Analysis of the terms of the 2017 Agreement

The construction sector in Pakistan is a fast-growing sector that is in line with the global construction trajectory and its contribution to Pakistan’s GDP in FY2022 was nearly PKR 1,848 billion, representing a year-on-year growth of 31.1%. The Business Monitor International (BMI) study also outlined healthy growth prospects for the industry and forecast a growth rate of 9.1% over 2016–2025.

Construction projects in Pakistan consist of multi-level and interconnected stages, ranging from planning and design to procurement, scheduling, execution and project management. To be successful in the competition, the project must be implemented in accordance with industry regulations. The regulatory responsibilities of Pakistan’s construction sector lie with the Pakistan Engineering Council (PEC): the main regulatory body responsible for registering engineers and contractors to ensure that they meet the required standards and qualifications to practice in the industry.

As well as regulating the work of engineers, the PEC’s role is integral to promoting uniformity in the construction sector through a standard document called ‘Conditions of Contract’. The role of the Conditions of Contract is to ensure transparency in the bids, evaluations, awards and performance of construction and consultancy contracts, which are dependent on tender/contract documents prepared on a fair and equitable basis for stakeholders. The contract terms address the inefficient practice of implementing construction projects, both public and private, where different government departments, autonomous bodies, etc. prepare their documents based on the limited expertise available. Such documents are either one-sided or do not adequately protect the public interest. Moreover, the lack of uniformity in the preparation of documentation between different departments creates confusion for contractors/suppliers, leading to many abuses and contractual disputes, resulting in high construction costs.

The PEC Standard Conditions of Contract were first formulated in 1992, which was in line with the findings/suggestions of a committee formed to examine and review existing policies and procedures for awarding large contracts and propose measures to prevent abuses. The Contract Conditions operated in accordance with the FIDIC package in Pakistan to meet the unique requirements and specifications of the Pakistani construction sector.

The construction sector in Pakistan under the PEC mandate until recently operated under the FIDIC Conditions of Contract 1987. In May 2024, PEC announced the long-awaited update of the 2017 Conditions of Contract, incorporating the latest changes introduced by FIDIC in later versions of the FIDIC suite. The update ensures that construction contracts are compliant with global standards and requirements of the Asian Development Bank (ADB), World Bank and the latest FIDIC Standard Forms of Contracts, which is a significant step forward for the Pakistani construction sector, especially in terms of dispute resolution procedures.

The 2017 Updated Conditions of Contract provide a comprehensive framework for contracts between parties involved in construction projects, including clients, contractors and consultants, which has significant implications for engineering projects in Pakistan. This update is a major step in PEC’s modern approach and will help bring the construction industry’s practices in line with global best practices.

The new terms of the contract are based on the FIDIC Conditions of Contract for the Construction of Building and Engineering Facilities Designed by the Ordering Party, second edition (Red Book 2017). This addition may represent a paradigm shift as it will take Pakistan’s construction industry from the 20th century to the 21st century as our previous document included the General Conditions of Contract from the ‘FIDIC General Conditions of Contract 1987 reprinted in 1992 with further amendments’. Compliance with international standards ensures consistency and transparency of project implementation. Contractors and employers can now rely on a well-defined set of rules during the tendering process, reducing confusion and disputes. This addition will open the door to learning and adopting the latest contracting practices for engineers/contract managers in the construction industry in Pakistan.

The new Terms and Conditions provide a healthy addition of “???????????? (??????????????????????????????????????????????????? ???????????????????????????????????????????????? to take into account the latest practices. It also stipulates that foreign builders cannot participate in tenders individually. Foreign Constructor will enter into a joint venture with a Pakistani Constructor registered with PEC and eligible to participate in the Bidding process, foreign companies can transfer advanced construction techniques, technologies and management practices.

Apart from the increase in space as indicated above, the renewed contract terms have a profound impact on Pakistan’s construction sector. The inclusion of the Dispute Avoidance/Adjudication Board (DAAB) from the inception of the project is a long-awaited change.

Dispute Avoidance/Adjudication Boards (DAABs) are a regular feature of international construction and infrastructure contracts. DAABs were originally introduced in the dispute resolution provisions of the 1999 editions of the FIDIC Contract, while FIDIC later introduced the concept in its 2017 contract package. The inherent complexity of construction disputes, combined with the technical elements and the involvement of multi-level stakeholders, requires DAAB assistance in the resolution disputes in real time, preventing cost spirals, adverse relationship effects and damage to the project as a whole.

The theory behind “comply now, argue later” arbitration boards allows the contract to continue without unnecessary interruption, while preserving the parties’ right to seek final resolution of the dispute through normal judicial or arbitration channels. Apart from the private sector, the public sector in Pakistan is the special benefactor of DAAB.

The main factor driving demand in the construction sector is spending under the Public Sector Development Program (PSDP); and then private investments in the construction sector. Most revenues from the construction industry come from government contracts, ranging from infrastructure construction to highways, offices and airports. Such projects create basic construction demand.

DAAB forecasts sunnier days for the public sector in Pakistan, implementing the preventive mechanism necessary to ensure timely implementation of projects, resulting in reduced costs for the exchequer and channeling the compound positive impact of the construction industry on Pakistan’s GDP.

If we talk about the softer impact of the renewed PEC Conditions of Contract of 2017, this development allows for a welcome alignment with international standards for construction project management and dispute resolution. The uniformity and adherence to best global standards brought by the Conditions of Contract 2017 provides an incentive for foreign investors to engage Pakistani contractors in construction projects, enabling a revenue stream for the country and contributing to the per capita income of Pakistani construction practitioners.

Incorporating DAAB requires a group of practitioners skilled in such dispute resolution mechanisms. An indirect effect would be the need for capacity building in the country, which highlights the importance of organizations such as the Chartered Institute of Arbitrators with their regulations on arbitration boards and the Dispute Resultation Board Foundation with their training to act as arbitrators member of the dispute board of lawyers, engineers and consultants .

The introduction of the Conditions of Contract 2017 in Pakistan represents a significant step forward in modernizing and improving the legal framework governing construction and related projects. These changes cover several key areas, including risk allocation, dispute resolution and project management, ensuring a more balanced and comprehensive approach to contracting. By incorporating international best practices and addressing shortcomings in legacy settings, the 2017 changes aim to increase transparency, reduce disputes and promote greater efficiency in project delivery. This evolution reflects Pakistan’s commitment to align its contractual practices with global standards, which will ultimately lead to a more enabling environment for investment and development, especially in the highly valued construction sector.

About the author:

The author is Mian Sheraz Javaid, distinguished advocate at Bar Association No. 5 and founder and chairman of the Chartered Institute of Arbitrators Pakistan Branch. He specializes in energy law and serves as an arbitrator, mediator, adjudicator, neutral evaluator and member of the arbitration panel around the world. Sheraz can be reached at [email protected] or on his LinkedIn as “Mian Sheraz Javaid”.