FIDIC contracts: analysis of the impact of general and particular

conditions on the financial risk management in Romanian

infrastructure projects 1

Professor Constanţa-Nicoleta BODEA2

Associate professor Augustin PURNUŞ3

Abstract
Construction projects are characterized by risks and uncertainties mainly due to
technical and economic complexity. Risk management is an important tool in making
decisions involving the identification and reduction, avoidance or transfer risk and
uncertainties consequences of events that occurs during project implementation. For this
reason, the objective of the contract between the beneficiary and the contractor is the
allocation of risk. The distribution of risk in contracts for the execution of construction
works was and is an ongoing challenge faced by parties having a significant impact on the
type of contract is used. On the one hand, the beneficiaries tend to transfer to the
contractors as many of the project risks and uncertainties, on the other hand, the
contractors look to exploit any weakness contract, so as to reduce their impact on the
expected profit. One of the most important risks assumed by the contractor by signing the
contract which is also increasingly common in the current economic situation is the
reduced financial capacity to support the project. A purely legal or purely technical
interpretation is not meant to describe the complexity of issues related to implementation of
construction projects. For this reason the authors have adopted a multi -disciplinary
approach, which includes the legal issues related to the nature of the contract, but also the
financial and technical aspects of construction projects. The paper aims to analyze how
special contract clauses can influence the implementation of construction projects and in
particular the financial management of contractors. The authors propose a model for
analyzing the impact of FIDIC contract conditions applied on a case study of five transport
infrastructure projects.

Keywords: risk, contract, FIDIC, time, cost.

JEL Classification: K12, K23

1
This article was submitted to 6th International Conference “Perspectives of Business Law in the
Third M illennium”, 25 -26 November 2016, the Bucharest University of Economic Studies,
Bucharest, Romania.
2
Constanţa-Nicoleta Bodea – Bucharest University of Economic Studies, Romania,
bodeaconstanta@gmail.com
3
Augustin Purnuş – Technical University of Civil Engineering of Bucharest, purnus@utcb.ro
166 Volume 6, Issue 2, December 2016 Juridical Tribune

1. Introduction

Construction projects are characterized by a high level of risk and

uncertainty, due to their complexity. Risk management is an important tool in
making decisions involving the identification and reduction, avoidance or transfer
risk and uncertainties consequences of events that occurs during project
implementation. For this reason, the objective of the contract between the
beneficiary and the contractor is the allocation of risk.
The distribution of risk in contracts for the execution of construction works
was and is an ongoing challenge faced by the contracting parties having a
significant impact on the type of contract that will be used. On the one hand, the
beneficiaries tend to transfer to the contractors as many of the project risks and
uncertainties, on the other hand, contractors look to exploit any weakness contract,
so as to reduce their impact on the expected profit.
Projects risks can be classified on the basis of two factors: natural risks and
hazards due to human factor. Natural risks may be due to exceptional adverse
weather conditions, unpredictable forces of nature and unforeseeable physical
conditions. Risks due to human factor causes are determined, above all, the main
actors involved in the contract (employer, contractor, engineer or third parties), the
social or political events, economic dynamics and regulatory changes.
The authors analyze risks and contractual clauses 8:14 influence of FIDIC
contract conditions on the financial relationship between the beneficiary and
entrepreneur focusing on the effects of special conditions have on the financial
management of the contractor. Continuing a series of previous work4, 5, 6, 7 , the
authors propose a practical approach to quantify risk by defining a model for
analyzing the impact FIDIC contract conditions, which is applied in a case study of
five transport infrastructure projects.

2. FIDIC Conditions of Contract

The adoption of FIDIC contract conditions in infrastructure projects is

widely accepted around the world, being recommended or required in international
agreements mainly by the financing banks. These conditions were tested more than
50 years, they are flexible, reflect the market requirements and distribute balanced
the risks, rights and obligations of the parties by the terms contained therein.

4
Purnus, A., Bodea, C. N. (2015). Financial management of the construction projects: a proposed
cash flow analysis model at project portfolio level, „Organization, Technology & M anagement in
Construction: An international Journal”, Volume 7, Issue 1, 2015, pp. 1217-1227,
http://www.grad.hr/otmcj/clanci/vol%207_1/OTM C_6.p df (accessed 30 August 2016).
5
Purnus, A., Bodea, C. N. (2014). Correlation between Time and Cost in a Quantitative Risk Analysis
of Construction Projects, „Procedia Engineering”, Elsevier Ltd, vol. 85, 436-445.
6
Purnus, A., Bodea, C. N. (2016). Influența condițiilor de contract FIDIC asupra managementului
financiar al proiectelor de construcții, „Revista Română de Inginerie Civilă”, Vol. 7 (2016), No. 1.
7
Sararu, C.-S. (2014). The interpretation of administrative contracts, „Juridical Tribune – Tribuna
Juridica”, Volume 4, Issue 1, June 2014, pp. 152-156.
Juridical Tribune Volume 6, Issue 2, December 2016 167

Representing the most popular form of contractual relationship in the case

of infrastructure projects, FIDIC contract conditions 8, 9 are characterized by their
fairness in risk distribution. Since inception phase of the project, the beneficiaries
analyze risks and determine the form of contract that fits best to the level of risks.
Thus, when you choose Red Book, the beneficiary take the risks related to the
contract price, considering that the activities are measurable quantities of efforts.
When you decide to adopt the Yellow Book you avoid the risk of the contract
price, but you may lose control over quality. Some risks are shared, such as
legislative changes or price changes, while aspects of the obligations and
responsibilities of the parties become potential risk events.
The harmonization of FIDIC contract general conditions with the law in
force and the particular project is done through special conditions of contract.
Although FIDIC has provided a guide for drafting special conditions so that the
parties may not alter the equitable sharing of risks, most often the beneficiaries, on
the basis of priority public interest, make significant changes of general terms, thus
transferring most of the risks to the contractor, which frequently leads to situations
where projects are delayed and over the budget that was originally set. One of the
most important risks assumed by the contractor by signing the contract which is
also increasingly common in the current economic situation is the financial
capacity to support the project.
A purely legal or purely technical interpretation is not meant to describe
the complexity of issues related to implementation of construction projects. For this
reason, the authors have adopted a multi-disciplinary approach, in order to include
not only the legal aspects, of the nature of the contract, but also the financial and
technical execution of construction projects. The paper aims to analyze how special
contract clauses can influence the implementation of the construction projects and
in particular the financial management made by contractors.

3. The application of FIDIC Conditions of Contract in infrastructure

project in Romania

Current economic conditions of construction projects implementation are

characterized by a significant reduction of public investment, linked to an increase
of the aggressive competition, especially in the construction market. Despite
government efforts to use all financial resources, especially European funds, for the
development and completion of transport infrastructure projects, most of them are
delayed and over budget. European Commission10 criticized Romania's limited

8
FIDIC 1999, Conditions of Contract for Construction for Building and Engineering Works Designed
by the Employer, International Federation of Consulting Engineers (FIDIC), First Edition, 1999,
(Romanian version)
9
FIDIC, 1999, Conditions of Contract for Plant and Design-Build for Electrical and M echanical Plant
and for Buildings and Engineering Works Designed by the Contractor, International Federation of
Consulting Engineers (FIDIC), First Edition, 1999, (Romanian version)
10
European Commission, Country Report Romania 2016, Brussels, 26.2.2016, SWD (2016) 91
final, p. 41, http://ec.europa.eu/Europe 2020/pdf/csr2016/cr2016_romania_en.pdf, (accessed 30
August 2016)
168 Volume 6, Issue 2, December 2016 Juridical Tribune

capacity to absorb EU funds due to insufficient preparation of projects and the

influence of external factors. Less than 70% of European funds were used in the
period 2007-2014 and many projects await to be funded through 2015 - 2020
European Programs. Major European investment funds from the public budget or
involved in transport infrastructure projects require the use of balanced, accepted
and tested contracts. These characteristics are achieved by FIDIC conditions of
contract. FIDIC contract is the main type of contract used in transport
infrastructure projects in Romania. However, due to high competition, construction
companies are forced to participate in biddings with low prices and to accept
excessive risk and becoming financially very vulnerable. In the latest annual report,
the FIDIC President11 noted that, in recent years, contract conditions have
deteriorated, some firms accepting unfair contract terms.
In its report12 of June 2015, the National Company of Motorways and
National Roads in Romania presented the status of 28 transport infrastructure
projects underway. Of these 18% were terminated and 32% had extensions of time
from 6 to 23 months (Figure 1).

Transport Infrastructure Projects

2
12 Months 1

2
16 Months 1
1
9
18 Months 2 Project Duration
5
Terminated Projects
5
24 Months Projects with EOT
3
5
36 Months 1

5
48 Months

Figure 1

11
FIDIC (2015a). Annual report 2014-2015, available at: http://fidic.org/Annual_Report
“...Unreasonable price competition in the awarding of engineering services is more frequent today
than ever before. As a result, this situation brings inefficient investment in infrastructure
development. Many decision makers are creating less efficient systems which do not help to
improve the quality of life today and in the future. These are causing higher costs of construction
and operation, delays in delivery, increased risk-taking, and a less efficient response from the
developers of infrastructure to the real needs of social communities. …The conditions of our
contracts have also deteriorated in recent years. Some firms are wrongly accepting abusive
contract conditions, unlimited liabilities, on demand performance bonds, undefined scopes of
works in lump sum contracts, and other unfair demands, and this is contributing to the
deterioration of our profession.” (pag. 45).
12
CNADNR, Stage Projects underway, www.cnadnr.ro/sites/default/files/ (accessed 18 August
2015).
Juridical Tribune Volume 6, Issue 2, December 2016 169

More than 60% of the projects had a physical progress of less than 30%,
the least likely to be completed by 2015, while in terms of financial progress, most
of them were facing lack of financial resources (Figure 2).

Physical and Financial Progress

21.4%
0%
14.3%

39.3%
< 30%
39.3%

17.9% Physical Progress

30% - 60%
28.6% Financial Progress

7.1%
60% - 90%
17.9%

14.3%
90% - 100%

Figure 2

Even if the projects were relatively well supported with financial resources
by the employer, contractors have submitted a large number of claims. The three
main reasons for claims of contractors (73% of the total), are: lack of permits or
delays in ensuring the access to the site and expropriation delays and variation
orders (Figure 3).

Motives for Claims

100%
94%
Permits 9
90%
82% 88%
Expropriation and Site Access 8 80%
73% 70%
Variation Orders 7
60%
52% Motives for Claims
Changes of Technical Solutions 3 50%
Cumulative Claims
40%
Utilities Relocation 2
30%
27%
Design 2 20%

10%
Lack of Financing 2
0%

Figure 3

The lack of effectiveness in the implementation of several transport

infrastructure projects is explained by the influence of various economic and social
factors, including cost and time constraints imposed to contractors by FIDIC
170 Volume 6, Issue 2, December 2016 Juridical Tribune

contract conditions. It has become common practice to consider construction

contracts not only from a legal perspective, but also as a tool for financial
management of construction projects 13, 14 .
The report15 published in March 2016 presents the aggregate value of the
ongoing arbitrations before the International Court of Arbitration in Paris, all
initiated against CNADNR by contractors or consultants. 32 actions that have
asked for abroad court of arbitration have a total value of over 360 mil. Euro,
representing payments and unpaid bills by CNADNR, financial discrepancies or
non-implemented decisions. Analyzing the distribution of claimed values (Figure
4) we can see that over 80% of them exceed 5 mil. Euros.

1.1% 0.0%
< 1 mil. Euro 9 10.0%
20.0%
10 - 20 mil. Euro 8 30.0%
40.0% Number of
40.3%
Arbitrations
5 - 10 mil. Euro 6 50.0%
52.0% 57.9% Amount of
60.0% Claims
1 - 5 mil. Euro 5 70.0%
80.0%
> 20 mil. Euro 4 90.0%
100.0%
100.0%

Figure 4

Analysis of the impact of FIDIC contract conditions on the project

financial management for transport infrastructure sector is very relevant, taking
into account that the Minister of Transport Order no. 146/201116 requires the
application of FIDIC conditions (especially red and yellow Books) by all
subordinate agencies under the Ministry of Transport for transport infrastructure
works of national importance with public funds and contracts whose value exceeds
a certain amount. But the first attempt to impose FIDIC standard forms in Romania

13
Bănică, C. (2013), Standard forms of construction contracts in Romania, „Urbanism. Arhitectură.
Construcţii”,,vol. 4, no. 4.
14
Zimmermann, J., Eber, W. (2014). Development of key performance indicators for organizational
structures in construction and real estate management, Proceedings of the Creative Construction
Conference, 21-24 June, 2014, Prague.
15
http://www.tirmagazin.ro/index.php/din-presa/13-esential/esential/15789-cnadnr-poate-pierde-un-
sfert-din-bugetul-anual-in-instan ta# !/ccomment, acced on in 15 iunie 2016.
16
Official Gazette no. 188 of M arch 17, 2011, Order no. 146 of 1 M arch 2011 approving the special
contractual conditions of contracts for equipment and construction, including design and contracts
for construction of buildings and engineering works designed by the beneficiary of the
International Federation of Consulting Engineers in construction (FIDIC) to investment objectives
in the field of road transport infrastructure of national interest, publicly funded, Issuer: M inistry of
transport.
Juridical Tribune Volume 6, Issue 2, December 2016 171

is the common Order of the Ministry of Transport, Finance and Public Works no.
915/200817 , but its implementation was halted in 2009 due to contradictions arising
from the superficial translation and inconsistences with the legal framework and
regulations for the period18 .
Another important cause for the difficulties of contractors during project
execution is the extremely low offer prices at biddings. Award of construction
projects based on the criterion "lowest price" leads very often to situations where
projects are awarded at 50% of the reference value. The effects on the construction
industry of such practices are extremely harmful. On short term, contractors will be
unable to carry out the construction works due to low prices at tender stage. Also,
the quality of work could be significantly reduced. On long term, these practices
lead to insolvency and then bankruptcy.
The authors of the paper analyze the influence of Clause 8 and Clause 14
of FIDIC conditions of contract to the financial relationship between employer and
contractor and their effects on the contractor’s financial management. Continuing a
series of previous work19, 20 , the authors propose a practical approach to quantify
risk by defining a model for analyzing the impact of FIDIC contract conditions,
applied on a case study of five transport infrastructure projects.

4. Treatment of time and cost in FIDIC conditions of contract

Two main aspects define any contract: time and cost. The FIDIC
conditions of contract describes the aspects that govern the relationship between
the employer and the contractor within two clauses 21, 22 : Clause 8 "Commencement,
Delays and Suspension Works" and Clause 14 "Contract Price and Payment".
In Clause 8 are detailed the commencement of work, time for completion,
the time program, the conditions contractor will be entitled to an extension of time
for completion, delays caused by authorities, the rate of progress, delay damages,

17
Order no. 915/465/415 of 25 M arch 2008 approving the general and special contractual conditions
to completion of works, Issuer: M inistry of Finance, published in the Official Gazette NO. 424 of
5 June 2008.
18
Georgescu D. (2011), Considerations concerning the applying of FIDIC contracts in Romania,
„Bulletin of the Polytechnic Institute of Iasi - Construction & Architecture”, 61(2): 29-40.
19
Purnus, A., Bodea, C. N. (2015). Financial management of the construction projects: a proposed
cash flow analysis model at project portfolio level, „Organization, Technology & M anagement in
Construction: An international Journal”, Volume 7, Issue 1, 2015, pp. 1217-1227,
http://www.grad.hr/otmcj/clanci/vol%207_1/OTM C_6.pdf .
20
Purnus, A., Bodea, C. N. (2014). Correlation between Time and Cost in a Quantitative Risk
Analysis of Construction Projects, „Procedia Engineering”, Elsevier Ltd, vol. 85, 436-445.
21
FIDIC 1999, Conditions of Contract for Construction for Building and Engineering Works
Designed by the Employer, International Federation of Consulting Engineers (FIDIC), First
Edition, 1999, (Romanian version) p. 29 and p. 45.
22
FIDIC, 1999, Conditions of Contract for Plant and Design-Build for Electrical and M echanical
Plant and for Buildings and Engineering Works Designed by the Contractor, International
Federation of Consulting Engineers (FIDIC), First Edition, 1999, (Romanian version) p. 30 and
p. 47.
172 Volume 6, Issue 2, December 2016 Juridical Tribune

the suspension of work and its consequence, payments in event of suspension,

prolonged suspension and resumption of work.
Clause 14 details the contract price, the advance payment, application for
interim payment certificates, the schedule of payment, how will be made the
payment, the delayed payment and payment of retention money, the statement at
completion and the final payment certificate.
FIDIC Red Book “Conditions of Contract for Construction of buildings
and engineering works designed by the employer” - General Conditions"23 defines
the sequence of typical events of payments (Figure 5): at the end of each month or
the reporting period, the Contractor submit the Statement and the supporting
documents to the Engineer. After its verification, if the Statement is accepted, the
Engineer will issue in maximum 28 days the Interim Payment Certificate. The
Employer shall pay to the Contractor the amount certified within 56 days after the
Engineer receives the Statement and supporting documents. The Employer will
make the final payment within 56 days after the Engineer issue the Final Payment
Certificate.
Issue of the
Letter of
8.1 Commencement Contractor
Acceptance
Date submit the
14.3 Contractor Invoice 14.7 Employer
4.2. Issue of
submits makes the
Performance
Statement to payment to the
Security 14.2 the Engineer Contractor
Advance Engineer issues
Payment Interim Payment
Certificate
28d 28d

7d 7d

1 2 3 4 5
<28d

The first possible Interim Payment

Certificate in minimum 65 days
42d

The first possible Payment in minimum 100 days

Figure 5

23
FIDIC 1999, Conditions of Contract for Construction for Building and Engineering Works
Designed by the Employer, International Federation of Consulting Engineers (FIDIC), First
Edition, 1999.
Juridical Tribune Volume 6, Issue 2, December 2016 173

If we take into consideration that the minimum time needed by the

Contractor to prepare the Statement and supporting documents is 7 to 10 days, the
first Interim Payment Certificate (IPC) will be issue at 65 days after the Date of
Commencement. Considering that issuing the invoice by the Contractor is 7 days,
the first payment will be done in 100 days after the Date of Commencement. With
such constraints, the contractors will face a huge financial pressure in order to
sustain the progress of works according with their programs.

5. Impact Analysis of FIDIC contract conditions on the financial

management of projects

Due to the adverse economic conditions, the contractor decisions are based
taking into account his financial capacity to support the project, in direct relation
with the incomes. The proposed model consider that different type of construction
projects lead to specific shape patterns of the contract price distributed on time.
The objective of the analysis is, first, to quantify the contractor’s potential financial
effort due to the variation of several parameters: project duration, the date of
commencement, the time interval for the invoice payment and the date of issuing of
the Statement and supporting documents. Secondly, the analysis aims to calculate
the probability corresponding to a reasonable financial effort to support the project
and its execution in optimal conditions.
Five real projects of transport construction, based on FIDIC Red Book
Contract - General Clauses were analyzed. The first project represents the
consolidation of a section of national road length of 7.200 Km, the second project
aimed the construction of a by-pass (7.625 km in length), third one dealt with the
rehabilitation of a section of national road length of 38.27 Km, the fourth project is
the rehabilitation of a national road of 88.460 km and the fifth project is the
construction of a section of high way (19.650 km in length). There were developed
and analyzed a total of 270 different cash flow templates. The typical contract price
monthly distribution, payments and cash flow is presented in in Figure 6.
The following computation hypotheses were considered in the cash flow
analyze:
• The payments will be made considering only the General Conditions of
Contract;
• The effect of the advance payment and the guaranty for the advance
payment was not taken into account;
174 Volume 6, Issue 2, December 2016 Juridical Tribune

6,000,000
Incomes
Contract Price Monthly Distribution
4,000,000

2,000,000

-2,000,000

-4,000,000

-6,000,000

-8,000,000

-10,000,000 Project Cash Flow

-12,000,000

-14,000,000

Figure 6

• The depreciation, the bank taxes and bank charges were not taken into
account;
• The Statement and supporting documents are prepared by the Contractor
monthly, or for minimum 5% from the Contract Price.
According the contractual terms, the project's cash flow consists of the
following categories of contractor costs: costs of labor, materials, equipment and
transport, other direct costs, overheads, profit and incomes. In the cash flow
analyze, the following parameter’s variation were took into account:
• Construction project duration considering for one project the following
durations: 16, 18, 20, 22 and 24 months;
• The date of commencement; the project schedule was develop so that the
date of commencement of work to correspond the months from March to October;
• The time interval for the invoice payment considering the following
payment terms: at 30 days, at 60 days and 90 days;
• The date of issuing of the Statement and supporting documents. Two
cases were considered for the date of issuing the Statement: at 10 days and at 35
days after the reporting period.
In each scenario analysis it was determined the maximum amount of cash
flow and its share in the contract price and as a result, the financial effort that the
contractor have to support in order to carry out the work within the parameters
contracted, identifying the most favorable unfavorable situations for each type of
project.
The effect of project duration
For the study we examined the influence length of the project 1 - the
consolidation of a national road section 7,200 km, taking into account the variation
of its duration between 16 and 24 months. Cash flow was obtained under
conditions where that paying bills is 30, 60 and 90 days and the Statement and
supporting documents are issued at 35 days after the reporting period. Considering
that the date of commencement vary from March to October, there were retained
the maximum and minimum weights of the peak of cash flow. As a result, we
Juridical Tribune Volume 6, Issue 2, December 2016 175

obtained the variation of peak share of cash flow from the contract price variation
considering the duration of the project (Figure 7).

90%
83.82%
85% 81.89% 81.18%
80.55% 79.14%
80% 79.21% 77.19%
78.01% 77.34% 77.06%
75% 71.46% Min (30 Days)
75.30%
72.79%
70% 68.73% 71.28% Max (30 Days)
65% 67.63% Min (60 Days)
60.08% 63.50% 62.23%
60% 57.63% Max (60 Days)
56.13% 58.74% 59.55% Min (90 Days)
55% 56.70%
53.60% 53.24% Max (90 Days)
50% 46.00% 46.51%
45% 46.51%
44.26%
40%
16 Months 18 Months 20 Months 22 Months 24 Months

Figure 7

Analyzing the results, we can find that for this type of construction project,
the minimum weight of cash flow peak is obtained for 24 months duration, due to
the distribution of the contract price on a higher duration. For this duration, the
cash flow peak weight from the contract price varies from 46.5% to 79%
depending on the date of commencement and the interval for payment. The
contractor financial effort will be as higher as the delay of payment will be higher.
The date of commencement effect
In order to emphasize the influence of the date of commencement on the
contractor financial support, several hypotheses were taken into consideration:
• All five projects have the duration of 24 months;
• The Statements and the supporting documents are prepared and submitted
at 35 days after the end of the reporting period;
• The payments are made at 30, 60 and 90 days.
In the case of project 1 - the consolidation of a section of 7.200 km of a
national road, the cash flow peak weight from the contract price vary from 39.20%
to 63.20% of the contract price, depending the date of commencement and the
interval for payment (Figure 8). Optimal date of commencement of the project is in
April and May. Starting the project in all other months lead to a big contractor’s
financial effort.
176 Volume 6, Issue 2, December 2016 Juridical Tribune

Payment at 30 days Payment at 60 days

65% 62.94% 70%
65.89% 66.26%
58.61% 59.04% 64.45%
60% 65%
57.14%
62.03%
54.63% 60.61% 60.42%
55% 53.02% 52.53%
60% 58.64% 58.11% 58.61% 58.57%
50.29% 49.97% 50.10% 50.69%
49.10% 48.76%
50% Project 1 Project 1
45.76% 55% 53.55% 53.65% 53.32% 53.44%
Project 2 52.82% Project 2
51.93% 51.94%
45% 42.95% 42.67%
41.56% 41.95% 41.36% 41.95% Project 3 49.81% 49.59% Project 3
40.11% 50%
39.20% Project 4 Project 4
40%
45.61%
Project 5 44.14% 44.08% 44.38% Project 5
34.65% 45% 43.43% 43.90%
33.70% 33.95% 34.28%
35% 33.11% 32.37% 41.45%
30.75% 40.22% 40.62%
29.44% 40% 38.57% 38.89%
30% 38.07%
35.66% 36.00%
25% 35%
March April May June July August September October March April May June July August September October

Payment at 90 days
75%

70.05% 70.42%
70% 68.77% 68.75%
66.56%
65.86% 65.40%
65% 63.20%
61.86%
Project 1
59.12% 59.26%
60% 57.83%
57.60% Project 2
56.48%
54.89% 55.46% Project 3
55% 53.86% 53.38%
52.72% Project 4
51.87%
Project 5
50% 48.86%
47.73% 47.31%
45.97% 46.24% 46.61%
44.37% 44.91% 44.98%
45% 42.98% 43.42%
41.41%

40%
March April May June July August September October

Figure 8

For the project 2 - the construction of a by-pass of 7.625 km, the cash flow
peak weight from the contract price vary from 50.29% to 70.42% of the contract
price, depending the date of commencement and the interval for payment. Optimal
months for commencement of the project are July and August, while April is not
recommended for starting the project.
In the case of project 3 - rehabilitation of a section of national road in
length of 38.270 Km the cash flow peak weight from the contract price vary from
41.08% to 69.26% of the contract price, depending the date of commencement and
the interval for payment. The best time to start work is in March and April.
The fourth project 4 - the rehabilitation of a national road of 88.460 km, is
characterized by a change in shares peak cash flow between 42.19% and 57.60% of
the contract price, depending the date of commencement and the interval for
payment. Optimal starting date of the project is in September and October.
In the case of project 5 - construction of a high way section of 19,650 Km,
the cash flow peak weight from the contract price vary from 29.44% to 46.61% of
the contract price, depending the date of commencement and the interval for
payment. Optimum project start date is in March and April.
Juridical Tribune Volume 6, Issue 2, December 2016 177

The effect of the time period for paying bills

The effect of the time period for paying bills manifests on all the analyzed
situations. Considering the same set of conditions, the contractor’s financial burden
varies when paying bills is 30 days between 34.65% and 63%, 41% and 66% when
paying bills is 60 days and between 46% and 70% when paying bills is 90 days,
depending on the project type and project date of commencement (Figure 9).

75%
70.42%
66.26%
65% 62.94%
63.20%
60.61%
Project 1
55% 50.69% 53.65%
Project 2
Project 3
46.61%
45% Proiect 4
41.45%
42.95% Proiect 5
35%
34.65%

25%
Payment at 30 days Payment at 60 days Payment at 90 days

Figure 9

As a general conclusion on this issue, we can say that as the time for
paying bills becomes greater, the contractor’s financial effort becomes larger.
The effect of timeframe for issuing work situations
Although the preparation and issue of the statement and supporting
documents by contractors in the shortest time is in their interest, practice shows
that most often, they are not enough well organized and prepared for drafting the
necessary documents.
Issuing as early as the statement and supporting documents can reduce the
contractor’s financial burden between 2% and 12.78% for project 1 between 3.2%
and 9.07% for project 2 and between 6.72% and 10.65% for the project 3 taking
into account the project start date and time for paying bills (Figure 10).
178 Volume 6, Issue 2, December 2016 Juridical Tribune

14%
12.78%

12%
10.65%
10.19%
10% 9.07% 9.13% 8.97%
8.53% 8.57%
8.21% 8.02% Project 1
8% 7.45%
6.84% 6.72% 6.81% Project 2
6.51% 6.52%
6.25%
Project 3
6% 5.28% 5.17%
4.59% Project 4
4.12% 4.21% 4.21%
Project 5
4% 3.28% 3.27%

2.00% 2.02%
2%

0%
March April May June July August September October

Figure 10

In the case of the project 4, the financial burden may be reduce between
5.28% and 8.61%, and in the case of project 5, between 4.12% and 7.24%
depending on the start date of the projects and timeframe for paying bills.

6. Risk probabilistic approach

The deterministic, traditional approach, of the projects due to increasingly

more evident risks and uncertainties requires the application of methods and
techniques that take into account the events dynamics in the development of
infrastructure construction. Given that the financial effort of the contractor proves
to be significant, it is important to consider what share of peak cash flow from the
contract price for a reasonable likelihood. Considering the effects due by the
project duration, the timing for starting the work, the time for paying bills and, not
least, when issuing statements of work, the analysis model proposed to apply the
Monte Carlo method, considering potential event risk and uncertainty. Monte Carlo
method is a risk simulation tool that allows the quantification of the risks and
uncertainties, which is extremely helpful in making decisions.
For this purpose, was analyzed project 3 - rehabilitation of a section of
national road length of 38 270 km, considering the following scenarios: optimistic
scenario to a situation where the starting date of the works is in March, payment
bills is 30 days, and works statements are issued 10 days after the end of the
reporting period; the most likely scenario corresponds to the case where the starting
date of the works is in April, paying bills is 30 days, and works statements are
issued 35 days after the end of the reporting period; pessimistic scenario to a
situation where the starting date of the works is in August, paying the bills is 90
days and work situations are issued 35 days after the end of the reporting period.
The value of cash flow peak is 9.061 mil. Euro in the optimistic scenario,
11.555 mil. Euro for the most likely scenario and 18.335 mil. Euro for the
pessimistic scenario.
Juridical Tribune Volume 6, Issue 2, December 2016 179

Applying Monte Carlo method we obtained that, for a reasonable

probability of 75%, the peak cash flow should not exceed the amount of 12.0 mil.
Euro (Figure 11).

100.0% 700
650
90.0%
600
80.0% 550
70.0% 500
450
60.0%
Probability

Frequency
400
50.0% 350
300
40.0%
250
30.0% 200
20.0% 150
100
10.0%
50
0.0% 0
9,074,182.27
9,461,143.71
9,848,105.16
10,235,066.61
10,622,028.05
11,008,989.50
11,395,950.94
11,782,912.39
12,169,873.83
12,556,835.28
12,943,796.73
13,330,758.17
13,717,719.62
14,104,681.06
14,491,642.51
14,878,603.96
15,265,565.40
15,652,526.85
16,039,488.29
16,426,449.74
16,813,411.18
17,200,372.63
17,587,334.08
17,974,295.52
18,361,256.97
Cash Flow Peak Value

Figure 11

In these circumstances, to make sure the project will be supported from a

financial perspective and that the risks arising from the terms of the contract FIDIC
can be treated properly, the contractor must have that amount of money to cover
peak cash flow.

7. Conclusions

The results of this study suggest that the way Clause 8 and Clause 14 from
FIDIC General Conditions of contract are amended by the employer may have
significant effects on the contractor strategy to supply the financial resources. The
large size of the transport infrastructure projects requires a great financial effort of
the contractor in order to complete the works within the parameters of time, cost
and quality. Unfortunately, the experience of recent years shows that many
construction companies recorded a fragile liquidity situation, very exposed to
adverse shocks24 .
The analysis also suggests that there are a number of factors that can
influence decisions, both in the bid-tender stage, but especially during the
execution of infrastructure projects. These factors must be considered carefully by

24
Guda, I. (2015), „Analiza sectoriala: Lucrări de construcții ale drumurilor si autostrăzilor”, Coface
Romania, available at: http://www.coface.ro/Stiri-Publicatii/Publicatii/Analiza-sectoriala-Lucrari-
de-constructii-ale-drumurilor-si-autostrazilor (accessed 10 June 2016).
180 Volume 6, Issue 2, December 2016 Juridical Tribune

construction companies. The complexity and specificity of works and applied

technologies, the sequence of activities and resources involved, all are influencing
the contract price distribution and lead to significant changes in the share of cash
flow in the contract price. Construction companies must treat very seriously FIDIC
Conditions of Contract from the stage bid-tender, so, considering the duration of
the project start date thereof, the time for paying bills and the time needed to
develop and issue work situations correlated with the ability of financial support, to
take the most appropriate decision.
In order to analyze and understand the dynamics of the financial problems
faced by contractors after signing the contract, there were considered ideal and
homogeneous conditions. Describing more accurately the real processes, however,
require consideration of risks and uncertainties. The presented analysis propose a
model to quantify the financial risks of the contractor, taking into account the
projects duration , date of commencement of work, the time for paying bills and the
time required to prepare and issue work situations.
The analysis model integrates the way of defining scenarios (parameters,
lists / ranges of values associated indicators, scenario analysis, how the results are
presented and sequence of stages of analysis, starting with the deterministic,
followed by probabilistic analysis. This model is presented using the case study,
consisting of five transport infrastructure projects. The approach adopted by the
authors is multi-disciplinary, since it is based both on the use of technical
parameters, as well as economic and financial indicators, all in the context of
contractual mechanisms for the execution of construction works. As future
research, the authors propose to formalize the proposed analysis model to develop
a software package that facilitates the adoption of this model by construction
companies.

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