Securing finance for infrastructure projects require contracts that give lenders certainty on risk, cost and timelines. While JBCC is widely used in South African building works, it can fall short for bankable deals. Kirsten Kelly speaks to Fasken lawyers on why FIDIC provides greater clarity and risk allocation for infrastructure finance.

“The Joint Building Contracts Committee (JBCC) contracts are standard-form agreements developed in South Africa for the building and construction industry – particularly residential, commercial and institutional projects. JBCC is best suited to your ‘bricks and mortar’ type of construction,” says Arnold Sagonda, executive, project finance, Fasken.

While JBCC contracts are widely used for local building works, FIDIC offers a broader suite of internationally recognised agreements designed to address diverse project types, risk allocation and financing requirements.

“FIDIC (French acronym for International Federation of Consulting Engineers) developed a suite of standardised, internationally recognised construction contracts which have been updated over the years,” explains Danielle van der Vaart, partner, Fasken.

The contracts are colour-coded and each one is tailored to a different project delivery method, level of risk allocation, and type of works:

• Red Book – construction contract for building or engineering works designed by the employer, commonly used for traditional design–bid–build projects
• Pink Book – a modified version of the Red Book, adapted for projects funded by Multilateral Development Banks (MDBs)
• Yellow Book – where mechanical and electrical, building and engineering works are designed by the contractor, frequently used for process, electrical, or mechanical plant projects
• Silver Book – for engineering, procurement and construction (EPC) or turnkey projects where the contractor takes full responsibility for design, engineering, procurement and delivery, usually at a fixed price and within a fixed time
• Green Book – short form of contract for relatively simple or short-duration projects (less than 2 years, lower value)
• Gold Book – design, build and operate contract, often used in water, wastewater and energy sectors
• White Book – client/consultant model services agreement that governs the relationship between an employer (client) and a consulting engineer.

“As a standardised template, FIDIC contracts have been applied and tested globally and are widely trusted. While each country has its own legal and regulatory nuances, these can be addressed by adding project- or jurisdiction-specific clauses to adapt the standard form to local requirements,” states van der Vaart.

Risk reduction and allocation

Financiers look at reducing risk as well as allocating risk to the party most capable of bearing that risk.

“Lenders want to move as much risk as possible away from the employer (client or project owner). Because the employer is carrying the debt, lenders want to minimise the employer’s exposure to risks that could jeopardise repayment. To achieve this, risks are shifted as far as possible downstream to the contractor or other parties who are directly responsible for the design, construction, or operation of the project. That way, if something goes wrong, the employer (and by extension, the lenders) is not left carrying the full burden. Instead, the employer has a clear contractual right to claim against the contractor or another responsible party, creating a buffer between the financing and the practical risks of delivering the project,” says van der Vaart.

Contracts where there is a fixed price that is not re-measurable, a clearly stated completion time with penalties for delays and a defined allocation of risk are favoured by bankers. Contracts need to offer certainty of output, certainty of price and certainty of timeline. The most lender-friendly of FIDIC’s suite of contracts is the FIDIC Silver Book.
There are allowances for sub-contracting, where FIDIC contracts will stipulate what type of work can be subcontracted, what parties can be chosen as sub-contractors and even monetary thresholds. “But the contractor will be fully liable for sub contracted work,” she adds.

Additional layers of protection are built into the contracts with bonds and parent company guarantees. “There is little point in claiming against a contractor that has run out of money, so it is important to have liquid security,” states van der Vaart.

Sagonda contrasts this with JBCC: “You’d almost have to rewrite the JBCC agreement to reach that level. Under JBCC, pricing is often linked to bills of quantities, meaning costs can fluctuate. JBCC includes provisions for variations and delays that allow contractors to claim additional time or costs. JBCC contracts also allow for a ‘cost plus profit’ approach.”

When tendering under a FIDIC contract, contractors typically include a contingency allowance in their lump-sum price to cover unforeseen risks and cost fluctuations they are expected to carry under the contract.

“The risk profiles under FIDIC and JBCC are different. Under FIDIC, risk is largely shifted to a contractor. But with JBCC, contractors can often claim additional costs and time extensions for unforeseen conditions, which shifts more risk back to the employer. That difference in risk profile is one of the reasons financiers see FIDIC as a safer choice,” Sagonda explains.

FIDIC contracts typically cap liability at 100% of the contract price, with exclusions for gross negligence or wilful misconduct, amongst others. Lenders will look at ‘worst case scenarios’ and model what level of risk the project can tolerate and thus what the likelihood is of reaching the liability cap. Insurance regimes vary by project and insurance cover will be taken out to provide another layer of risk mitigation. JBCC, however, has lighter insurance requirements given its focus on smaller works, and notably lacks standardised liability caps and consequential losses provisions.

Dispute resolution and enforcement

“Both FIDIC and JBCC agreements are regarded as contractual instruments, and the courts or arbitration forums do not distinguish between them. Any dispute arising under either form will be approached and resolved in the same manner as any other contractual dispute, based on the terms agreed by the parties,” says Tania Siciliano, partner, Fasken.

Arbitration serves as the final tier of dispute resolution under FIDIC and JBCC contracts, providing a specialised forum for settling construction-related disagreements. South Africa has a sophisticated arbitration environment with a strong pool of arbitrators.

Conclusion

While most clients are now well-versed in choosing between FIDIC and JBCC, uncertainty often arises around selecting the appropriate FIDIC book for a specific project. Siciliano explains that some private sector players find FIDIC daunting due to its length and complexity. “However its detail is precisely what makes it valuable. FIDIC goes further than most contracts in defining where risk lies. That clarity makes it easy to litigate on and for clients to understand where risk is allocated.”

Sagonda agrees: “The market has matured. Users understand that JBCC doesn’t suit every project, and that FIDIC – especially the Silver Book – is the benchmark for large-scale, lender-financed infrastructure. The 2017 Silver Book introduced significant improvements over the 1999 edition, and further updates are expected. New versions may soon incorporate ESG and sustainability provisions, reflecting global market shifts.”