Understanding Risk Allocation in FIDIC Construction Contracts • Arbitration

Construction contracts do more than set out scope, price, and timelines – they also determine how risks are allocated between the parties.[1] Risk allocation is often described as the “soul” of a construction contract because it defines who bears responsibility when projects face design errors, cost overruns, delays, or unforeseen site conditions.[2]

The Fédération Internationale des Ingénieurs-Conseils (“FIDIC”) suite of contracts, used widely in international infrastructure and energy projects, was designed to allocate the risks between the Employer and the Contractor in a fair, consistent, and predictable manner. Effective risk allocation promotes cooperation, reduces disputes, and supports successful project delivery. Poorly balanced risk allocation, by contrast, can increase costs, deter bidders, and lead to unnecessary disputes.

The Red, Yellow, and Silver Books are the most widely used FIDIC contracts, each created for a different type of construction project. The main differences between them lie in how control, risk, responsibility, and reward are divided between the Employer and the Contractor:

The Red Book follows an Employer-designed model, aiming for a fair and balanced distribution of risk.
The Yellow Book moves further toward Contractor responsibility, as the Contractor is in charge of both design and construction.
The Silver Book places the greatest share of risk on the Contractor, offering the Employer higher certainty over price and completion dates.[3]

Risk Allocation FIDIC This note offers a practical overview of how construction contracts allocate risk, focusing on the 2017 Second Editions of the FIDIC contracts. It aims to help practitioners understand how each form distributes responsibility for design, site conditions, time, and cost, so they can select the most appropriate contract and manage their projects more effectively.

What Is Risk Allocation in Construction Projects?

In construction, risk can be defined as “an uncertain event or set of circumstances that, should it occur, will influence the achievement of one or more of the project’s objectives.”[4] As Dr Nael G. Bunni explains, risk allocation in construction projects is complex because of the inherent characteristics of the industry.[5] He identifies several key factors that make construction projects uniquely exposed to a wide matrix of hazards and risks:

Long project durations: Construction projects often take years, sometimes exceeding the natural recurrence cycles of hazards like rainfall or flooding. As a result, the project remains exposed to various environmental and external risks throughout its lifecycle.
Large number of participants: Projects involve many people from different professions, cultures, and contractual backgrounds. This diversity increases the potential for misunderstanding and coordination risk.
Challenging environments: Many engineering projects are carried out in remote or difficult locations, where terrain and weather introduce unpredictable risks.
Use of new materials and technologies: Construction often relies on innovative but unproven materials or complex technology, which carries its own uncertainty and performance risk.
Extensive interdependence among parties: Projects require collaboration among numerous firms, such as suppliers, subcontractors, designers, and manufacturers, each with its own objectives. Misalignment between these participants can generate additional risk.[6]

A good construction contract cannot remove risk altogether, but it can manage it intelligently. The aim is to allocate each risk to the party best placed to control, bear, or insure against it. When the contract does not allocate risks properly and this balance is lost, projects suffer – costs increase, cooperation breaks down, and parties end up in a dispute.[7]

FIDIC’s Practical Approach to Risk Allocation

FIDIC’s approach to risk allocation is based on practical experiences from the construction industry and not only abstract legal theory. Each of its standard forms is designed to distribute risk fairly and predictably. The underlying idea is simple: risks should rest with the party best able to manage them. This reflects the so-called Abrahamson principle, which stipulates that:

Risk should be allocated to the party best able to control it.
Risk should be allocated to the party best able to bear it.
Risk should be allocated to the party best able to insure against it.
Risk should be allocated to the party that benefits from bearing it.
Risk should be allocated where it is most economically efficient.
Risk should be allocated clearly and unambiguously.[8]

FIDIC contracts are designed around maintaining this balance. They recognise that fairness depends on the specific context of each project, including its type, procurement method, and the capacities of the parties involved. By incorporating these principles throughout its suite of contracts, FIDIC offers not only a strong legal framework but also a practical foundation for managing projects cooperatively and successfully.

The FIDIC Golden Principles and Fair Risk Allocation

To preserve the integrity of its standard forms, FIDIC published the so-called FIDIC’s Golden Principles (GPs) in 2019. These five guiding rules are intended to keep the core structure and fairness of FIDIC contracts intact, even when parties make adjustments to the Particular Conditions to meet the needs of a specific project. The five FIDIC Golden Principles are:

GP1: The duties, rights, obligations, roles, and responsibilities of all the contract participants must be generally as implied in the General Conditions, and appropriate to the requirements of the project.
GP2: The Particular Conditions must be drafted clearly and unambiguously.
GP3: The Particular Conditions must not change the balance of risk/reward allocation provided for in the General Conditions.
GP4: All time periods specified in the Contract for Contract Participants to perform their obligations must be of reasonable duration.
GP5: Unless there is a conflict with the governing law of the Contract, all formal disputes must be referred to a Dispute Avoidance/Adjudication Board (or a Dispute Adjudication Board, if applicable) for a provisionally binding decision as a condition precedent to arbitration.[9]

Of these, Golden Principle 3 sits at the very core of risk allocation. It prevents Employers from transferring fundamental risks to the Contractors, such as, for instance, requiring the Contractor to design the majority of the Works under the FIDIC Red Book or forcing the Contractor to assume the risk of unforeseeable physical conditions under the Red or Yellow Book.[10] By following these principles, parties can adapt FIDIC contracts without altering the fair and balanced risk allocation.

Comparing the Red, Yellow, and Silver FIDIC Contracts

FIDIC’s three main contract forms, i.e., the Red, Yellow, and Silver Books, take different approaches to how projects are delivered and how risks are shared. Although they follow the same overall structure and legal framework, each one is designed for a different type of procurement and divides responsibility for design, cost, and performance in its own way.

The FIDIC Red Book (Conditions of Contract for Construction)

The Red Book is FIDIC’s traditional “employer design” contract, used where the Employer provides the design and the Contractor is responsible for construction. It is generally regarded as the most balanced of the three forms and is administered by the Engineer, who acts as both the Employer’s agent and a neutral and independent decision-maker:[11]

Design Responsibility: Employer.
Payment Basis: Re-measurement (based on quantities of completed work); parties may agree to change this, and in practice, they often convert it into a lump-sum contract.
Risk Allocation: Balanced; the Employer bears design and unforeseen site risks, while the Contractor bears construction and workmanship risks.

The Red Book is preferred for public infrastructure projects where the Employer wishes to retain design control and flexibility through the variation process.

The FIDIC Yellow Book (Conditions of Contract for Plant and Design-Build)

The Yellow Book is used for plant and design-build projects, where the Contractor is responsible for both design and construction. The Employer provides performance requirements rather than detailed drawings, and the Contractor must deliver a complete, functional facility meeting the Employer’s specifications. Like the Red Book, the Yellow Book includes an Engineer who administers the contract:

Design Responsibility: Contractor.
Payment Basis: Lump Sum Contract Price; interim payments are made as work proceeds and are typically based on instalments specified in a schedule.
Risk Allocation: Moderate; the Contractor bears design and performance risks, while the Employer retains certain site and external risks.

The Yellow Book suits complex industrial or energy projects, such as power plants or treatment facilities, where design and construction are closely integrated.

The FIDIC Silver Book (Conditions of Contract for EPC/Turnkey Projects)

The Silver Book is intended for EPC (Engineering, Procurement, and Construction) or turnkey projects, where the Employer seeks maximum certainty in price, scope, and completion date. The Contractor assumes nearly all project risks, including design, site conditions, and performance, and is supposed to deliver a fully operational facility ready for use.

Unlike the Red and Yellow Books, the Silver Book does not include an independent Engineer. Instead, the Employer (through its representative) manages the contract directly:

Design Responsibility: Contractor.
Payment Basis: Lump-sum, fixed-price model.
Risk Allocation: Heavily weighted toward the Contractor; minimal Employer risk.

The Silver Book is commonly used for large-scale, privately financed, or cross-border infrastructure projects where the Employer prioritises certainty and single-point accountability, such as in the power generation, oil and gas, or transportation sectors.

How the FIDIC 2017 Second Editions Allocate Key Project Risks

FIDIC’s standard forms distribute risks according to who is best placed to manage them. Each of the main forms, the Red, Yellow, and Silver Books, follows a distinct logic consistent with the Golden Principle 3, which warns against disturbing the fair balance of risk and reward set out in the General Conditions. In the following paragraphs, we explore how FIDIC allocates core project risks under the 2017 Second Edition, highlighting the practical differences between the three main forms.[12]

Design and Defects (Sub-Clauses 5.1 and 5.8)

In the Red Book, the Employer assumes full design responsibility. The Contractor’s role is limited to constructing in accordance with the Employer’s drawings and specifications, and its liability is confined to workmanship and material quality. This reflects a traditional, balanced approach consistent with the design–bid–build procurement model.[13]

The Yellow Book shifts design risk to the Contractor, who is required to both design and construct the works to meet the Employer’s performance requirements. The Contractor must ensure that the completed facility is “fit for purpose”, a higher threshold of responsibility that encompasses both design integrity and functionality.[14]

Under the Silver Book, design liability rests entirely with the Contractor, even when the Employer provides initial data or performance specifications. The Contractor must verify and take responsibility for the accuracy of all Employer-provided information (see Errors in the Employer’s Requirements under the FIDIC Contracts: Legal Implications and Lessons Learned).[15] This approach represents the furthest point in the FIDIC risk spectrum, transferring design and performance risk almost entirely to the Contractor.[16]

Unforeseeable Physical Conditions (Sub-Clause 4.12)

Unforeseeable ground conditions are another common cause of disputes in construction projects. In the Red Book, the Employer bears the risk of unforeseeable physical conditions, which reflects the Employer’s control over site investigation and the design.[17] The Contractor may claim time and cost if it encounters conditions that an experienced Contractor could not reasonably have foreseen at the tender stage.[18] In the Yellow Book, this risk is shared. The Contractor must inspect and assess the site, but retains the right to claim if truly unforeseeable conditions arise.[19]

By contrast, in the Silver Book, the Contractor is primarily responsible for almost all site-related risks. The Contractor accepts the site “as is” and is deemed to have obtained all information necessary to complete the works successfully.[20] This reflects the logic of turnkey and EPC contracting, where certainty of price and time is paramount for the Employer, but at the cost of a significantly higher risk for the Contractor.[21]

Financial and Cost Risk (Clauses 13 and 14)

FIDIC’s payment structure directly determines how financial risks are distributed.

The Red Book typically operates on a remeasurement basis, meaning the Employer bears the risk that actual quantities may differ from estimates. The Contractor is compensated for the measured quantity of work completed, allowing for price adjustments through variations.[22]

In the Yellow Book, the contract is typically a lump sum. The Contractor bears the risk of quantity and cost variations, except where instructed changes or unforeseeable events occur.[23]

The Silver Book goes a step further, imposing a fixed lump sum structure with limited grounds for price adjustment.[24] This gives Employers cost certainty but shifts virtually all financial risk to the Contractor. This certainty often comes at a price: Contractors increase their bids to offset exposure to unforeseen costs and inflationary pressures.[25]

Time and Delay (Sub-Clauses 8.4 & 8.5)

All FIDIC forms recognise that Employers may cause delay and thus provide for extensions of time (EOTs). The Red and Yellow Books allow EOTs for events such as variations, exceptional weather, or delays attributable to the Employer.

The Silver Book, however, limits such relief to narrowly defined events, generally excluding most Employer-related risks other than force majeure or exceptional events.[26]

Exceptional Events (Clause 18)

The 2017 updates to the FIDIC suite replaced the traditional concept of “force majeure” with “Exceptional Events”, harmonising the language across the suite.[27] The new term captures events beyond parties’ control, such as war, natural disasters, and government actions, and clarifies entitlement and procedure.[28]

The impact of the risk of a force majeure occurrence receives a similar treatment across all FIDIC forms: both the time and cost impacts of such an event are allocated to the Employer.[29]

A party that is unable to perform its contractual obligations due to a force majeure event must notify the other party within 14 days of becoming, or when it should have become, aware of the event. During this period, the affected party is excused from performing those obligations. In the case of the contractor, this may also give rise to additional relief, such as an extension of time and, in limited situations, compensation for extra costs incurred.[30]

Compliance with Laws (Sub-Clauses 1.13 and 4.8)

All FIDIC contracts require the Contractor to comply with applicable laws and health and safety obligations.[31] The 2017 editions expanded these obligations to reflect growing emphasis on sustainability, health and safety, and ESG compliance.[32] While responsibility for regulatory compliance rests with the Contractor, Employers retain obligations for approvals and land access.[33]

The Role of the Engineer and the DAAB in FIDIC Dispute Resolution

Under the Red and Yellow Books, the Engineer serves a dual purpose, acting both as the Employer’s representative and as a neutral decision maker in the administration of the contract.[34] The 2017 Second Editions strengthened this impartial role by expressly requiring the Engineer to act fairly and neutrally when assessing claims or determining entitlements. This clarification aimed to promote transparency and consistency in contract administration. In contrast, the Silver Book does not include an Engineer. Instead, it designates an Employer’s Representative, removing the neutral intermediary between the parties. Without an impartial decision-maker at this stage, disputes under the Silver Book may escalate more quickly, as determinations may be perceived as one-sided.[35]

FIDIC first introduced the concept of a Dispute Adjudication Board (“DAB”) in its 1999 suite of contracts. The DAB was designed to ensure prompt resolution of disputes and timely payment to contractors, providing swift, temporarily binding decisions to keep projects moving forward. These decisions remain effective unless revised or overturned through a final dispute resolution process, usually arbitration (see FIDIC Dispute Resolution Mechanism).

The 2017 Second Editions modernised and expanded this system by creating the Dispute Avoidance/Adjudication Board (“DAAB”). The change reflected a shift in emphasis from merely resolving disputes to actively preventing them. The idea behind this change is that the DAAB can now engage proactively, assisting the parties in identifying and addressing issues before they escalate. Under the new framework, in the Red Book, a standing DAAB must be appointed from the start of the project, unless the Parties agree otherwise.[36] The Yellow and Silver Books, which, under the 1999 editions, used ad hoc boards appointed only when disputes arose, now also provide for standing DAABs to be in place throughout the project.[37] Standing DAABs are supposed to encourage proactive dialogue and early resolution of disagreements before they escalate to arbitration.[38]

Conclusion

FIDIC’s Rainbow Suite provides a clear and reliable framework for balancing risk in international construction projects. The Red Book promotes shared risk and flexibility, the Yellow Book combines design and construction with moderate Contractor responsibility, and the Silver Book prioritises cost and schedule certainty but transfers most risks to the Contractor. Understanding these distinctions is essential for both Employers and Contractors – not only when selecting the right form at the outset but also when interpreting their rights and obligations if a dispute arises.

Nina Jankovic, William Kirtley, Aceris Law LLC

[1] R. Adra, J. Lindsay, E. Northcott, E. Van Espen, Allocation of risk in construction contracts, in S. Brekoulakis, D.B. Thomas, The Guide to Construction Arbitration (6^th ed., 2025), Introduction.

[2] Pragmatic Project Consilium, FIDIC Risk Allocation: A pragmatic comparison across Red, Yellow, and Silver Books 1999, 30 August 2024.

[3] E. Baker, R. Major, Over the rainbow: FIDIC’s Second Edition Red, Yellow and Silver Books, in S. Brekoulakis, D.B. Thomas, The Guide to Construction Arbitration (6^th ed., 2025).

[4] R. Adra, J. Lindsay, E. Northcott, E. Van Espen, Allocation of risk in construction contracts, in S. Brekoulakis, D.B. Thomas, The Guide to Construction Arbitration (6^th ed., 2025); M. Simon, D. Villson and K. Oewland, Project Risk Analysis and Management Guide (2nd ed., Association for Project Management, 1997, p. 17.

[5] N.G. Bunni, The FIDIC Forms of Contract (3^rd ed., 2005), pp. 93-94.

[6] Ibid.

[7] R. Adra, J. Lindsay, E. Northcott, E. Van Espen, Allocation of risk in construction contracts, in S. Brekoulakis, D.B. Thomas, The Guide to Construction Arbitration (6^th ed., 2025).

[8] The FIDIC Golden Principles (First Edition, 2019), p. 11; N.G. Bunni, The FIDIC Forms of Contract (3^rd ed., 2005), pp. 102-103.

[9] The FIDIC Golden Principles (First Edition, 2019), p. 8.

[10] The FIDIC Golden Principles (First Edition, 2019), p. 9.

[11] E. Baker, R. Major, Over the rainbow: FIDIC’s Second Edition Red, Yellow and Silver Books, in S. Brekoulakis, D.B. Thomas, The Guide to Construction Arbitration (6^th ed., 2025), Describing the rainbow, Red Book.

[12] R. Adra, J. Lindsay, E. Northcott, E. Van Espen, Allocation of risk in construction contracts, in S. Brekoulakis, D.B. Thomas, The Guide to Construction Arbitration (6^th ed., 2025).

[13] E. Baker, R. Major, Over the rainbow: FIDIC’s Second Edition Red, Yellow and Silver Books, in S. Brekoulakis, D.B. Thomas, The Guide to Construction Arbitration (6th ed., 2025), Describing the rainbow, Red Book.

[14] FIDIC Yellow Book, Sub-Clauses 5.1. and 5.8. E. Baker, R. Major, Over the rainbow: FIDIC’s Second Edition Red, Yellow and Silver Books, in S. Brekoulakis, D.B. Thomas, The Guide to Construction Arbitration (6th ed., 2025), Product, Fitness for purpose.

[15] FIDIC Silver Book, Sub-Clause 5.1; see also J. Hosie, Turnkey contracting under the FIDIC Silver Book: What do owners want? What do they get? (2017).

[16] FIDIC Yellow Book, Sub-Clauses 5.1. and 5.8. E. Baker, R. Major, Over the rainbow: FIDIC’s Second Edition Red, Yellow and Silver Books, in S. Brekoulakis, D.B. Thomas, The Guide to Construction Arbitration (6th ed., 2025), Describing the rainbow, Silver Book.

[17] FIDIC Red Book, Sub-Clause 4.12.

[18] R. Adra, J. Lindsay, E. Northcott, E. Van Espen, Allocation of risk in construction contracts, in S. Brekoulakis, D.B. Thomas, The Guide to Construction Arbitration (6^th ed., 2025).

[19] FIDIC Yellow Book, Sub-Clause 4.12.

[20] FIDIC Silver Book, Sub-Clause 4.12(c); J. Hosie, Turnkey contracting under the FIDIC Silver Book: What do owners want? What do they get? (2017).

[21] R. Adra, J. Lindsay, E. Northcott, E. Van Espen, Allocation of risk in construction contracts, in S. Brekoulakis, D.B. Thomas, The Guide to Construction Arbitration (6^th ed., 2025).

[22] FIDIC Red Book, Clause 14.

[23] FIDIC Yellow Book, Clause 14.

[24] FIDIC Silver Book, Clause 14.

[25] J. Hosie, Turnkey contracting under the FIDIC Silver Book: What do owners want? What do they get? (2017).

[26] FIDIC Silver Book, Sub-Clause 8.5.

[27] R. Adra, J. Lindsay, E. Northcott, E. Van Espen, Allocation of risk in construction contracts, in S. Brekoulakis, D.B. Thomas, The Guide to Construction Arbitration (6^th ed., 2025).

[28] FIDIC Red, Yellow, and Silver Books, Clause 18.

[29] Red, Yellow, and Silver Books, Clause 18; see also J. Hosie, Turnkey contracting under the FIDIC Silver Book: What do owners want? What do they get? (2017).

[30] FIDIC Red, Yellow, and Silver Books, Clause 18.

[31] FIDIC Red, Yellow, and Silver Books, Sub-Clause 1.13.

[32] R. Adra, J. Lindsay, E. Northcott, E. Van Espen, Allocation of risk in construction contracts, in S. Brekoulakis, D.B. Thomas, The Guide to Construction Arbitration (6^th ed., 2025), Change in law.

[33] FIDIC Red, Yellow, and Silver Books, Sub-Clauses 1.13, 4.8.

[34] F. Gillon, R. Morson, S. Jackson, C. de Jager, The New FIDIC Suite 2017: Significant Development and Key Changes (ICLR, 2018), p. 397.

[35] E. Baker, R. Major, Over the rainbow: FIDIC’s Second Edition Red, Yellow and Silver Books, in S. Brekoulakis, D.B. Thomas, The Guide to Construction Arbitration (6^th ed., 2025).

[36] FIDIC Red Book, Sub-Clause 21.1.

[37] The FIDIC Golden Principles (First Edition, 2019), p. 12.

[38] R. Adra, J. Lindsay, E. Northcott, E. Van Espen, Allocation of risk in construction contracts, in S. Brekoulakis, D.B. Thomas, The Guide to Construction Arbitration (6^th ed., 2025).