Introduction
There has been a growing trend in major infrastructure projects for the employer to appoint the main contractor as the initial operator of the plant. The logic is straightforward enough: a specialist contractor will know its product better than an incoming third-party operation and maintenance contractor, and if the EPC contractor has to live with the asset after completion, it has a much better reason to think seriously about durability, maintainability and long-term performance, rather than simply getting the job built and handed over.
In practice, this often means negotiating two contracts in parallel, with the main contract being entered into at the same time as a separate operation and maintenance contract. Less frequently do the parties agree to wrap design, construction, operation and maintenance into a single contract package.
That single contract package is the commercial thinking behind FIDIC’s Conditions of Contract for Design, Build and Operate Projects, better known as the Gold Book. When the first edition was published in 2008, it was an attempt by FIDIC to fill a gap in the existing FIDIC suite by offering one form that covered not just design and construction, but also operation and maintenance over the years that followed.
It has never come close to the market dominance of the Red, Yellow or Silver Books and there are good reasons for that. Even so, it remains an important form, particularly on water, wastewater, transport and energy projects where the performance of the plant for its full life cycle is as important as the original construction. Few would disagree that aligning design, construction and operation should produce better outcomes. The more difficult question is whether employers are prepared to pay for that alignment and whether contractors are willing to accept the extended risk that comes with it.
A different procurement model
The Gold Book is fundamentally different from most other FIDIC contracts because it contemplates a contractual relationship which continues after the works are complete and the Commissioning Certificate has been issued. The contract comprises two distinct phases:
- the Design-Build Period; and
- the Operation Service Period (intended to be at least 20 years).
The Design-Build Period operates in a broadly familiar manner based on the principles set out in the FIDIC Yellow Book. The contractor designs and constructs the works, assumes fitness-for-purpose obligations in relation to the completed plant and is paid for the works it undertakes.
The Operation Service Period commences on the date stated in the Commissioning Certificate (Clause 10.2, Gold Book). During the Operation Service Period the contractor provides the Operation Service in compliance with the Operation Management Requirements prepared by the employer and its own as-built documents and operation and maintenance manuals which are prepared as part of the Design-Build Period. In practice, the Operation Management Requirements are often given far less attention during procurement than the Employer’s Requirements for the design and construction of the works. That can be a mistake. Poorly drafted Operation Management Requirements can create uncertainty that persists throughout the entire Operation Service Period.
During the Operation Service Period the employer is responsible for the supply and delivery of the raw materials, fuels and consumables required for the plant to operate in accordance with the Employer’s Requirements. The employer is under its own fitness for purpose obligation in relation to such items, ensuing that they comply with the contract in respect of quality, purpose and function.
In my experience, this is the point at which many proposed Gold Book procurements begin to unravel. Employers are understandably attracted to the prospect of transferring operational risk but are often less enthusiastic when the contractor prices that risk appropriately. There can be a significant gap between the employer’s desire for certainty in the long term and its willingness to pay for it. That gap is often only exposed once contractors begin pricing the operational risk properly. Contractors are being asked to make assumptions about maintenance cycles, staffing, energy consumption, replacement of key components and the cost of keeping the facility at the required level of performance for many years. Making it harder is that this is all done before the asset has been fully designed or built, often the Operation Service Period will not commence for many years after the contract is signed.
Performance-based obligations
A notable feature of the Gold Book is its emphasis on the performance of the plant through the Operation Service Period. Clause 10.7 of the Gold Book requires the contractor to achieve the production outputs required under the contract. Where there is a failure to achieve such outputs, the parties are to jointly establish the cause of failure. If the cause of the failure is established to lie with the contractor, then the contractor shall pay the employer pre-agreed performance damages.
If a failure caused by the contractor continues for a period of more than 84 days, the employer has the option to reduce payment to the contractor or, if production output fails to reach pre-agreed minimum values, terminate the contract.
I have seen performance regimes where the parties spent months debating liquidated damages for delay but relatively little time considering how operational outputs would actually be measured ten years later. In a Gold Book project, that is usually the more important question. Too often the parties devote significant attention to construction requirements but leave operational outputs expressed at a high level. Those issues may not become apparent until years after completion, when the individuals who negotiated the contract have moved on.
As with all term-based contracts, the real issue is often a shift in the perceived risk allocation ten or fifteen years after contract signature when the project has moved well beyond the assumptions made at that stage. For example, in relation to changes in law, on a 20-year operating term it is unrealistic to assume that environmental rules, health and safety requirements or sector-specific operating standards will stand still.
The same is true of inflation and market volatility. A pricing model that looks workable at contract signature may no longer be fit for purpose years later, particularly where labour, energy or replacement parts move sharply. No contract can perfectly allocate 20 years of future risk. The Gold Book sometimes gives the impression that all risk for the Operational Services Period can be completely transferred to the contractor. In reality the parties are often agreeing a risk allocation based upon assumptions that both know may prove inaccurate over time.
The interface with PPP and concession structures
The Gold Book is sometimes described as a simplified PPP contract. Whilst there are similarities, important distinctions remain. Under a conventional concession structure, the private-sector entity often assumes financing obligations and derives revenue directly from users or through availability payments. The Gold Book does not try to deal with financing arrangements; the foreword reads, “The Contractor has no responsibility for either financing the project or for its ultimate commercial success”.
That makes the Gold Book more attractive in the right set of circumstances, particularly where an employer intends to secure a meaningful operating commitment without taking on the full complexity of a concession model. That is one reason why many major infrastructure projects still rely on bespoke PPP documentation rather than the Gold Book itself. That may explain why the Gold Book is frequently discussed but comparatively rarely encountered in the market. The Gold Book arguably occupies an uncomfortable middle ground. The projects that need sophisticated long-term operation and maintenance arrangements often move towards bespoke concession documentation, whilst projects that do not need that level of sophistication may struggle to justify the additional complexity of the Gold Book.
Why has the Gold Book not achieved wider adoption?
Given the market’s increasing focus on whole life asset performance, it might seem surprising that the Gold Book has not seen wider adoption. Part of the answer is that the Gold Book asks the parties to do something many are reluctant to do: price and allocate risk over a period that may run well beyond 20 years. Many contractors are understandably more comfortable with a design-build model where the risk profile is more defined and the commercial exposure does not continue deep into the asset’s operating life.
There is also a cultural issue. Most contractors are construction businesses rather than long-term asset operators. Whilst many have developed operational capabilities, committing to a 20-year operating obligation requires a fundamentally different approach to risk, staffing and business planning than that required under a conventional EPC contract.
There is also a market reality. Projects that genuinely need operation and maintenance obligations are often procured through bespoke and separate operation and maintenance agreements. In that environment, lenders, sponsors and public authorities usually want heavily negotiated, project-specific documentation rather than a standard form.
Conclusion
The Gold Book occupies a distinctive place in the FIDIC suite. It tries to deal with the life of an infrastructure asset, not just its delivery, and that remains a worthwhile ambition.
At its best, it encourages the right kind of thinking: design choices are tested against performance, maintenance burden and operating reality, rather than being treated as someone else’s problem after handover. That is a sensible and commercially mature approach to procurement.
My own view is that the Gold Book is probably best deployed on technically complex process plant where operational performance is central to the employer’s objectives and where the contractor already possesses genuine operational expertise. It is far less convincing when used simply as a mechanism to push additional risk onto the contractor. Like many FIDIC contracts, its success depends less on the form itself and more on whether the parties understand the commercial bargain they are striking.