Procurement difficulties in appointing the DAB No DAB

Procurement difficulties in appointing the DAB No DAB in place: how to deal? ‘TECHNICAL AUDIT’ VS FIDIC DAB/DAAB MECHANISM Case study: a large and complex infrastructure, under FIDIC Contract, completed within the budget without appointing the DAB 4 TH GLOBAL PROCUREMENT CONFERENCE Villa Mondragone 9 July 2019 Angelo Bianchi Procurement Specialist, PMP®

The context • We are all aware of the benefits of the Dispute Adjudication Board (DAB) mechanism in large infrastructure projects • While the old FIDIC suite (1999) recommended an ad-hoc DAB on Yellow Book contracts and a standing DAB on Red Book contracts, the new FIDIC suite (2017) recommends a standing DAAB (Dispute Adjudication/Avoidance Board) on all forms of contracts Angelo Bianchi, PMP® • DABs facilitate agreement and are a powerful tool for resolving disputes before parties move with an arbitration 2

Benefits of an early appointing of the DAB • Ideally DAB members should be selected and appointed before works commence at site • Multilateral Development Banks are supporters of the DAB mechanism and encourage the appointment of the DAB at an early stage Angelo Bianchi, PMP® • Most of the benefits of the DAB are possible if the DAB is constituted at the early phase of the contract, so that its recommendations can prevent mistakes and litigation costs 3

However, in practice … there are difficulties in appointing DABs • According to the FIDIC contract, each Party shall pay -half of the remuneration one • In most cases, Employers believe they can manage the disputes without the DAB and are doubtful that the DAB can really prevent/avoid future costs of litigation Angelo Bianchi, PMP® • Parties (in particular Employers) are concerned about the costs of the DAB, and they delay the appointing process 4

Further public procurement constraints • But most of the Employers are public Contracting Authorities and cannot appoint an expert without a public competitive procedure • In particular, the EU PRAG (Practical Guide for external contracts) does not allow the single tender procedure (direct selection) for the appointment of an expert, even if it is jointly appointed by both Parties Angelo Bianchi, PMP® • According to the FIDIC (MDB, 2010) contract, ‘the Parties shall appoint a DB by the date stated in the Contract Data’ (3 members in case they do not reach an agreement) 5

One of the EU procurement principle: Competition Angelo Bianchi, PMP® • UEfunded projects (external actions) have to be carried out in compliance with the PRAG. 6

The result of neglecting the procurement constraints: no DAB is appointed Angelo Bianchi, PMP® • As a consequence of the mentioned difficulties in appointing the DAB, many large infrastructure projects financed by the IFIs (EU in particular) are carried out under FIDIC contracts, but with no DAB in place 7

No DAB in place? Typical problems • On average, litigation costs are much higher of the saved DAB’s costs Contracts are completed with relevant delays and additional costs Angelo Bianchi, PMP® • The decisional process of the Employer is slower 8

This presentation focuses on the general difficulties of appointing DABs in international projects carried out under FIDIC Conditions of Contracts and in particular on the procurement issues of selecting Board members in EU-funded projects. The purpose is the identification of feasible and efficient procurement procedures to have an early appointment of the DAB Angelo Bianchi, PMP® Objective 9

Case study Angelo Bianchi, PMP® A large and complex infrastructure successfully completed within the budget (210 million euro), with no DAB in place 10

Focus on a large transport infrastructure project co-financed by three major IFIs Angelo Bianchi, PMP® • The project is the construction of a section (28 Km long) of a new motorway along one of the Pan-European Corridors 11

Scope of the Works Contract • • • new motorway, 2 lanes double carriageway 28 km long 6 major bridges 2 twin-tube tunnels (1. 2 km each) 8 million m 3 of earthworks Angelo Bianchi, PMP® carried out under FIDIC RB (1999) 12

The crucial contractual facts • The Engineer’s Team included 20 full-time experts on site (8 expatriates and 12 local experts), for a contract value of 5% approximately of the construction costs • The Engineer’s Team included a short term FIDIC expert, who provided his opinion on each claim, before the involvement of the Technical Audit Team • The Employer was supported by a Board of local experts Angelo Bianchi, PMP® • The works included the re-design of 5 out of the 6 major bridges, following variations proposed by the Contractor (to move foundations out of the river beds) 13

The procurement procedure chosen by the IFI • At the beginning of the 3 rd of the 4 years planned for the completion of the works, the IFIs’ coordinator realised that the Parties had delayed the appointment of the DAB, to the point of not having appointed him at all • The IFI decided to invest a small amount (0. 1% of the works contract value) in the appointment of a ‘Technical Audit Team’, following the a public competitive procedure called FWC (*), which is completed by 21 calendar days Angelo Bianchi, PMP® • But relevant contractual issues had arisen, and they required prompt action from a Dispute Resolution Board 14 • (*) FWC is the EU standard procurement procedure used for external contracts with value of < EUR 300, 000 and duration up to 3 years

The Technical Audit Team, appointed by the IFI (grant) It consisted of 4 Independent Senior Experts, recruited and coordinated by an International Consulting Firm: Highway Engineer (TL), expert of Works Supervision Contract Engineer Bridge Specialist Tunnel Specialist Angelo Bianchi, PMP® 1. 2. 3. 4. 15

The To. R of the Technical Audit Team (a de facto DAB? ) The To. R of our Technical Audit Team were very similar to the general obligations of a DAB: • Ensure availability for periodic visits to the site • Meet with Employer/Contractor/Engineer without giving advise to either Party on the conduct of the contract • Give advice and opinions on specific contractual issues, if and when required by the IFI Angelo Bianchi, PMP® • Become conversant with the contract and progress of the works 16

Factual results of this case study • Two relevant Contractor’s claims for additional costs were withdrawn • The suspended payment of a relevant IPC was released, and the works moved forward according to the Programme • The Engineer’s assessment of a large and complex variation proposed by the Contractor was definitively completed, with full agreement of the Parties • The Works were completed within the budget and with the desired quality Angelo Bianchi, PMP® Following the Technical Audit Team’s opinions, on issues that had caused Contractor’s claims and delays: 17

Conclusions • It should not be neglected that the appointment of the DAB in FIDIC contracts still remains difficult because of the Employers’ resistance and public procurement constraints • The competitive procedure may guarantee: equal independence and competence, at reasonable costs • The IFIs should consider to finance DAB’s costs through grants (following a proper competition), if they are really convinced of the DAB’s benefits for the implementation of works contracts Angelo Bianchi, PMP® • DABs (or equivalent Dispute Resolution Teams) may be quickly appointed by the IFI, following a competitive selection procedure (e. g. FWC) 18

Now, the procurement question: Angelo Bianchi, PMP® … are DAB members a Priestly Class of experts that must be selected without competition? 19

Benefits of the proposed procurement option Future situation • Appointment of the DAB is often delayed • The DAB is appointed by the IFI within 21 days • Employers are concerned about DAB’s costs • IFIs (supporters of DABs) take over the costs of the DABs (by grants) • DABs (suite 2017? ) risk to be considered a ‘priestly class’ appointed without competition • The DAB is selected following a standard competitive public procurement procedure • The appointment of the DAB risks • The appointment is fully to be non compliant with the public procurement rules Angelo Bianchi, PMP® Current situation 20