Tunnelling Contracts – Has FIDIC unearthed a buried gem or does the NEC hit the tunnelling target?

Over the last couple of years, I’ve been lucky enough to work for developers in relation to a number of projects which involve significant excavation and tunnelling works. As a lawyer who started her working life as a civil engineer, the risk balance and technical considerations underpinning these contracts is right up my street. These are high risk civils works that require specialist terms, conditions and risk allocation mechanisms. They will remain in use for major infrastructure projects, including pumped storage hydro, roads, railways, power and utility tunnels, offshore wind connections, and more.

The two contracting forms battling it out in this market are FIDIC’s Emerald Book and NEC’s target cost contract. Having used both forms for tunnelling works I would say that each has its merits. I have summarised the key take aways below.

FIDIC Emerald Book

Whilst the FIDIC Emerald Book was first published in 2019, its niche remit as a tunnelling contract means that for many it still retains its sparkle as a new form. Attending the FIDIC conference in London this year, I was reminded of the 2023 conference at which the talk on the then new Emerald Book guide was hotly awaited. Having advised on a pumped storage hydro project using this form, my copy is already well thumbed.

Background – Why did FIDIC produce a specialist tunnelling form?

With no competitors to the Emerald Book on the market it would be fair to ask why FIDIC focussed its attention on underground works. Production of the Emerald Book was a joint initiative between FIDIC and the ITA (International Tunnelling Association). Both parties agreed the underground works market was growing and standard contracts did not adequately address rising risks. Projects often used split contracts—the Red Book for high-risk civils and the Yellow Book for less risky civil and other work elements. In producing the Emerald Book, FIDIC have provided the option to contract for different risk profiles under a single contract.

Contract Form – How have FIDIC crafted the gem?

First time users fear not. Whilst the Emerald Book’s specific features undoubtedly set it apart, this is not a departure from the family. There is much that regular FIDIC users will be familiar with.

The Emerald Book is a 2017 Yellow Book with some bolt on mechanisms. The most obvious of which is a tailored, Red Book style re-measurement price and time adjustment mechanism which sits outside of the claims process. In what could be seen as a departure from FIDIC’s strong adherence to its Golden Principles, FIDIC themselves noted when launching the Emerald Book that it can be used as a standard form in its own right, or for Emerald Book features to be bolted on to its 1999 Yellow Book or other forms of contract. From my perspective, this reflects our experience of developing contracts for major sub-surface works.

The Emerald Book is an acceptable starting point for the UK project contractor market, it is endorsed by key players in the global development banking world and is being used world-wide.

So, what are the key Emerald Book features:

• Balanced risk allocation – the emphasis is on ground conditions with a recognition and focus on unforeseeable physical conditions. Other risk profile items remain aligned with the Yellow Book. As for any project, each risk will need to be reviewed from the parties’ perspective to make appropriate allocation for the project in question.
• Geotechnical Baseline Report (“GBR) and Geotechnical Data Report (“GDR”) – assisting in, and setting out the parties’ agreed, underground risk allocation. More detail on these below.
• Role of the Engineer – whilst the role of the Engineer is similar to other FIDIC books, under the Emerald Book the Engineer plays a specialised role in monitoring ground conditions encountered and the measures adopted by the Contractor in response to such conditions. This role is critical to the GBR’s risk allocation and the re-measurement provisions.
• Excavation and Lining Works - a hybrid pricing mechanism balancing a lump-sum model for general works with a re-measurement-based system for specific high-risk excavation and lining works. Payment for the excavation and lining works is governed by the rates and prices set out in a Bill of Quantities covering fixed rate items, time related items and quantity related items. A Schedule of Baselines (i.e. a simplified bill of quantities) is used to implement the adjustment of the Time for Completion. This allows for the valuation of prolongation costs where unforeseeable subsurface conditions are encountered. 

GBR, GDR and Schedule of Baselines

The key tool in the Emerald Book’s risk allocation mechanism is the GBR. GBRs have been around since the 1970s so this is not a new FIDIC invention but many contract users will not be familiar with GBRs and even less will be experienced. The GBR is a key contractual document (not a non-reliance site investigation report) which sets out the parties’ agreed allocation of subsurface risk. It includes allocation for both the geology and the reaction of the ground to excavation and support under the agreed construction methodology. Essentially it defines what is foreseeable in terms of ground conditions. The Employer bears the risk of conditions worse than the GBR, but gains time and cost advantages if conditions are better. Anything which is outside of the scope of the GBR is considered unforeseeable providing the Contractor with time and cost relief.

The GDR is a purely factual report on the geological and geotechnical survey data gathered. It does not impact what is foreseeable but may be useful in updating the GBR, where the Contractor proposes alternative construction methods and the GBR is otherwise silent.

The dynamics in finalising a GBR can be complex. A good GBR requires good data and good interpretation of that data and construction methodology. It necessitates collaboration between the technical, commercial and legal teams to move from the GDR through to a finalised GBR contractual document. An initial investment is needed, which may not be appealing for some projects, but allocating additional funds to GBR development provides more information for pricing and leads to greater cost certainty. In essence, spend more up front to spend less later.

NEC Target Cost

NEC’s Option C, the target cost contract is popular in the UK civils market and is championed by several organisations as an effective procurement method for tunnelling related works. This is not a specialist contract form and one benefit of that is market familiarity, however it does require tailoring for use on high risk, tunnelling works. In relation to its use for tunnelling projects the following key points should be considered:

Target Cost

The NEC target cost contract is a re-measurement contract with a target cost mechanism to incentivise collaboration between the parties and allocate the risk of overspend and the benefit of underspend. Unlike the Emerald Book, where the contractor takes price risk under a lump sum pricing mechanism for less risky works, the contractor is paid for the work it carries out subject to the pain/gain share. The is preferable for contractors where the risk of unforeseen subsurface conditions are high and may drive more competition at tender stage from a stretched supply chain. If the Emerald Book is chosen, contractors may seek to negotiate towards this position, expanding the scope of the excavation and lining works principles.

GBR incorporation

Often tunnelling contracts based on the NEC target costs contract will incorporate a GBR linked compensation event mechanism to determine the contractor’s rights to an extension of time where unforeseen ground conditions are encountered. The comments above in relation to finalising the GBR are equally relevant here. Particular thought must be given to ensuring the Project Manager’s role in monitoring ground conditions encountered (and the measures adopted by the contractor in response to such conditions) is appropriately defined. The quality of project management resource is a key driver for success on projects that use NEC contracts. Whilst the role of the Engineer in FIDIC is undoubtedly significant, NEC’s proactive project management processes up the ante, and the introduction of the GBR provides an additional layer of complexity and importance. Development of the GBR during X22 ECI stage contracting provisions may also require the inclusion of bespoke drafting.

Regardless of the contract form selected, tunnelling projects will always demand thorough analysis of construction risk and I look forward to having my engineering brain challenged by these complexities.