9 8 9 )

( h ) The New Engineering Contract

I n 1 9 8 6 the L e g a l A f f a i r s panel o f the Institution o f C i v i l

Engineers acted upon the pressures of proliferating forms of

c o n t r a c t a n d the resultant increase i n a r b i t r a t i o n , a n d c o m m i s s i o n e d

t h e d e v e l o p m e n t o f the N e w E n g i n e e r i n g C o n t r a c t ( N E C ) . The

NEC was first published in January 1991 as a consultative

d o c u m e n t a n d since t h e n it has been substantially a m e n d e d . The

First E d i t i o n w a s m a d e a v a i l a b l e f o r use i n 1 9 9 3 . It is a n e w a n d

innovative form of contract which is said to facilitate good

m a n a g e m e n t a n d t e a m w o r k b y g i v i n g the e m p l o y e r c h o i c e i n the

t y p e o f contract strategy a n d i n the allocation o f risks. NEC is

d r a f t e d i n clear, simple language a n d suitable f o r projects a n y w h e r e

in t h e w o r l d . ( I n s t i t u t i o n o f C i v i l E n g i n e e r s , 1 9 9 3 )

1.1.3 Evolution of Conditions of Contract in Sri Lanka

T h e o r i g i n o f C o n d i t i o n s o f C o n t r a c t i n S r i L a n k a dates back
to n o w defunct Public W o r k s Department. Subsequently other
G o v e r n m e n t D e p a r t m e n t s such as I r r i g a t i o n , B u i l d i n g s , H i g h w a y s
etc. d e v e l o p e d t h e i r o w n C o n d i t i o n s o f C o n t r a c t . T h e s e documents
are characterised b y t h e i r bias t o w a r d s the E m p l o y e r a n d l a c k o f
b a l a n c e , p a r t i c u l a r l y i n the a r e a o f sharing o f risks.

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 I n m i d seventies, organisations such as C e n t r a l E n g i n e e r i n g

Consultancy B u r e a u , C e y l o n Electricity Board, w h o have been

w o r k i n g w i t h i n t e r n a t i o n a l f i n a n c i a l institutions such as the W o r l d

B a n k , A s i a n D e v e l o p m e n t B a n k w e r e using t h e S e c o n d E d i t i o n o f

the F I D I C Conditions o f Contract w i t h some modifications. In

January 1983 the I n s t i t u t i o n E n g i n e e r s , S r i L a n k a produced a

C o n d i t i o n s o f C o n t r a c t based o n the T h i r d E d i t i o n o f the F I D I C

document (Institution o f Engineers Sri Lanka, 1983).

T h e g o v e r n m e n t b y a C a b i n e t decision ( C a b i n e t Paper 1 1 6 )

t a k e n o n 10th A u g u s t 1 9 8 8 , has m a d e m a n d a t o r y the use o f the

document CONDITIONS OF CONTRACT FOR WORKS OF

B U I L D I N G & C I V I L E N G I N E E R I N G - S R I L A N K A , produced by

the Institute for Construction Training and Development,

c o m m o n l y k n o w n as the ' I C T A D C o n d i t i o n s ' , i n the state sector.

(ICTAD, 1988). The I C T A D Conditions o f Contract w h i c h is

based o n the T h i r d E d i t i o n o f the F I D I C C o n d i t i o n s o f C o n t r a c t ,

w a s first published i n S e p t e m b e r 1 9 8 6 . It has been revised once

a n d t h e current v e r s i o n is d a t e d January 1 9 8 9 . (ICTAD, 1989).

T h e I C T A D C o n d i t i o n s o f C o n t r a c t is a d o c u m e n t far from perfect

a n d there is a plenty o f scope f o r i m p r o v e m e n t s .

I t has to be a p p r e c i a t e d that in t h e f o r m u l a t i o n o f the I C T A D

d o c u m e n t , the authorities h a v e e n d e a v o u r e d to p r o v i d e solutions to
some o f the u r g e n t p r o b l e m s f a c e d by local contractors such as
delays i n p a y m e n t t o contractors, inadequate system o f f i n a n c i n g o f
contractors, p o o r construction m a n a g e m e n t etc.

1.1.4 Problems with ICTAD Conditions of Contract

T h e I C T A D C o n d i t i o n s o f C o n t r a c t is based o n the T h i r d

E d i t i o n o f the F I D I C C o n d i t i o n s w h i c h is seventeen years o l d . A s a

result, it suffers from all t h e shortcomings associated w i t h the base

document. Although the Fourth Edition o f the F I D I C Conditions

w a s p u b l i s h e d i n 1 9 8 7 , I C T A D is yet to update t h e C o n d i t i o n s o f

C o n t r a c t w h i c h has b e c o m e obsolete. Furthermore the ICTAD

d o c u m e n t suffers from t h e p o o r q u a l i t y o f t h e p r o d u c t i o n , the

presence o f n u m e r o u s t y p o g r a p h i c a l errors, a n d t h e presence of

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 several clauses which are not acceptable particularly to the
E m p l o y e r s . W e a k n e s s e s o f the I C T A D C o n d i t i o n s are e n u m e r a t e d
i n section 4.1.

A n o t h e r negative aspect o f the I C T A D d o c u m e n t is that it

attempts to encompass both building construction and civil

e n g i n e e r i n g sectors into a single d o c u m e n t w h i c h is not a desirable

a p p r o a c h , g i v e n the d i v e r s i t y o f practices a n d traditions p r e v a i l i n g

in the two sectors. Such diversity is due to the distinct

characteristics o f the b u i l d i n g a n d c i v i l e n g i n e e r i n g sectors in

respect o f l e v e l o f risks, l i k e l i h o o d o f variations in quantities a n d

scope o f w o r k , role o f A r c h i t e c t vis-a-vis E n g i n e e r , degree of

e n v i r o n m e n t a l impacts, etc.

A t present the local construction industry, particularly the

c i v i l e n g i n e e r i n g sector is h a n d i c a p p e d by the n o n - a v a i l a b i l i t y o f a n

upto d a t e a n d appropriate C o n d i t i o n s o f C o n t r a c t , hence the n e e d

f o r the d e v e l o p m e n t o f a n e w document.

1.2 Objectives

The main objective o f this study is to develop a new

C o n d i t i o n s o f C o n t r a c t suitable f o r m a j o r C i v i l E n g i n e e r i n g w o r k s ,

a n d appropriate to t h e local conditions.

T h e sub-objectives a r e .

(i) T o study t h e strengths a n d weaknesses o f the I C T A D

Conditions o f Contract;

(ii) T o study i n t e r n a t i o n a l l y accepted C o n d i t i o n s o f Contracts

for C i v i l Engineering works.

1.3 Methodology

A literature survey was carried out, and views and

suggestions o f senior e n g i n e e r s representing Employers, Engineers

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 a n d Contractors w e r e e l i c i t e d b y means o f a questionnaire a n d

interviews. F u r t h e r m o r e C o n d i t i o n s o f Contracts d r a w n up f o r

several m a j o r construction projects i n S r i L a n k a w e r e analysed.

E a c h clause o f t h e base d o c u m e n t F I D I C (Fourth Edition) was

analysed a n d a m e n d m e n t s h a v e been proposed w h e r e necessary.

1.4 Scope of Study

A s the title i m p l i e s , the study w a s c o n f i n e d to m a j o r c i v i l

engineering works. F o r the purpose o f this study, w o r k s h a v i n g

estimated v a l u e o f m o r e t h a n R s . 1 0 0 m i l l i o n s h a v e been considered

as 'major works'. A l t h o u g h the focus is o n m a j o r w o r k s , t h e

d o c u m e n t d e v e l o p e d is equally applicable t o small a n d m e d i u m

scale c i v i l e n g i n e e r i n g w o r k s , w i t h m i n o r modifications. The

C o n d i t i o n s o f C o n t r a c t d e v e l o p e d is targeted at re-measurement

contracts w h i c h is t h e most popular type o f contract used i n S r i

Lanka. T h e a r r a n g e m e n t o f insurance by t h e E m p l o y e r w a s not

considered i n t h e present study d u e to its l i m i t e d application i n S r i

Lanka.

1.5 Guide to the Report

T h e R e p o r t is structured i n t h e f o l l o w i n g manner.

Chapter II - Base Document and Data Collection

T h i s chapter gives t h e reasons f o r t h e selection o f F I D I C

( F o u r t h E d i t i o n ) as t h e base d o c u m e n t f o r t h e study, out o f several
d o c u m e n t s a v a i l a b l e , a n d describes t h e d a t a collection process.

Chapter III - Background and Concept of FIDIC Conditions

of Contract (Fourth Edition)

T h i s chapter outlines t h e b a c k g r o u n d , concept a n d principles

o f the F I D I C C o n d i t i o n s .

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Chapter IV - Analysis and Findings

T h e v i e w s o b t a i n e d f r o m the i n t e r v i e w s a n d p r o b l e m areas

i d e n t i f i e d f r o m t h e study o f contract d o c u m e n t s o f c o m p l e t e d m a j o r

c i v i l e n g i n e e r i n g projects are analysed i n this chapter.

Chapter V - Development of the New Conditions of Contract

This chapter outlines the policies adopted in the

development o f the n e w Conditions o f Contract.

Chapter VI - Conditions of Contract For Major Civil

Engineering Works

T h e o u t c o m e o f the research p r o j e c t v i z . the n e w C o n d i t i o n s

of Contract titled " Conditions of Contract for Major Civil

E n g i n e e r i n g W o r k s " is presented i n this chapter.