Ethiopian Roads Authority

Table of Contents

FINANCIAL CONTROL
6 FINANCIAL CONTROL..................................................................................................... 6-3
6.1 SECURITIES ................................................................................................................... 6-3
6.1.1 Types of Security .................................................................................................... 6-3
6.1.2 Bonds and Guarantees............................................................................................. 6-4
6.1.3 Conditional and Unconditional Bonds/Guarantees ................................................. 6-4
6.1.4 Issuers of Securities................................................................................................. 6-5
6.1.4.1 Bid Security......................................................................................................... 6-5
6.1.4.2 Performance Security .......................................................................................... 6-6
6.1.4.3 Advance Payment................................................................................................ 6-6
6.1.4.4 Retention ............................................................................................................. 6-7
6.2 INSURANCE ................................................................................................................... 6-8
6.2.1 Introduction ............................................................................................................. 6-8
6.2.2 Principles of Insurance............................................................................................ 6-8
6.2.3 ERA Project Insurance............................................................................................ 6-8
6.2.3.1 The Works........................................................................................................... 6-9
6.2.3.2 The Contractor's Equipment................................................................................ 6-9
6.2.3.3 Damage to Persons and Property ........................................................................ 6-9
6.2.3.4 Third Party (including Employer's Property) .................................................... 6-10
6.2.3.5 Accident to Workmen ....................................................................................... 6-10
6.2.3.6 Professional Indemnity...................................................................................... 6-10
6.2.4 Expiry and Renewal of Insurances........................................................................ 6-10
6.2.5 Insurance Exclusions............................................................................................. 6-11
6.2.6 Insurance Policy Exclusions ................................................................................. 6-11
6.2.7 Insurer ................................................................................................................... 6-12
6.2.8 Adequacy of Insurance.......................................................................................... 6-12
6.2.9 Remedy on Contractor's Failure to Insure............................................................. 6-12
6.2.10 Insurance in Joint Names ...................................................................................... 6-12
6.2.11 Indemnity .............................................................................................................. 6-13
6.3 CONTRACTOR'S IPC................................................................................................... 6-13
6.3.1 Cost Control .......................................................................................................... 6-13
6.3.2 Contract Currencies............................................................................................... 6-14
6.3.3 Contract Exchange Rate........................................................................................ 6-15
6.3.4 Monthly vs. Cumulative........................................................................................ 6-16
6.3.5 IPC Format ............................................................................................................ 6-17
6.3.6 Work Done ............................................................................................................ 6-18
6.3.7 Variations .............................................................................................................. 6-18
6.3.8 Dayworks .............................................................................................................. 6-19
6.3.9 CPA....................................................................................................................... 6-20
6.3.10 Retention ............................................................................................................... 6-22
6.3.11 Materials on Site (MoS) ........................................................................................ 6-23
6.3.12 Advance Payment.................................................................................................. 6-23
6.3.13 Any Other Amount................................................................................................ 6-25
6.3.13.1 Interest on Late Payments ............................................................................. 6-26
6.3.13.2 Claims ........................................................................................................... 6-26
6.3.13.3 Early / Late Contract Completion ................................................................. 6-26
6.3.13.4 Duties and Taxes ........................................................................................... 6-27
6.4 CONSULTANT'S INVOICE .......................................................................................... 6-27
6.5 LIQUIDATED DAMAGES............................................................................................ 6-27

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6.6 MEASUREMENT .......................................................................................................... 6-29

6.6.1 Records.................................................................................................................. 6-29

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6.6.2 Final Estimate........................................................................................................ 6-30
6.6.3 Statement at Completion ....................................................................................... 6-30
6.6.4 Final Statement...................................................................................................... 6-31
6.6.5 Variations vs. Addenda ......................................................................................... 6-31
6.7 APPENDICES ............................................................................................................... 6-32
INDEX..................................................................................................................................... 6-187

Appendix 6-1 - Guideline CA2 Securities ............................................................................... 6-33

Appendix 6-2- Standard Forms of Security ............................................................................ 6-54

Appendix 6-3 - Insurance Summary........................................................................................ 6-61

Appendix 6-4 - FIDIC IV/IDA/NCT/ICB Insurance Clauses ................................................. 6-63

Appendix 6-5 - Guideline CA3 Financial Monitoring ............................................................. 6-77

Appendix 6-6 - Monthly vs. Cumulative IPC........................................................................... 6-99

Appendix 6-7 - ERA vs. WB ICB SBD Clause 60................................................................ 6-103

Appendix 6-8 - CPA Indices and Weightings ....................................................................... 6-112

Appendix 6-9 - Guideline CA4 Consultant's Invoice ........................................................... 6-115

Appendix 6-10 - Guideline CA5 Liquidated Damages ........................................................ 6-136

Appendix 6-11 - ERA Measurement and Payment Clauses.............................................. 6-156

Appendix 6-12 - Further Explanations................................................................................... 6-159

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6 FINANCIAL CONTROL

FINANCIAL CONTROL
6.1 SECURITIES
When entering into a large value contract it is usual for the Employer to seek some form or forms
of security which will reduce the risk of loss in the event that something “goes wrong” with the
project. It is also usual that a contracted supplier of some high value item or goods requests a
guarantee of payment from the Employer, this is not, however, common in conventional
construction contracts as undertaken by ERA and is not, therefore, discussed further here. There are
many ways in which something can “go wrong”. Some of the most common ways are the
following:

• The Employer has insufficient funds to complete the project

• The Employer unreasonably delays payment or refuses to pay
• The Contractor becomes bankrupt or absconds
• The Contractor’s quality of work or rate of progress is so poor that the contract is
terminated by the Employer
• The Contractor is prevented from completing the works
• The works are damaged or delayed by natural or accidental disasters e.g. floods, fire,
earthquakes etc.

Whilst it is a relatively simple matter to insure against damages due to natural or accidental causes
it is more difficult to insure against the other items. This security is made more difficult in an
international environment where the different parties to the contract may fall under different legal
systems, to those of the contract, in their home countries. It is essential that the Employer be able to
call upon the security and receive compensation no matter what the origin of the cover is. It is
therefore imperative that the person responsible for the management of a project, on behalf of the
Employer, satisfy himself that the institution providing the security is sound and that the legal
system under which the institution falls will permit the payment of compensation in the event of a
claim. For example one would be unwise to accept cover provided by an institution based in a
country (i) with very strict controls on the movement of foreign currencies without confirmation
that payments could be made in the event of a claim or (ii) with a very high inflation rate or non
convertible currency.

Extensive reference has been made, in this document, to the document previously prepared by the
ERA Legal Services Division's. This document has been revised and is included as Appendix 6-1 -
Guideline CA2 Securities

6.1.1 Types of Security

The Collins dictionary defines a security as:

“Something given or pledged to secure the fulfilment of a promise or obligation".

Contract securities can take a number of different forms/types e.g.

• A bond, defined as “a written acknowledgement of an obligation to pay a sum or to

perform a contract”.
• A guarantee, defined as “a promise, especially a collateral agreement to answer for the
debt, default or miscarriage of another”.
• Insurance, defined as "securing of compensation in the event of loss or damage by advance
regular payments"

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A surety is defined as:

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“A person who assumes legal responsibility for the fulfilment of another’s debt or
obligation and himself becomes liable if the other defaults”.

Bonds, Guarantees and Insurance can therefore be classed under the generic term of ‘Security’.
Usually insurance companies provide bonds and insurances and banks guarantees.

6.1.2 Bonds and Guarantees

Construction contracts usually require a number of different types of bonds/guarantees. In their
usual form, the surety agrees to pay the beneficiary a certain sum of money in the event that the
principal fails to perform the relevant contractual duties.

Another form does however exist i.e. a surety bond via which the surety guarantees completion of
the contract. These are usually set at a far higher percentage of the contract price than conventional
bonds and guarantees. It should be noted that a beneficiary holding a surety bond can not call upon
the surety for a payment of money - he calls for completion of the contract.

The most commonly used bonds/guarantees encountered in international construction are:

• Bid or Tender Bonds/Guarantees

• Performance Bonds/Guarantees
• Advance Payment Bonds/Guarantees
• Retention Bonds/Guarantees

The above common forms of Security are discussed further under items 6.1.4.1 to 6.1.4.4 below.

6.1.3 Conditional and Unconditional Bonds/Guarantees

A conditional bond/guarantee sometimes termed an ‘on-default’ bond/guarantee is one which can
be called when a contractor fails to comply with its obligations under the contract.

An unconditional bond/guarantee sometimes referred to as an ‘on-demand’ bond/guarantee is one

which may be called by the employer even when there may be no justifiable cause for such calling.
WB and other lenders, however, state that any unjustified calling of such a bond, or unreasonable
pressure exercised by an employer, would be regarded by them as contrary to the spirit and basic
principles of international procurement.

Due to the increased risk which unconditional bonds/guarantees carry financial institutions are
likely to charge more for unconditional bonds than for conditional bonds. FIDIC IV and the
international contracting community object to the use of on-demand guarantees, for the reason that
such guarantees can be called without justification, and their use is likely to increase the tender
sum. WB however, considers that the on-demand form has the merit of simplicity and of being
universally known and accepted by commercial banks. WB, in their Standard Bidding Documents,
include both conditional and unconditional forms of Performance Guarantee, samples of these have
been included in Appendix 6-2- Standard Forms of Security.

It should be borne in mind that, notwithstanding any contractual provision to the contrary, the
employer will ultimately pay for the bond premium as it will be reflected somewhere in the
contractor’s price. Whilst it is generally considered that unconditional ‘on-demand’ bonds are
onerous and inequitable, in many international construction contracts, particularly in the Middle
East and Africa, they are insisted upon by the Employer, as is the case with WB and ERA.

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It should be noted that a contractor may not escape the financial consequences of default by
providing a bond, since a Surety has common law rights of recovery against the contractor. Under

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the Ethiopian Civil Code such rights of recovery may also be possible, depending upon the wording
of the bond. Under common law systems such rights of recovery are usually reinforced by the
Surety requiring a written form of counter-indemnity or other security from the contractor, or the
contractor’s parent company.

6.1.4 Issuers of Securities

Both Bonds, issued by insurance companies, and Guarantees, issued by Banks have their
advantages and disadvantages.

Banks usually regard securities/guarantees as an extension of a contractor's line of credit and as

they usually know a contractor better than an insurance company would, the guarantees can
normally be issued more speedily. When a guarantee is issued by a bank however, the magnitude of
the guarantee may affect the availability of that bank’s line of credit to the contractor, which could
have adverse repercussions on the Contractor’s ability to adequately fund the contract or indeed
other contracts taking place during the same period of risk. Banks are however, generally more
prompt in paying out on guarantees as they are usually less willing to argue or investigate the
merits of any claim than an insurance company.

Bonds issued by insurance companies will usually only be issued after the insurance company has
made detailed enquiries into a contractor’s financial background and ability to perform the contract
in question.

Such detailed enquiries can be reassuring to an employer as if the insurance company issues the
bond then the company is satisfied with the risk. Conversely, if the company refuses to issue the
requisite bond and the employer is aware of such a decision, the Employer might decide to question
the suitability of the contractor he has selected.

6.1.4.1 Bid Security

In order to ensure that Tenderers are serious about their tenders and that they do not withdraw their
tenders during the tender evaluation period, Employers often require Tenderers to provide financial
securities to guarantee that they honour their tenders and hold them valid for the evaluation period.

This financial security is usually in the form of a Guarantee or Bank Certified Cheque which is
lodged with the Employer until the tender has been evaluated and awarded. The standard ERA
bidding documents demand a bid security with a minimum value of 1% of the tendered amount.

WB standard documents specify that the security should be between 1 and 3% of the tendered
amount. Therefore for a contract of, say, Birr 200M, the value of the tender security would be
approximately Birr 2M.

Once the Letter of Acceptance (see 3.2) has been issued and the successful bidder's Performance
security received, all of the Bid Securities (including that of the successful tenderer) should be
returned to the tenderers for cancellation (see 5.3.14).

It is important that the Bid Securities are retained in a safe place as they are convertible and must
be returned to the Tenderers once the Contract has been awarded.

Samples of these have been included in Appendix 6-2- Standard Forms of Security.

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6.1.4.2 Performance Security

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A Performance security is a promise by a third party to cover any costs (in the case of a guarantee
or bond) incurred by the Employer as a result of non or poor performance by the Contractor or to
complete the works (in the case of a surety bond) for the same reasons.. These costs could relate to
the employment of a second contractor to complete the works or the demolition and reconstruction
of unacceptable elements of the works etc.

In the case of WB and ERA projects the security is in the form of an unlimited Bank Guarantee
which undertakes to cover all costs incurred The value of the guarantee is usually limited to some
(usually ten) percent of the Contract Value. However, the limit of the guarantee will depend on the
nature of the works and the Contractors likely to be employed to undertake the works. The value of
the guarantee will, therefore, be determined, by ERA, prior to the invitation of tenders. One other
aspect of the performance guarantee required by both ERA and the WB is that it is required to be
payable in the types and proportions of currencies in which the Contract Price is payable. If a
variation is issued for more than 25% of the contract amount the Engineer has the right to request a
proportionate increase in the Performance Guarantee.

Works contracts usually require the Performance Security to be furnished prior to the formal
signing of the contract and within a specified period (e.g. 28 days) of the award of the Contract.

The wording of the guarantee is such that the Employer is entitled to utilise the guarantee when and
if they deem it necessary i.e. it is effectively a signed cheque made out to the Employer waiting to
be cashed. It is therefore very important that the guarantee document be retained in a safe place.

On satisfactory completion of the works the Employer is required to return the guarantee to the
Contractor thereby releasing the Contractor from all liabilities with regard to the performance of
the works.

Satisfactory Completion "must be defined in the contract documents. Usually "Satisfactory

Completion" will be deemed to have been achieved at one of two stages in the project. These
would either when the Taking-Over Certificate (see 2.3.8, 5.2.17 and 8.2) is issue or when the
Defects Liability Certificate (see 8.6) is issued. The second option would provide additional
security to the Employer for the duration of the Defects Liability Period, usually one year.

In the case of WB and ERA standard bidding documents, a Performance guarantee is required to
remain validity until 28 days after the issue of the Taking-Over certificate. In the case of a
Performance Bond, WB requires it to be valid until the issue of the Defects Liability certificate and
ERA until 28 days after the issue of the Taking-Over Certificate.

Samples of these have been included in Appendix 6-2- Standard Forms of Security.

6.1.4.3 Advance Payment

Construction contracts have large initial expenditures associated with the mobilisation of plant,
materials, personnel and equipment. In order to assist the Contractor with these initial expenditures
and reduce its financial burden, the Employer will often provide an interest free cash advance to the
Contractor. These advance payments are usually in the order of five to twenty percent of the
contract value, depending on the nature and location of the works (see 5.2.11).

In order to avoid the risk of the Contractor simply taking the money and disappearing, the
Employer will usually require the Contractor to provide some form of security to guarantee the
repayment of the loan. On WB and ERA contracts this security is usually in the form of a Bank
Guarantee.

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This advance payment is repaid to the Employer by deducting pre agreed amounts from each of the
payments made to the Contractor. Following the full repayment of the advance payment the

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security is returned to the Contractor for cancellation.

Samples of these have been included in Appendix 6-2- Standard Forms of Security. Although the
wording of the guarantee in Appendix 6-2 requires it to remaining in "full effect" i.e. the full value,
until the advance payment is repaid, a staged or reducing guarantee would, normally, be acceptable

6.1.4.4 Retention
In addition to the above Performance securities the Employer usually retains a small percentage of
all payments made to the Contractor as a further, more readily available or liquid, security. The
reason for this additional security is that the Performance Security is provided by a third party and
is considered to be available for “more serious” failures by the Contractor e.g. where the Employer
is required to undertake the completion or rectification of the works.

The value of the retained payments is usually limited to five (but sometimes ten) percent of the
contract value. However, in order to create a sizeable fund of retained payments as early in the
project as possible it is usual to deduct ten percent of all payments until such time as the five
percent limit is reached.

In the event of the Contractor's good performance and timely completion of the works, the retained
funds are released to the Contractor in two stages. The first on the issuance of the Taking-Over
Certificate (see 2.3.8, 5.2.17 and 8.2) (the Employer releases one half of all of the retained funds)
and the second on the issuance of the Defects Liability Certificate (see 8.6) (the Employer releases
the final half of the retained funds)

The retention of a portion of cash payments can create cash flow problems, for the Contractor, as it
represents compensation for expenses incurred. In order to improve their cash flow, (availability of
liquid cash), contractors often prefer to replace the retained cash with a guarantee. This guarantee
is, as above, a promise made by a financial institution to provide the funds necessary to rectify
some particular element of the works in the event that this proves necessary. The guarantee would
be limited to the same five percent of the contract value as the cash retention. It is important to note
that in order to release one half of a Retention guarantee it would be necessary for the Contractor to
provide a new guarantee for the lesser amount. Depending on the cost of the guarantee to the
Contractor they may or may not choose to reduce the value of the guarantee. ERA should,
however, only accept such a guarantee, in lieu of a cash retention, if they are satisfied with the
Contractor's performance and have no reason to doubt that the Contractor will attend to whatever
they may be required to attend to.

In the case of WB and ERA standard contract documents Retention guarantees are only acceptable
during the Defects Liability Period and for an amount equal to the difference between the total
retention and that release on the issue of the Taking-Over Certificate.

As with all security documents it is important that the Retention guarantee be retained in a safe
place as it is required to be returned to the Contractor once they have fulfilled their obligations as
described above.

Samples of these have been included in Appendix 6-2- Standard Forms of Security.

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6.2 INSURANCE

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6.2.1 Introduction
All parties involved in a construction project must accept that there is some attached to their
activities. All parties, whether they are the owner, contractor, engineer or supplier, can protect their
interests by insurance but must accept that not all risks are insurable.

The cornerstone of insurance philosophy is the principle of the equitable contribution of many for
the benefit of a few individuals suffering a loss (loss-sharing) but to make insurance a viable
commercial transaction, insurers impose certain limitations on what they will insure.

Construction insurance, like any other commercial activity, is subject to these limitations and
therefore insurance cover must be arranged within this framework.

When risks fall outside the limitations prescribed by the insurer they become uninsurable. One
example of an uninsurable risk is defective material and/or workmanship. This is under the
contractor's control and should remain with him. The owner's way of protecting himself against this
uninsured part of the contract is to pursue the contractor for non-performance.

Insurers sell promises to pay in case of certain events and the value of the promise depends upon
the integrity of the firm giving it. Low premiums may relate to empty promises. Reputable
organisations in the construction industry have learned not to shop for insurance but to develop
long term relationships with quality insurance companies.

6.2.2 Principles of Insurance

1. An insurable risk must be a risk that is acceptable to the insurance market through
appropriate selection methods.

2. Insurable risks must be fortuitous, i.e. accidental in character. As the degree of probability
of a harmful occurrence increases, the premium necessary to cover increases too.

3. An insurable risk must be measurable in quantitative terms and in such a way that the
theories of probability and the law of the inertia of large numbers may be used. The
premium required to insure the risk cannot be scientifically calculated without this
limitation.

4. An insurable risk must be such that the cause of the event which results in damage can be
determined. If it cannot, it would be difficult to establish whether it falls within or without
the limitations imposed by the insurance contract.

5. The insured must have an insurable interest in the object of the insurance contract.

6.2.3 ERA Project Insurance

All construction contracts require that the Works, Plant & Equipment, Personnel, Vehicles etc. be
covered by short term insurance for damage, loss, theft, etc. for the duration of the project. The
responsibility for taking out this cover is usually that of the Contractor and the cost of this is
included in the Contract Price.

The insurances are usually required in the joint names of the Employer and the Contractor in order
to facilitate claims by both parties. In addition both parties are required to indemnify each other
from claims against the other party.

The insurance requirements of the FIDIC IV, IDA, ERA NCT and ERA ICB conditions of contract
are summarised in Appendix 6-3 - Insurance Summary.

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The full wording of the FIDIC IV, IDA, ERA NCT and ERA ICB conditions of contract are
included in Appendix 6-4 - FIDIC IV/IDA/NCT/ICB Insurance Clauses.

The remainder of this document describes the nature of the required insurances and their
implications for both the Contractor and the Employer.

6.2.3.1 The Works

Clauses 21(a) & (b) require the Contractor to take out insurance cover for any damage which might
occur to the works and or materials or plant which are to be included in the works, from
whatsoever cause. Cover is required for the full value of the Works and further cover for an
additional 15% of the cost of the Works to cover any additional cost of and incidental to the
rectification of loss or damage including professional fees and the cost of demolishing and
removing any part of the Works and of removing debris of whatsoever nature.

The cover is required to be in the joint names of the Contractor and the Employer, in order to
allow for both to make claims against the insurance.

The cover is required to be valid for claims by the Employer and Contractor from the first working
day after the Commencement Date until the date of issue of the Taking-Over certificate and by the
Contractor during the Defects Liability period.

The Contractor is also required to notify the insurance company of any change in the nature and
extent of the Works and to ensure the adequacy of the insurance coverage at all times during the
period of the Contract.

6.2.3.2 The Contractor's Equipment

Clause 21.1(c) requires the Contractor to insure the equipment and other things which they bring
onto the Site for a sum sufficient to provide for their replacement at the Site.

Although the conditions of contract do not specify a period of cover for this insurance, it is
reasonable to assume that the cover should be for as long as the Contractor's equipment is assigned
to the site.

6.2.3.3 Damage to Persons and Property

Clause 22.1 requires the Contractor to indemnify the Employer against all losses and claims in
respect of death or injury to any person or loss of or damage to any property (other than the Works)
which may arise out of or in consequence of the execution and completion of the Works and
against all claims, proceedings, damages, costs, charges and expenses whatsoever in respect thereof
i.e. the Contractor may not claim compensation from the Employer in the event of his having
received a claim from any other person or body for any of the events.

Clause 22.3 requires the Employer to indemnify the Contractor against all claims, proceedings,
damages, costs, charges and expenses in respect of the exceptions defined in Clause 22.2

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6.2.3.4 Third Party1 (including Employer's Property)

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Clause 23.1 requires the Contractor to take out cover, in the joint names of the Contractor and the
Employer, against liabilities for death of or injury to any person or loss of or damage to any
property other than those and that covered by 6.3 above i.e. persons and property not directly
involved in the project e.g. passing members of the public or vehicles.

The minimum value of this cover is required to be specified in the Appendix to Tender and is
usually around USD 500 000 per occurrence with an unlimited number of occurrences.

6.2.3.5 Accident to Workmen

Clause 24.2 requires the Contractor to take out cover, in his own name, against any damages or
compensation payable to any workman or other person in the employment of the Contractor or any
Subcontractor, other than death or injury resulting from any act or default of the Employer, his
agents or servants.

This clause also requires the Contractor to indemnify the Employer against all such damages and
compensation in relation to workmen's accidents.

Neither the IDA nor ERA standard contract formats require the specification of the value of the
Workman's Compensation. The FIDIC 1999 format does require the value to be specified. As a
minimum it should be equal to the GoE legislated amount.

6.2.3.6 Professional Indemnity

When a contract requires the Contractor to undertake design of the works, the Employer may well
also require the Contractor or his design engineer to take out and maintain Professional Indemnity
insurance to cover any claims resulting from errors in or failures from the design. The value of this
insurance would depend on the value and nature of the works being designed.

6.2.4 Expiry and Renewal of Insurances

Clauses 21.2 requires the insurances listed in Clauses 21.1(a) and (b) to be valid from the start of
work until the date of the Taking Over Certificate in terms of the joint Employer/Contractor cover
and to the date of issue of the Defects Liability Certificate in terms of the Contractor's cover.

In the case of the Clause 23.1 Third Party insurance no period of cover is specified.
Notwithstanding, the period of cover must be from the commencement of the works until the issue
of the Defects Liability period and maybe even a little beyond that if the Contractor has not
completely left site by that time.

Clause 24.2 requires the Workman's compensation insurance to be valid during the whole time that
any persons are employed by the Contractor on the works.

The insurance company(s) calculates the premiums2 for the above insurance on the basis of the
contract value and minimum values of cover, specified in the Appendix to Tender. Any increases in
the contract value will result in an increase in the premium. If the Insurers are not advised of such
increases, they will view this as a deliberate attempt to "underinsure", which will result in reduced
payments in the event of a claim.

1
Third Party —n. 1 another party besides the two principals. 2 bystander etc. —adj. (third-party) (of
insurance) covering damage or injury suffered by a person other than the insured. (Oxford Dictionary)
2
Premium = Amount to be paid for a contract of insurance. Normally paid annually in advance but may be
paid monthly in advance.
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Both IDA and ERA have included special conditions of contract requiring the Contractor to advise
the insurers of any changes in the nature and extent of the Works and to ensure the adequacy of the

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insurance coverage at all times.

Most contract periods are longer than one year and, therefore they will most certainly span year
ends. It is common for insurance companies to issue insurance for periods greater than one year but
to require the insurance premiums to be paid on an annual basis. Both the ERA and IDA contract
formats place the responsibility for the maintenance of the insurance on the Contractor and further
require the Contractor to indemnify the Employer against any claims in the event that the
Contractor fails to renew the insurance.

6.2.5 Insurance Exclusions

There are certain events which are unlikely to occur and which would be very expensive to insure
against. The Employer therefore takes the risk that these events will not occur and allows the
Contractor to exclude them from the insurance policies. In the event that one of these events does
occur and that damage results, the Employer is liable for those costs.

There is, therefore, no obligation on the insurance in Sub-Clause 21.1 to include loss or damage
caused by the following:

• war, hostilities, invasion, act of foreign enemy

• rebellion, revolution, insurrection, civil war
• ionising radiations, contamination by radio-activity, radio-active toxic explosive
• sonic and supersonic pressure waves

There are a number of additional risks which cannot be insured. The reason for this is that they are
unacceptable to the Insurance companies. These risks must, accordingly, remain the responsibility
of the party to which they are allocated. The Employer accepts the following risks:

• riot, commotion or disorder by others other that the Contractor's workers

• loss or damage due to use or occupation by the Employer
• any operation of the forces of nature against which an experienced contractor could not
reasonably have been expected to take precautions

6.2.6 Insurance Policy Exclusions

The exclusions under 6.7 above represent the items for which the Employer accepts the risk. There
are, however, often items which insurance companies exclude from their standard insurance policy
cover. It is quite possible, however, that these excluded items are required to be covered and it is
therefore very important when reviewing the terms of an insurance policy to identify the exclusions
and decide if they are acceptable or not.

Insurance companies will often deduct a fixed amount from any payment made against a claim.
The reason for this is to discourage Contractors from making many small claims which would be
administratively time consuming for the insurer. As most of the insurances are required to be taken
out in the joint names of the Contractor and the Employer, to facilitate cover of and claiming by
both of them, it is important when reviewing the insurance policy documents that any such
deductions or excesses be considered.

In general terms the greater the excess accepted by the Contractor, the cheaper will be the
insurance. In approving the insurance, the Employer must therefore satisfy himself that the
proposed excess will provide sufficient cover.

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6.2.7 Insurer

FINANCIAL CONTROL
The ERA standard document for NCT specifies that the insurer must be both acceptable to the
Employer and Ethiopian.

The IDA and ERA ICB standard documents specify that the insurer must be acceptable to the
Employer and from one of a number of IDA defined or Funding Agency approved acceptable
countries.

It is therefore important when approving the insurance cover on foreign funded projects that ERA
know which are the eligible source countries.

It is, further, important for ERA to satisfy itself of the dependability and financial stability of the
insurer and the country in which it is based e.g. it would be unwise to accept insurance from
Zimbabwean insurance company, at present, when the country is suffering such high inflation,
devaluation of its currency and strict foreign exchange controls.

6.2.8 Adequacy of Insurance

The IDA and ERA contracts require the Contractor to notify the insurers of all changes in the
nature, extent or programme for the execution of the Works and ensure the adequacy of the
insurances at all time. They further require the Contractor to produce to the Employer, when
required, the insurance policies in force and the receipts for payment of the current premiums.

It is extremely important to review the policies and the basis upon which the premiums have been
calculated as "under insurance" will result in reduced payments in the event of a claim. e.g. If one
were to insure a car valued at USD 40 000 for say USD 30 000 and, following and accident, claim
compensation of (say) USD 10 000. The insurance company would, at best, reduce the pay out in
proportion to insured value i.e. USD 10 000 x 30 000/40 000 = USD 7 500 and, at worst, refuse to
pay because you had attempted to defraud the company.

The Contractor must therefore advise the Insurer of all changes e.g. increased quantities, variation
orders, etc., which result in an increase in the contract amount. Failure to do so could result in the
Insurer refusing to pay out in the event of a claim.

6.2.9 Remedy on Contractor's Failure to Insure

All of the contract formats use the FIDIC IV wording to describe the Employer's remedy if the
Contractor fails to take out, maintain or renew any of the specified insurances. In summary the
conditions of contract allow the Employer to take out the necessary insurance and pay any
premium which may be necessary and from time to time to deduct the cost of that insurance from
any monies due to the Contractor.

Failure to insure a project places a considerable financial risk on the Employer. It is therefore
essential that ERA's project engineers closely monitor the validity of the projects insurances and
that ERA act promptly, if the Contractor fails to insure.

6.2.10 Insurance in Joint Names

In a number if cases above and in the FIDIC IV reference is made to Insurance in the joint names
of the Contractor and the Employer. What this means is that the actual insurance policy document
indicates that the cover provided by the policy is for both the Contractor and the Employer and that
either of them can therefore make a claim against the insurance e.g. Under the clause 21.1(a)
insurance the Contractor might claim for damage to the works resulting from heavy rain whilst
under clause 21.1(b) the Employer might claim for additional design costs resulting from the
redesign necessary to rectify the damage caused by the rain.

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A further example using clause 23.1 Third Party insurance is that a member of the public who
suffers an accident whilst travelling through the site might chose to claim compensation from the

FINANCIAL CONTROL
Contractor (as it was the Contractor whose poor traffic control had resulted in the accident) or from
the Employer (as it was the Employer who promoted the project and was therefore responsible for
the situation which resulted in the accident). In both cases the insurance would cover the
compensation as it is in the joint names of the Contractor and Employer.

6.2.11 Indemnity3
Under a number of the insurance clauses the Contractor is required to indemnify the Employer and
vice versa. What this means is that each of the parties is required to undertake not to "pass on" or
counter claim against the other party in the event of an incident which results in costs. e.g. if a
workman were injured on site (because of a failure by the Contractor to provide protective
clothing) and the insurance company refused to pay compensation and the workman accordingly
sued the contractor for compensation and subsequently won, the Contractor would not be entitled
to sue the Employer for the recovery of the money.

The Contractor's indemnification of the Employer effectively means that the Contractor exempts
the Employer from any such counter claims. Where the Employer is required to indemnify the
Contractor e.g. clause 22.3 the Contractor is similarly protected from counterclaims by the
Employer.

6.3 CONTRACTOR'S IPC

The ERA and WB standard document formats all specify, under Clause 60, how IPCs are to be
calculated and presented. The IPC format is further discussed under 6.3.5 below and new IPC
formats proposed in Appendix 6-7 - ERA vs. WB ICB SBD Clause 60.

The function of the following items is to clarify and explain the various terms and concepts referred
to in Clause 60 of the ERA and WB standard bidding and contract documents.

Note: Following the completion of this section of the Manual it was realised that a number of ERA
staff had still not grasped the various concepts discussed and the relationship between them.
Accordingly a further document was prepared to discuss these items in more detail. This document
is included as Appendix 6-12 - Further Explanations to this manual.

6.3.1 Cost Control

Most of the works which ERA presently undertakes fall under the RSDP. Although the funding
used for this project is obtained from a number of different sources, a large portion of the funding
is by the World Bank and in terms of the agreement between the GoE and the World Bank the
Bank act as general project managers of all of the RSDP activities. It is important to realise that this
even applies to GoE funded projects and DMO projects.

In terms of the agreement with the Bank, ERA is effectively not allowed to commit itself to any
expenditure without the prior approval of the Bank. It is, therefore, a requirement that very strict
financial control be exercised over all expenditure. The principal aims of this control are:

• To ensure that ERA remains within its budget constraints

3
indemnity n. (pl. -ies) 1 a compensation for damage. b sum exacted by a victor in war. 2 security against
loss. 3 exemption from penalties (Oxford Dictionary)
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 Ethiopian Roads Authority

• To ensure that ERA receives value for money

• To ensure that no monies are misappropriated

FINANCIAL CONTROL
It is in support of this financial control that the strict contractual relationships and various
procedures have been established.

In general the money to be paid for works on large contracts is calculated in the same way as it is
for Maintenance contracts i.e. quantities of work done multiplied by the unit rates for those items.
The contracts all assume that the actual amounts to be paid are determined from the actual volumes
of work done. In other words all works are measured after they have been completed and payment
made accordingly i.e. the contracts are "re-measurable" (see 6.3.6 and Appendix 3-5 FIDIC IV
Clauses 55 and 56).

The contracts therefore make provision for variations in the quantity of measured work and so
when such variations occur no prior approval is required from either the Bank or MFED. The only
exception to this is when a variation in a quantity is so great that it results in the contract amount
being exceeded. In this case it would be necessary to get the approval of the Funding Agency and
GoE to allocate additional funds to the project. The exception to this is where a Variation Order
(see 6.3.7) is issued with a value in excess of the Engineer's authority as specified in COC Clause
2.1

The contracts also make provision for the inclusion of new works and additional works. It is
possible that some item of work not envisaged during the design stage becomes necessary during
the construction stage (new works). It is also possible that some item of work not envisaged during
the design stage, but of a similar nature to works already included, becomes necessary (additional
works). In both these cases, if the work can be undertaken within the contract ceiling amount it
would only be necessary to issue a Variation Order to define the nature of the works and the cost
thereof. Variations are discussed in more detail under section 6.3.7 below (see Appendix 3-5 FIDIC
IV Clause 51).

In the case of Variation Orders, depending on the nature of the works, it may or may not be
necessary to get the approval from the Bank but it is not necessary to get the approval of the MFED
as the contract and its conditions of contract will already have been approved with the Variation
provisions. It is possible that the ERA/GoE internal systems may require approval and signing of
some documentation in order to allocate additional funds to a project. This is not, however, a
contractual requirement. However, until such time as such has been approved by all parties and
signed by ERA (and the Contractor?) it may not be possible to pay any monies in excess of the
original contract amount. It is therefore very important that sufficient time be allowed for the
processing of such documentation in order to avoid delaying payments to the Contractor (see
6.3.7).

Guidelines for financial control have been included as Appendix 6-5 - Guideline CA3 Financial
Monitoring.

6.3.2 Contract Currencies

In most ERA contracts Contractors receive a portion of their payments in Birr and the remainder in
some foreign currency(s) e.g. USD, Euro etc. The reason for this being that the Contractor has
certain foreign expenditures for which they require the foreign currency.

Depending on the funding agreement, ERA may pay a portion of the Birr and Foreign Currency
and the Funding Agency the remainder of the Birr and Foreign Currency. The result of this is that
each invoice is settled via four separate payments i.e. GoE Birr, GoE Foreign Currency, Funding
Agency Birr and Funding Agency Foreign Currency. In the event that GoE only pays Birr or the
Funding Agency only pays the foreign currency or any other combination of these, the general
principal of the example below remains the same.

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For the purposes of this example it is assumed that a Contractor receives 20% of his payments in
Birr and 80% in United States Dollars and that GoE provides 10% of the funding and the World

FINANCIAL CONTROL
Bank 90%. The percentages in this example are typical of contracts undertaken by ERA at present.

The sketch below details these payments diagrammatically.

Contractor's Invoice

1 2

80% USD 20% Birr

3 5 4 6

90% IDA 10% GoE 90% IDA 10% GoE

Note: The numbers included in the diagram above refer to the various payment elements
of each IPC, which are required to be monitored (see description below).

The Contractor is not particularly concerned about the source of the funding for his payments but
rather that the payments are received. However, in order to ensure proper financial control of the
project's funds and the Contractor's invoices and payments received, each of these six “cost
centres” has to be monitored. If there were payments in a third currency there would be eight costs
centres to monitor. This is a lot more complicated than the single currency single funding source
Maintenance contracts but the principles are the same.

The cost centres which the Project Engineer must monitor, shown in the diagram above, are the
following:

1. Value of US$ paid to Contractor vs. US$ portion of the Contract Amount
2. Value of ETB paid to Contractor vs. ETB portion of the Contract Amount
3. Value of US$ paid by Funding Agency vs. Agency US$ portion of the Contract Amount
4. Value of ETB paid by Funding Agency vs. Agency ETB portion of the Contract Amount
5. Value of US$ paid by GoE vs. GoE US$ portion of the Contract Amount
6. Value of ETB paid by GoE vs. GoE ETB portion of the Contract Amount

Typical spreadsheets for this financial monitoring are included as Appendix 6-5 - Guideline CA3
Financial Monitoring to this document. If the information reflected on these spreadsheets is readily
available from the RDPB it should not be necessary, but could still be convenient, for the PE to
maintain these spreadsheets, however, if it is not available, it is essential that he does maintain this
information.

6.3.3 Contract Exchange Rate

The value of a currency in relation to any other currency is determined by market forces on the
basis of the perceived strength of the currencies i.e. the strength of the country's economy, the
country’s level of debt, the country’s balance of payments, the political situation etc. As these
factors vary, so does the value of the currency.

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Fluctuations in the value of the Birr affect both the Contractor, as it results in in/decreases in the
cost of imported items, and ERA, as it in/decreases the cost of the project and repayment of monies

FINANCIAL CONTROL
borrowed for the project.

In order to remove the risk of exchange rate fluctuations from the Contractor a contract exchange
rate is agreed at the commencement of the project and this rate is utilised throughout the project
(see Appendix 3-4 Appendix to Form of Tender Table 1).

Unfortunately ERA can not avoid this exchange rate risk and it is therefore absorbs all such
variations whether they are positive or negative. Although this is can be a very real cause of
increases in the final project cost it is often overlooked because its effect is not immediately
obvious when reviewing the actual costs versus the anticipated and billed costs. However, when
one considers the amount of Birr required to repay a loan it is very clear how the cost has increased
for the GoE. This is best explained by way of a simple example:

If GoE borrows $ 100 when the Birr/Dollar exchange rate is (say) 5/1, GoE
would receive Birr 500. However, if they were to repay the loan when the
exchange rate was 9/1, GoE would be required to use Birr 900 to purchase the
$ 100. An effective 80% increase in the cost of the works.

In an economy with a rapidly devaluing currency this can result in very significant increases in
project costs. The exchange rate between the Birr and USD has ranged between approximately 2
and almost 9 during the past 25 years.

Although the ERA PEs will not normally be required to monitor the exchange rate fluctuations it is
useful to monitor these as devaluations in local currency can often lead to an increase in the local
funds available from Funding Agencies and a decrease in foreign funds from ERA.

6.3.4 Monthly vs. Cumulative

The FIDIC conditions of contract (see Appendix 3-5 FIDIC IV Clause 60) require the Contractor to
submit a statement at the end of each month, detailing the work undertaken and the amounts to
which the Contractor considers himself due. The Engineer is required to review this statement and
to issue a certificate which details how much he considers due and how much the Employer is
required to pay (see 2.3.5 and 5.2.16).

The review and approval of payment certificates, by ERA, for both Consultants and Contractors is
a task with a lot of responsibility because of the large amounts of money involved. However, by
following a very simple rule it is possible to remove a large element of the risk of making serious
mistakes during these reviews.

A payment certificates will be prepared and presented on a Monthly basis as follows:

Project ABC - Payment Certificate Nº X

This
Item Description Unit Rate Total
Month
1 Work Done zzzzzzz 34.355,00
2
Amount Now Due 34.355,00

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The problem with this type of IPC is that if there is an error which is not identified and an incorrect
payment is made, there is very little chance of the error ever being identified and therefore

FINANCIAL CONTROL
corrected. If such an error was identified it would be necessary to go back to that particular IPC and
correct the error via a debit or credit note. This is very time consuming and complicated, especially
for the RDPB. In order to avoid this problem an IPC should be prepared and presented on a
cumulative basis as follows

This method of calculation and presentation will result in any errors made in previous certificates
being automatically corrected in subsequent certificates without the need to “go back in history”.
This method only requires the total of all of the correct and incorrect amounts due for payment to
the date of the IPC to be subtracted from the correct cost of the total volume of work carried out up
to the IPC date. The resulting amount due for payment will automatically take into account any
previous errors and correct them.

The spread sheets included as Appendix 6-6 - Monthly vs. Cumulative IPC demonstrate the two
methods and how they accommodate/correct errors.

6.3.5 IPC Format

The WB and ERA SBDs under Clause 60 of their conditions of contract specify what should be
reflected on IPCs and the order in which those items should appear. This is done in order to avoid
the differences in value of IPCs which can occur when the various components are presented in
different orders. These clauses are compared in Appendix 6-7 - ERA vs. WB ICB SBD Clause 60.
This appendix also includes IPC formats for each clause.

The WB and ERA Clauses 60 and their resulting IPC formats are compared in Appendix 6-7 - ERA
vs. WB ICB SBD Clause 60. At the time of preparation of this manual the ERA IPC formats in use
did not correctly reflect the requirements of either of the Clauses 60. In addition, there were
significant differences between the WB and ERA modified formats. Appendix 6-7 - ERA vs. WB
ICB SBD Clause 60 accordingly contains IPC formats which correctly reflect the requirements of
Clause 60.

In general the WB and ERA Clause 60 require the IPC to reflect the following items in the order
shown:

Project ABC - Payment Certificate Nº X

This
Item Description Unit Rate Total Previous Total
Month
1 Work Done xxxxxxx yyyyyyy zzzzzz 123.456,00

2
Less Previously
89.101,00
invoiced
Amount Now Due 34.355,00
Work Done
plus Variations
plus Dayworks
plus Contract Price Adjustment (CPA)
less Retention
plus Materials on Site (MoS)
less Advance Payment
plus Any other amount

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These components of an IPC are explained below.

FINANCIAL CONTROL
6.3.6 Work Done
Bill of Quantities (BOQ) (see 3.7). The various tasks and items of work to be undertaken and as
described on the drawings and specifications are all detailed in the BOQ. The value of the work
done is the sum of all of the various quantities of work done multiplied by their respective unit
rates.

Most of the ERA contracts are re-measurable (see 6.3.1 and Appendix 3-5 FIDIC IV Clauses 55
and 56). The tender BOQ is accordingly only an estimate of the work to be done. Occasionally the
BOQ may be inaccurate if there has been insufficient survey and investigation undertaken during
the design stage or if the quantities are estimated rather than calculated or if there are unforeseen
variations.

The result of this is that the final quantities of the anticipated items of work will be greater/less than
the quantities, and hence cost, included in the Contract Document. The Final Contract Price is,
accordingly, based on the actual volumes of work undertaken.

Variations of this nature are usually fairly small and are usually accommodated by means of the
inclusion of a Contingency allowance in the Bill of Quantities. Such Contingencies would normally
be in the order of five to ten percent of the Contract Price. Such variations are formally “included”
in the contract by the measurement of works undertaken and no other correspondence or paperwork
is necessary. In the event that the variations are significant it may be necessary to review the works
to be undertaken or to increase the funds allocated to the project via some internal or WB
documentation.

6.3.7 Variations
FIDIC and most of the other forms of Conditions of Contract used by ERA define the Contract
Price as “The sum stated in the Letter of Acceptance as payable to the Contractor for the execution
and completion of the Works and remedying of any defects therein in accordance with the revisions
of the Contract”(see Appendix 3-5 FIDIC IV Clause 1.1(e)(i))

The Contract Price is usually based on a bill of quantities which has been priced by a Contractor
under competitive bidding conditions. Although every attempt is made to ensure that the bill of
quantities is as accurate as possible there are a number of factors which can result in the Final
Contract Price being different to the Contract Price.

In the case of projects undertaken by ERA these variations in the Contract Price are generally not
provided for in the project budget and it is, therefore, necessary to allocate additional funds to these
projects for these increases when they occur. This allocation of additional funds normally takes
quite some time and sufficient time must be allowed for the acquisition of the additional funds.

Most contract documents acknowledge the existence and uncertainty of such variations of the
Contract Price and make provision for these in the Conditions of Contract (see Appendix 3-5
FIDIC IV Clause 51). Any variation order to increase or decrease the quantity of work, omit work,
change the character or quality of work, change lines and levels, additional work or change any
specified sequence issued will be included in the IPC under this heading. It must be noted,
however, that CPA (see 6.3.9) will be calculated on the value of the Variations and they must
therefore be presented as base date costs rather than current costs.

Typical examples of these would be:

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New Works. During the course of a Contract the need for previously unforeseen or unwarranted
works often arises e.g. a flood may wash away a bridge which previously did not require any

FINANCIAL CONTROL
attention, political or social developments may demand the inclusion of previously omitted works
etc. In the case of works such as these there are usually no suitable rates in the BOQ and it is
necessary to derive and agree new rates for the works with the Contractor (see Appendix 3-5 FIDIC
IV Clause 52).

Variations of this nature are required to be formally “included” in the contract by means of a
Variation Order which is a document which describes the nature, details, cost and timing of the
additional works and an instruction to implement the work described (see Appendix 3-5 FIDIC IV
Clause 51).

Revision of Billed Rates. Most of the Contracts allow for a revision of the billed rates/contract
price in the event that the quantities of work vary by more than a specified percentage. The
rationale for this is that the basis of the tender would no longer be valid if the quantities were to
either increase or decrease substantially.

Variations of this nature are formally “included” in the contract by means of a Variation Order
following an exchange of correspondence with the final correspondence being the Engineers
approval of the revised rates.

Once again, CPA (see 6.3.9) will be calculated on the new rates and they must therefore be
presented as base date rates rather than current rates.

Note: In terms of the contract a variation is introduced into a contract via an instruction or order
from the Engineer. The contract does not require the Contractor to sign, approve or even agree to a
Variation Order. It is important therefore that unnecessary bureaucracy is not introduced into a
contract by requiring the Contractor to sign or accept such a document as this may well lead to
unnecessary delays and problems (see 6.3.1).

6.3.8 Dayworks
It is almost impossible to anticipate every single item of work which will be required during the
course of a project. This is particularly so when the works involve working below the natural
ground level or when it comes to the need for emergency works. For this reason contracts usually
call for unit rates for particular grades of labour, plant, equipment and materials, which, in the
event of something occurring which is not provided for in the Bill of Quantities, can be used to
cover the cost of the required works. Because these works are usually limited in nature the unit
rates are usually given as hourly or daily rates.

Work undertaken on this basis is known as Daywork. A typical Daywork claim for say “searching
for a water pipe by hand excavation (in order not to damage the pipe)” would be as follows.

Project ABC - Dayworks Claim No 1

Excavate for Water pipe at km 21+500 as per site Instruction SI 25

5 labourers x 10 hrs @ $ 0.40/hr = $ 20.00

1 Supervisor x 10 hrs @ $ 0.85/hr = $ 8.50
1 Vehicle x 50km @ $ 0.40/km = $ 20.00

Total Dayworks Claim No 1 carried to IPC Summary $ 48.50

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6.3.9 CPA

FINANCIAL CONTROL
In projects of reasonably long duration (say > one year) undertaken in areas which suffer from
persistent inflation, Employers consider it reasonable to compensate Contractors for losses which
they might suffer as a result of increases in the prices of Labour, Materials, Fuel, Plant etc. There
are a number of methods of calculating such CPA. Whichever method is used it usually provides
for both increases and decreases in prices and can accordingly result in either an increase or a
decrease in the contract price. Unfortunately, the norm is that CPA tends to be an escalation of the
contract price.

The two most common methods of calculating CPA are the following:

Proven Cost Method. With this method the Contractor is required, at tender stage, to detail those
elements of his costs which he requires to be subject to CPA. These details include the actual cost
and supplier of the various elements upon which the tender was based. The Contractor is then
reimbursed the difference between these “Basic Costs” and the "Actual" invoiced cost of those
same items when they are purchased. Although this is the method generally used on EU funded
projects it is not the preferred method as it has the potential for abuse.

A typical month's CPA calculation using the Proven Cost Method might be as follows:

Basic Current Difference

Description Unit Qty (This IPC) CPA
Price Price
Cement pk 200 55.00 61.00 6.00 1,200.00
Diesel l 5000 4.50 5.50 1.00 5,000.00
Total CPA for this Month (Birr) 6,200.00
Formula Method. With this method the works, to be undertaken, are mathematically described in a
formula. The formula contains a number of factors representing the various elements of the project
at the time of tender and a number of similar factors for the various elements of work at the time
that the works are undertaken. By using these factors in the formula a percentage increase in the
tendered value of work done is obtained and the amount resulting from this represents the CPA due
to the Contractor. This is the preferred method, where such factors or indices are available.

The formula is usually of the following type:

Pn= a + b Ln/Lo + c Mn/Mo + d En/Eo + etc.

Where:

Pn is a price adjustment factor to be applied to the amount in each specific currency for the
payment of the work carried out in the subject month, determined in accordance with Sub-
Clause 60.1 (c), and Sub-Clauses 60.1 (d) and (e), where such Variations and Daywork are
not otherwise subject to adjustment;

a is a constant, specified in the Appendix to Bid, representing the non adjustable portion of
contractual payments;

b, c, d, etc., are weightings or coefficients representing the estimated proportion of each

cost element (labour, materials, equipment usage, etc.) in the Works or sections thereof, net
of Provisional Sums, as specified in the Appendix to Bid;

Ln, Mn, En, etc., are the current cost indices or reference prices of the cost elements in the
specific currency for month “n” determined pursuant to Sub-Clause 70.5, applicable to
each cost element; and

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 Ethiopian Roads Authority

Lo, Mo, Eo, etc., are the base cost indices or reference prices corresponding to the above
cost elements at the date specified in Sub-Clause 70.5.

FINANCIAL CONTROL
If a price adjustment factor is applied to payments made in a currency other than the
currency of the source of the index for a particular indexed input, a correction factor Zo/Z
will be applied to the respective component factor of Pn for the formula of the relevant
currency. Zo is the number of units of currency of the country of the index, equivalent to
one unit of the currency of payment on the date of the base index, and Z is the
corresponding number of such currency units on the date of the current index.

Unfortunately the indices for use in such a formula are not being generated in Ethiopia and it is
therefore necessary to utilise proxy indices from suppliers or the government in order to utilise the
formula. Further explanation of the indices and weighting is included in Appendix 6-8 - CPA
Indices and Weightings Sources and types of proxy indices could be a cement factory for cement,
minimum labour rate for local labour, government published fuel price for fuel etc. or failing the
existence of reliable indices a simplified form of the formula utilising only the consumer price
index, which is published, could be used e.g.

Pn= 0.1 + 0.9 CPIn/CPIo

Contract documents allow for variations of this nature and they are formally “included” in the
contract as a simple calculation sheet, attached to IPCs. No other correspondence or paperwork
should be necessary. The PE should, however, determine where the Funding Agency has made its
budget provision for CPA in order to confirm that no paperwork is necessary.

The payment of CPA is effectively a correction of the unit rates to reflect current market prices at
that time of doing the work. As such, CPA represents a part of or an addition to the value of work
done.

Where contract payments are made in more than one currency, there will usually be one CPA
formula for each currency with indices sources being in the country of that currency.

Example Interim Payment Certificate Nº 2 (Single Currency)

Description This Cert Previous Total

Work Done as per Bill of Quantities $ 250.000,00 $ 500.000,00 $750.000,00
Add: Variation Orders $ 0,00 $ 125.000,00 $125.000,00
Add: Contract Price Adjustment $ 12.500,00 $ 25.000,00 $ 37.500,00
Total Payable to Date $ 262.500,00 $ 650.000,00 $912.500,00
Less: Amounts Previously Claimed $650.000,00

Amount Due on this Certificate $262.500,00

The WB IPC format shown in Appendix 6-7 - ERA vs. WB ICB SBD Clause 60 easily
accommodates CPA in more than one currency. The ERA format, however, makes the exercise of
including CPA quite complicated and requires a separate calculation sheet. Once again,
consideration should be given to changing the ERA format to that proposed in Appendix 6-7.

ERA has structured their contracts with the currency of contracts being fixed in one currency but
with the payments for work done being made in two different currencies in predetermined
percentages. In addition to this ERA has determined that separate methods of calculation of CPA
will be used for Local and Foreign currency components of work done (see Appendix 6-7).

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6.3.10 Retention

FINANCIAL CONTROL
In addition to the Performance security (see 2.3.7, 5.2.3 and 6.1.4.2) the Employer usually retains a
small percentage of all payments made to the Contractor as a further, more readily available or
liquid, security. In general terms this security or retention (see 6.1.4.4) is held to provide an easily
accessible source of funds for the rectification or completion of some minor aspect of the works by
the Employer, in the event that the Contractor either fails or refuses to do so. The value of the
retained payments is usually limited to five (but sometimes ten) percent of the contract value.
However, in order to create a sizeable fund of retained payments as early in the project as possible
it is usual to deduct ten percent of all payments until such time as the five percent limit is reached.

50% of the Retention is released when the Taking-Over Certificate (see 2.3.8, 5.2.17 and 8.2) is
issued and the final 50% when the Defects Liability Certificate (see 8.6) is issued. The certificate
format easily accommodates this release of retention which is effected by simply reducing the total
amount of Retention held.

The retention on each IPC is calculated as a percentage of the Total Value of Work Done
(including Variations, Dayworks and CPA) as shown on the example payment certificate below.

Example Interim Payment Certificate Nº 2

Description This Cert Previous Total

Work Done as per Bill of Quantities $250.000,00 $500.000,00 $750.000,00
Add: Variation Orders $0,00 $125.000,00 $125.000,00
Add: Contract Price Adjustment $ 12.500,00 $ 25.000,00 $ 37.500,00
Sub-Total $ 262.500,00 $ 650.000,00 $912.500,00
Less: Retention (say) 5% $13.125,00 $32.500,00 $45.625,00
Total Payable To Date $249.375,00 $617.500,00 $866.875,00
Less: Amounts Previously Claimed $617.500,00
Amount Due on this Certificate $249.375,00

A reduction of 50% of the Retention is demonstrated in the example below. For the purposes of this
example it is assumed that no further work was done between certificate 2 and this one.

Example Interim Payment Certificate Nº 3

Description This Cert Previous Total

Work Done as per Bill of Quantities $0,00 $750.000,00 $750.000,00
Add: Variation Orders $0,00 $125.000,00 $125.000,00
Add: Contract Price Adjustment $0,00 $ 37.500,00 $ 37.500,00
Sub-Total $0,00 $912.500,00 $912.500,00
Less: Retention (50% released)1 $(22.812,50) $45.625.00 $22.812,50
Total Payable To Date $22.812,50 $866.875,00 $889.687,50
Less: Amounts Previously Claimed $866.875,50

Amount Due on this Certificate $22.812,50

1
By subtracting a negative number, one effectively adds that value to the amount to be
paid, thereby returning or repaying the Retention.

It is not unusual for Contractors to want to replace the normal cash retention with a retention
guarantee (see 6.1.4.4). This is not, however, recommended prior to the issue of the Taking over
Certificate as this would defeat the object of having an easily accessible liquid cash reserve.

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 Ethiopian Roads Authority

The use of a guarantee in lieu of the cash retention during the Defects Liability Period would be
more acceptable as the Client would have the assurance that the Works had been acceptably

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completed. ERA's standard contract formats permit the acceptance of a guarantee in lieu of cash
retention after the issue of the Taking over certificate. In the event that a Contractor wishes to
replace the cash retention as above with a retention security one could simply return all of the
retention to the contractor by processing a certificate with a zero total in the “Total” column.

6.3.11 Materials on Site (MoS)

The value of the material component of some projects is considerable and can impose a financial
burden on a Contractor who would have to carry the cost of the materials from the time when they
are ordered and paid for until they had been built into the works, claimed and paid for by the
Employer. As these materials will have been purchased by the Contractor on behalf of the
Employer they are effectively the property of the Employer. Therefore, if the Contractor is
prepared to cede ownership of the materials to the Employer, the Employer can safely pay for the
materials in the knowledge that they have received something for their money.

The ceding of ownership is important because if this has not been done and the Contractor is
declared bankrupt the liquidators of the company could seize the materials as assets of the bankrupt
company. In this case the Employer would have paid for materials which it would never receive
and they would have no recourse other than to make a claim as one of the company's creditors.

In this regard it is important to note that the Contractor can only cede ownership if they themselves
are the owner i.e. if they have paid for the materials. Therefore, it is very important that the
Employer satisfies himself that the Contractor has paid for the materials prior to making any
payments for MoS.

When a contract makes provision for the payment for MOS (Appendix 3-5 FIDIC IV Clause 60.1),
payment is usually in the order of 75 to 90 percent of the invoiced value of the materials and
usually excludes the cost of any transportation of the materials. These conditions should, however,
be included in the Conditions of Contract, the Conditions of Particular Application and or the
Appendix to Tender (see 3.3.2).

As the cost of materials is included in the unit rates in the Bill of Quantities the payment for MOS
in addition to the payment for the work done under the unit rates in the Bill of Quantities would
result in double payment to the Contractor. For this reason the payment for MoS can effectively be
considered as an advance payment (see item 6.3.12 below) which must be repaid, to avoid the
double payment.

This payment for MOS and the repayment of these sums when the materials are built into the
works and paid for via the unit rates is achieved by simply measuring the value of the stock of
material on site every month and deducting this from the previous months value. The difference
between the two being the value of the materials built in during that month.

Unless there are materials which have been purchased but not built in, the final value of MOS at
the end of the contract must always be zero

6.3.12 Advance Payment

All projects have large expenditures for the mobilisation of plant, materials, personnel and
equipment at the beginning of a project. During this period the Contractor is unable to do any work
and is, therefore, unable to earn any income and is therefore required to fund this expenditure. In
order to ease the Contractor's financial burden the Employer will often provide an interest free cash
advance to the Contractor. These payments are usually in the order of five to twenty percent of the
contract value, depending on the nature and location of the works.
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 Ethiopian Roads Authority

This payment in advance of any work being done is known as an Advance Payment and will
normally be made in exchange for a guarantee of the same amount. This is further discussed under

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items 5.2.11, 6.1.1 and 6.1.4.3

An advance payment can take one of two forms. It can be a part of the total sum to be paid to the
contractor (A) or it can be independent of the total sum to be paid to the contractor (B) e.g.

A B
Total Contract Amount = $ 1 000 = $ 1 000

Payment - Advance = = $ 100 = $ 100

Payment 1 = $ 200 = $ 200
Payment 2 = $ 500 = $ 500
Payment 3 = $ 200 = $ 200
Payment 4 =$ 0 = $ 100
Total Paid = $ 1 000 = $ 1 100

It can be seen in the case of (B), where the Advance Payment is independent of the total sum to be
paid, the contractor would receive more than the contract amount. As it is not the intention to give
the contractor more than the contract amount it is necessary for the contractor to repay the
additional money.

The method of repayment is defined in the contract document and is usually related to the value of
work completed although it could also be time related. In order to simplify the above example we
will assume that the method of recovery of the additional money paid to the contractor in example
(B) is as follows: “One quarter of the advance payment shall be deducted from each payment
certificate”. i.e. $ 100/4 = $ 25 will be deducted from each payment certificate as detailed below.

B
Total Contract Amount = $ 1 000

Payment 1- Advance = $ 100

Payment 2 = $ 200 - $ 25 = $ 175
Payment 3 = $ 500 - $ 25 = $ 475
Payment 4 = $ 200 - $ 25 = $ 175
Payment 5 = $ 100 - $ 25 = $ 75
Total Paid = $ 1 100 - $100 = $ 1 000

The deduction by this, and similar methods, results in the contractor receiving only the contract
amount and no more.

Although the method described in example (A) would appear to be simpler and should therefore be
the preferred method it is only possible to use this method when the exact final contract amount is
known i.e. a lump sum fixed price contract. Unfortunately most of the works contracts are not lump
sum fixed price contracts. They require payment for the actual work undertaken, contract price
adjustment, claims etc. If method (A) were used for the payment of the advance it would be very
difficult to determine which parts of the actual works undertaken should be paid for from the
advance and which parts via monthly payment certificates. Method (B) is therefore used for
construction contracts subject to remeasurement.

In the above example the method of repayment or recovery of the advance was very simple in order
to illustrate the point. The extract from the WB and ERA SBDs below details a more complicated
and normal method of recovery.

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"The advance payment shall be repaid through percentage deductions from the
interim payments certified by the Engineer in accordance with this clause.

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Deductions shall commence in the next Interim Payment Certificate following
that in which the total of all interim payments certified to the Contractor has
reached the percentage of the Contract Price stipulated in the Appendix to Bid
less Provisional Sums, and shall be made at the rate stated in the Appendix to
Bid of the amount of all Interim Payment Certificates in the types and
proportionate amounts of currencies of the advance payment until such time as
the advance payment has been repaid; always provided that the advance
payment shall be completely repaid prior to the time when 80 percent of the
Contract Price has been certified for payment"

The above extract raises two points not apparent from the simple examples (A) and (B) above.
These are identified by the underlined words above:
Contract Price less Provisional Sums
Provisional Sums are amounts which are included in a contract document for work which, at the
time of preparation of the contract documents can not be fully defined and may or may not be
constructed. Accordingly, to avoid the situation where the works covered by the provisional sums
are not constructed and all of the advance payment not recovered, it is assumed, for the purposes of
recovery of the Advance payment that the works covered by the provisional sums will not be
constructed. In the event that the works are constructed it will simply result in the Advance
payment being recovered slightly quicker than it should have been.

types and proportionate amounts of currencies of the advance payment

Most of the ERA contracts allow for payments in both Birr and some other currency of the
contractor’s choice. In addition to this ERA also fixes the rate of exchange between these two
currencies for the duration of the contract (see 6.3.2). Although ERA fixes this exchange rate, the
exchange rate between these two currencies on the open market fluctuates all of the time and can
be extreme (1980 $1= Birr 2.06 to 2006 $1 = Birr 8.70).

Although the contracts make provision for compensating Contractors for losses resulting from such
fluctuations by allowing for CPA it is very important that the impact of such fluctuations on the
repayment of the Advance Payment be studied and understood as the financial impact can be
considerable. What must be remembered at all times is that the Advance Payment must be repaid
at the exchange rate at which it was paid.

Example:

If an advance of $ 100 was paid in Birr at a rate of 5/1 the contractor would
receive Birr 500. However, if the contractor were to repay this Birr at an
exchange rate of 8/1 he would only repay $ 62.50 instead of the original $ 100,
resulting in a profit for the Contractor. The converse of this is also true where
the exchange rate reduces, resulting in a profit to ERA. Obviously no one
should make a profit and the only way to ensure this is to use the "payment"
exchange rate for all repayments.

6.3.13 Any Other Amount

The use of this line item for "other amounts" needs to be carefully considered as its position as a
"bottom line" items means that it would not be subject to CPA, would not have any retention
withheld on its value and would not be included for the calculation of repayment of the Advance
Payment.

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6.3.13.1 Interest on Late Payments

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Most of the ERA contracts include a provision for the payment of interest, at commercial rates, to
Contractors, on all amounts not paid within a specified period (see Appendix 3-5 FIDIC IV Clause
60.10). In this regard it is important to note that there are only two parties to the Construction
Contract. These are the Contractor and the Employer, ERA, who undertakes to pay all amounts due
to the Contractor within a specified period. Therefore, if the Contractor does not receive payment
within that period the only organisation which can be held liable is ERA. The fact that the payment
may have been delayed because of some problem with ERA's bankers or a Funding Agency or any
one else is of no consequence to the Contractor.

Both the WB and ERA standard contracts provide for the payment of interest on all outstanding
amounts to be applied at predefined commercial rates and compounded monthly until such time as
payment has been made (see CoC Clause 60.8).

Contract documents allow for variations of this nature and therefore they would be formally
“included” in the contract as a simple calculation sheet included in the final account. No other
correspondence or paperwork should be necessary.

6.3.13.2 Claims
Contractors are often entitled to compensation in addition to that included in the Contract e.g. if the
Employer fails to make the site available to the Contractor they would be prevented from
commencing the works and would accordingly incur additional costs due to men and machines
standing idle or if the nature or quantity of the works changes to such an extent that the tendered
rates are no longer applicable.

In cases like this it is usual for the Contractor to evaluate the loss/compensation and submit a claim
to the Engineer, for this amount, for his consideration/approval and inclusion in the Contract.

However, the exact position of inclusion of such a payment for a claim needs to be carefully
considered. If the amount due has been determined using unit rates, the amount might well be
subject to CPA and would therefore need to be included "higher" up in the IPC. If the amount has
been determined by current costs, it would not be subject to CPA and possibly should be included
at this point of the IPC. It is also possible in both cases that retention is to be withheld on claimed
Amounts in which case it should be "higher" in the IPC but below CPA.

Variations of this nature are formally “included” in the contract by means of an exchange of
correspondence with the final correspondence being the Engineers approval of or determination on
the claim.

Claims are addressed in detail in a separate Claims Manual prepared under the same assignment as
this Manual.

6.3.13.3 Early / Late Contract Completion

Some Contracts allow for the payment of Bonuses to Contractors in the event that they complete
the works earlier than the programmed Contract completion date. As early completion seldom
results in any direct savings in the cost of the works undertaken the payment of a Bonus will,
therefore, result in an increase of the Final Contract Price.

If the contract document allowed for a variation of this nature it would be formally “included” in
the contract as a simple calculation sheet included in the final account. No other correspondence or
paperwork would be necessary.

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Most Contracts allow for the imposition of Liquidated Damages (see 6.5) in the event that the
Contractor does not complete the works within the contract period. Liquidated Damages represent a

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calculated estimation of the costs which will be incurred by the Employer in the event that the
Contractor does not complete the works on time.

On the face value of the Works Contract the Final Contract Price will, accordingly, decrease.
However, when one considers the Project as a whole it is possible that any delay will most likely
result in the extension of the Supervision Contract and hence an increase in its supervision cost.

Appendix 3-5 FIDIC IV Clause 47 states that the Contractor shall pay the Liquidated Damages to
the Employer in the event that they do not complete the works within the contract period or that the
Employer may deduct the Liquidated Damages from any amounts due to the Contractor. The
conditions of contract do not permit the Engineer to deduct liquidated damages on his own
imitative and accordingly these should not appear on any IPCs.

6.3.13.4 Duties and Taxes

Any organisation doing business in Ethiopia is subject to the payment of various different forms of
duties and taxes on the materials and equipment which they use and on the income which they earn.
These duties and taxes are real costs to the Contractors and they therefore include these costs in
their pricing when submitting tenders to ERA.

Some of the Funding Agencies accept the inclusion of these costs in works to be funded by
themselves whilst others do not. In the case where the Funding Agency does not accept the
inclusion of these costs it will be necessary for the costs to be separately identified within the
contract documents (BOQ see 3.7). In these cases when payments are made to Contractors all
duties and taxes are excluded from monies to be paid by the funding agency.

6.4 CONSULTANT'S INVOICE

In the same way as the Contractor is entitled to be compensated for the work which he undertakes
so is the Supervising Engineer for the services which they provide. The format of the Engineer's
invoice is, however, somewhat different and in general comprises two parts. The first for time or
man month based personnel assigned to the project and the second for reimbursable items. It may,
however, be based on a lump sum and be as simple as a single monthly amount calculated as a
percentage of the total lump sum. All of the previous comments related to "time for payment" are
equally applicable to these invoices as they are to Contractor's IPCs.

An ERA format and guideline for Consultant's invoices has been included in Appendix 6-9 -
Guideline CA4 Consultant's Invoice.

6.5 LIQUIDATED DAMAGES

Most contracts entered into have fixed durations to allow the Employer to plan ahead for the use of
the particular thing being constructed e.g. in the case of a building the Employer would want to
start entering into contracts for the rental of shops and offices. If, however, the building is not
completed on time and the new tenants are unable to move in, in accordance with their rental
contracts, the Employer could well be liable for the costs incurred by the lessees plus the Employer
would loose out on rentals which would have been received.

It is, therefore, common to include a provision (see Appendix 3-5 FIDIC IV Clause 47.1) in
construction contracts to the effect that if the works are not completed on time the Contractor will
be held liable for any costs incurred.
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 Ethiopian Roads Authority

In order to avoid any haggling which might arises in trying to determine if the costs incurred are
reasonable or not the Employer must calculate, at the time of tendering, the loss likely to be

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incurred and include this in the contract document as the value of the Liquidated4 Damage.
Although the reasonableness of the Liquidated Damage might still be questioned the tenderer has
the option to either accept the Damage and submit a bid or not accept and not submit.

These Liquidated Damages are often incorrectly referred to as Penalties. The reason that this is an
incorrect description is that common law contractual law, in general and upon which FIDIC is
based, does not allow one to arbitrarily penalise another. It does, however, allow one to recover any
loss suffered as a result of an action by another. It is, therefore, very important that the amount of
Liquidated Damage should be calculated on a sound commercial basis and should not simply
reflect an arbitrarily chosen penalty. If it can be shown that the amount payable is a penalty rather
than a Liquidated Damage the courts may rule that nothing is due.

In the case of civil law penalties are in general permitted. In the event that the law of the contract is
not common law, careful consideration needs to be given to possible conflicts which may exist
between FIDIC and the law. The use of FIDIC in a civil law environment is discussed further in
Appendix 6-10 - Guideline CA5 Liquidated Damages.

In the case of the example of the building above it would be relatively easy to calculate the loss of
rental and additional interest due on loans etc. but in the case of a typical ERA road project it
becomes a little more difficult. Unfortunately the difficulty does not relieve ERA of its obligation
to make an “honest estimation” of the likely loss by calculation. The calculation of Liquidated
Damages is addressed in the Planning and Procurement Manual.

The type of losses likely to be suffered by ERA would be:

• The additional cost of Supervision Consultants
• Additional Costs of ERA Project Engineers traveling to site
• The interest payable on monies loaned for the project (although RSDP is a grant)

The files of every project must therefore contain a calculation and explanation of how the
Liquidated Damages have been determined.

It is important to note that if it occurs that the Liquidated Damages are either an over- or
underestimate of the actual loss, no adjustment of the amount payable is made and the Employer
would then either make a profit or a loss.

It is also important to note that if Liquidated Damages are not included in the contract i.e. not
referred to at all in the conditions of contract this would not preclude the Employer from claiming
damages. In this case he would be required to prove his loss. The inclusion of a zero rate for
Liquidated Damages, on the understanding that the Employer would determine his losses when
they occurred, would most likely be interpreted by the courts as zero loss. This should therefore be
avoided.

The period over which liquidated damages would be due is calculated from the difference between
the contractual completion date and the actual completion date, which is defined by the date on
which the Taking-Over Certificate (see 2.3.8, 5.2.17 and 8.2) is issued.

If the delay in completion does not affect the whole of the Works, arrangements for a pro-rata
reduction of the Liquidated Damages can be made. (See Appendix 3-5 FIDIC IV Sub-Clause 47.2).

4
Liquidate = to ascertain liabilities or ascertain the cost of

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 Ethiopian Roads Authority

The actual amounts payable for Liquidated Damages are usually expressed in terms of an amount
per day for every day that the completion of the works is delayed. Any such amounts payable for

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Liquidated Damages may be deducted, by the Employer, from any monies due or which become
due to the Contractor. An important thing to note, in this regard, is that the FIDIC conditions of
contract allow the Employer to deduct these damages without any reference to the Engineer or the
Contractor. Obviously, in order to avoid any confusion the Employer should advise both the
Engineer and the Contractor when they do deduct these damages.

Finally, the standard FIDIC IV wording for Clause 47.1, which is unchanged by ERA,
ADB and WB, states that

"If the Contractor fails to comply with the Time for Completion ....., then the Contractor shall
pay to the Employer the relevant sum stated ... . The Employer may, ...., deduct the amount of
such damages from any monies due or to become due to the Contractor ...".

The onus for the payment of liquidated damages therefore lies with the Contractor
unless the Employer specifically advises the Contractor that it intends (i) to deduct the
liquidated damages from monies due or (ii) that it does not require the payment of
liquidated damages.

6.6 MEASUREMENT
The contractual requirement that the Contractor and Consultant be paid for works done and
services provided has been addressed above. The Mechanisms for and content of the IPCs and
invoices were also addressed above in sections 6.3 and 6.4. What has not yet been addressed is the
physical methods of measuring work done and the record keeping which is necessary for the
calculation of the final contract amount and auditing of monies paid.

The physical methods of measurement are being addressed under a separate set of manuals and
guidelines prepared under a separate assignment to this one.

The ERA standard specification (see Appendix 3-1 -ERA Standard Specification) includes
Measurement and Payment clauses under every Series Division. These clauses define exactly how
each item is to be physically measured and what "supporting activities" are deemed to be included
in that measurement. A number of the typical Measurement and Payment clauses have been
reproduced in Appendix 6-11 - ERA Measurement and Payment Clauses for explanatory purposes..

Because of this system of defining exactly how each item is to be measured and what supporting
items are to be included in that item's rate it is of utmost importance that the Item numbers utilised
in the project's BoQ are the same as the Item numbers utilised for those same items in the
specification. Failure to do so will result in having items for which there is no "Measurement and
Payment" clause. The preparation of BOQs is further addressed in the Planning and Procurement
Manual prepared under the same assignment as this Manual.

6.6.1 Records
The records referred to under this heading are the data used for the arithmetic calculation of the
actual quantities of each element of the works, which when multiplied by their unit rates provide
the cost of the Works at the time of calculation.

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 Ethiopian Roads Authority

The calculation of the quantity of every item of work, as described in the BOQ, must be
individually presented as a unique page(s) of calculation. The easiest way to do this is via a series

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of Excel workbooks and or spreadsheets. The presentation of these calculations must be such that it
can be easily understood by a person not directly involved in the project.

6.6.2 Final Estimate

Although most of ERA's contracts are undertaken on a re-measurable basis (see 6.3.1, 6.3.6 and
Appendix 3-5 FIDIC IV Clauses 55 and 56) ERA, internally and in general terms, implements its
projects on the basis of a fixed budget i.e. The Contract Sum. This means that the PE and Engineer
must at all times monitor the progress of the works and the cost thereof in relation to the total
works and "contract budget". Failure to do so will in all likelihood result in ERA being committed
to expenditure in excess of its available funds. The only way to ensure the effectiveness of this
monitoring is for both the PE and Engineer to have access to an accurate and up to date estimate of
the final contract amount at all times. One aspect of this, the financial control of IPCs submitted
and payments made has been addressed in 6.3.1 and Appendix 6-5 - Guideline CA3 Financial
Monitoring. The most effective way to maintain this final estimate is to maintain the above
measurement records as current as possible and to ensure that works which have not yet been
undertaken have accurate estimates and calculations of their likely final quantities and costs and
further that these be updated immediately any additional, new or final information becomes
available. This information will also provide the input for the annual budget report as required by
the Programme and Budgetary Branch.

6.6.3 Statement at Completion

The ERA and WB Sub-Clause 60.10 of their conditions of contract requires that:

"Not later than 84 days after the issue of the Taking-Over Certificate in respect of the
whole of the Works, the Contractor shall submit to the Engineer a Statement at
Completion in the number of copies specified in the Appendix to Bid with supporting
documents showing in detail, in the form approved by the Engineer,

(a) The final value of all work done in accordance with the Contract up to the
date stated in such Taking-Over Certificate;
(b) Any further sums which the Contractor considers to be due; and
(c) An estimate of amounts that the Contractor considers will become due to
him under the Contract. Estimated amounts shall be shown separately in
such Statement at Completion. The Engineer shall certify payment in
accordance with Sub-Clause 60.2."

Notwithstanding this requirement, the PE and Engineer should, long before this, have determined
accurately the estimated final contract amount as at this stage the works will have been completed
and it will be "too late" to modify the works to remain within the budget i.e. the PE cannot afford to
wait until this time to be surprised by an over budget final account.

This statement should, therefore be viewed as a confirmation of the Engineer's final estimate and a
definition by the Contractor of all items of financial consequence, including financial claims.

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6.6.4 Final Statement

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The ERA and WB Sub-Clause 60.11 of their conditions of contract requires that:

"Not later than 56 days after the issue of the Defects Liability Certificate pursuant to
Sub-Clause 62.1, the Contractor shall submit to the Engineer for consideration a draft
final statement in the number of copies stipulated in the Appendix to Bid with
supporting documents showing in detail, in the form approved by the Engineer,

(a) The value of all work done in accordance with the Contract; and
(b) Any further sums that the Contractor considers to be due to him under the
Contract or otherwise.

If the Engineer disagrees with or cannot verify any part of the draft final statement,
the Contractor shall submit such further information as the Engineer may reasonably
require and shall make such changes in the draft as may be agreed between them.
The Contractor shall then prepare and submit to the Engineer the final statement as
agreed (for the purposes of these Conditions referred to as the “Final Statement”).

If, following discussions between the Engineer and the Contractor and any changes to the
draft final statement that may be agreed between them, it becomes evident that a dispute
exists, the Engineer shall deliver to the Employer an Interim Payment Certificate for those
parts of the draft final statement, if any, that are not in dispute. The dispute shall then be
settled in accordance with Clause 67. The Final Statement shall be the agreed upon
settlement of the dispute.

Upon submission of the Final Statement, the Contractor shall give to the Employer,
with a copy to the Engineer, a written discharge confirming that the total of the Final
Statement represents full and final settlement of all monies due to the Contractor
arising out of or in respect of the Contract. Provided that such discharge shall
become effective only after payment due under the Final Payment Certificate issued
pursuant to Sub-Clause 60.13 has been made and the performance security referred to
in Sub-Clause 10.1 has been returned to the Contractor."

This as the name indicates is the final definition by the Contractor of the monies to which
he considers himself to be entitled to in full and final settlement of the contract. This is
obviously an important document from which there can be no "going back"

6.6.5 Variations vs. Addenda

As has been mentioned above, the contracts undertaken by ERA are, in general, remeasurement
contracts with provision for payment of the final value of the works rather than the initial value as
detailed in the tender BOQ. In addition there is provision for claims, extensions of time and various
other additional expenditures (see 6.3.1, 6.3.7, 6.3.8, 6.3.9 and 6.3.13).

Although it may be necessary to issue variation orders from time to time to formalise the inclusion
of some additional or new works there is no need, in terms of the ERA and WB contracts, to issue
any documentation to increase (or decrease) the Contract Price. It is, however, normal that
organisations such as ERA and the Funding Agencies view the Contract Price as a "ceiling
amount" above which no expenditure may be made without approval. It is important that sufficient
time be allowed for such approvals to ensure that there are no delays in payment as a result of such
non contractual administrative tasks.

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An addendum to a contract is an agreement between the parties to a contract (Contractor and ERA)
to alter the conditions of that contract. Although the administrative systems of organisations like

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ERA and WB often "require" addenda to increase contract budgets, these are not contractually
required and great care should be taken that unnecessary complications are not introduced into a
contract by such requirements. An increase in the "contract ceiling" amount is of no consequence to
the Contractor and therefore does not require his signature. The only time that an Addendum is
required is when the parties to that contract wish to change the contract e.g. increase the time for
payments, increase the defects liability period etc. In this case the addendum would require the
signature of both parties indicating their agreement to that modification of the contract.

6.7 APPENDICES
See the following pages for Section 6 Appendices

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Appendix 6-1 - Guideline CA2 Securities

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 Ethiopian Roads Authority

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o Ethiopian Roads Authority

Guideline No CA2
Securities

Contract Administration Manual

September 1998
Rev November 2006

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 Ethiopian Roads Authority

FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA

ETHIOPIAN ROADS AUTHORITY

FINANCIAL CONTROL
CONTRACT ADMINISTRATION DIVISION

Securities - Bonds and Guarantees

November 2006

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Legal Services Division

Construction and Contract Guidelines

Securities - Bonds and Guarantees

CONTENTS

Pages

Part 1. Introduction 6-36

Part 2. Securities, Bonds and Guarantees 6-36

Part 3. Types of Bonds/Guarantees 6-36

Part 4. Conditional and Unconditional Bonds/Guarantees 6-39

Part 5. Issuers of Securities 6-42

Part 6. The ICC Uniform Rules for Demand Guarantees 6-43

Part 7. The ICC Uniform Rules for Contract Bonds 6-44

Part 8. Conclusion and Recommendations 6-46

Appendix 1 Examples of standard forms of securities

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Part 1. Introduction

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The whole field of securities is marked with uncertainty, inconsistency and confusion, both
conceptually and in respect of the terminology used to describe securities in various parts of the
world.

This confusion and inconsistency has affected not only those using such ‘standard forms’ of bonds,
but also the courts whose responsibility it is to interpret them in the event of litigation. In
particular, there has been confusion as to the meaning of the exact nature of the obligation created
by such forms in view of the archaic English wording generally used despite repeated complaints.

In one case, Lord Atkin referred to the traditional form of bond as follows:

‘I entertain no doubt that this was a guarantee, and the rights of the parties should be regulated on
that footing. I may be allowed to remark that it is difficult to understand why businessmen persist
in entering upon considerable obligations in old-fashioned forms of contract which do not
adequately express the true transaction….’.

Part 2. Securities, Bonds and Guarantees

Collins Dictionary defines:

A security as “something given or pledged to secure the fulfilment of a promise or obligation.”

A bond as “a written acknowledgement of an obligation to pay a sum or to perform a contract”.

A guarantee as “a promise, especially a collateral agreement to answer for the debt, default or
miscarriage of another”.

A surety as “a person who assumes legal responsibility for the fulfilment of another’s debt or
obligation and himself becomes liable if the other defaults”.

Both Bonds and Guarantees can therefore be classed under the generic term of ‘Security’.

A bond or guarantee is an arrangement under which the performance of certain contractual duties
owed by one party (A) to another party (B) is backed up by a third party (C). The result is that the
C promises to pay B a sum of money if A fails to fulfil the relevant duties. In this context, A is
commonly known as the principal debtor or principal; B is called the beneficiary; and C is called
the bondsman, surety or guarantor. The ‘back-up’ could come in the form of a parent company
guarantee, under which the contractual performance of one company within a corporate group is
underwritten by other members of the group but a more usual and preferable source of protection
consists of a bond, which is normally provided (at a price), by a financial institution such as a bank
or an insurance company. Usually an insurance company provides a bond and a bank provides a
guarantee.

Part 3. Types of Bonds/Guarantees

There are a number of types of bonds/guarantees usually encountered in construction contracts and
it should be understood that in the usual form, the surety agrees to pay the beneficiary a certain sum
of money (in the case of performance bonds/guarantees, often 10% of the contract price on
international construction contracts), in the event that the principal fails to perform the relevant
contractual duties.

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Another form does however exist, where the surety guarantees completion of the contract and these
are known as surety bonds. These are usually set at a far higher percentage of the contract price. It

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should be noted that a beneficiary holding a surety bond can not call upon the surety for a payment
of money - he calls for completion of the contract.

The most commonly found types of bonds/guarantees encountered in international construction are:

• Bid or Tender Bonds/Guarantees

• Performance Bonds/Guarantees
• Advance Payment Bonds/Guarantees
• Retention Bonds/Guarantees
• Other Bonds/Guarantees

Bid or Tender Bonds/Guarantees

The Bid (or tender) bond/guarantee is intended to reassure the Employer that a bid/tender is a
responsible one and that if the bid/tender is accepted, then the bidder/tenderer will proceed to
execute a contract. If the bidder/tenderer fails to do so, and the Employer incurs loss and expense in
the re-bidding/re-tendering process, such losses could form the basis of a claim under the bond.

Generally in international contracts and specifically under the World Bank Standard Bidding
Documents, the Bid Security is in the form of a Bank Guarantee. The Bid Security is required to be
submitted with the Bid and it is preferred that the amount of the Bid Security is a fixed amount to
avoid disclosure of the bidder’s prices originating in the financial organisation issuing the security.
The amount should be entered in the bidding documents and should be approximately 1% of the
estimated cost of the contract for very large contracts, up to 3% for smaller contracts.

The validity of the security is usually up to and including the date 28 days after the deadline for
submission of bids. However, this period may be extended if necessary.

The original securities are to be promptly returned to all unsuccessful bidders, usually not later than
28 days after the expiration of the period of bid validity.

The original bid security of the successful bidder is to be returned when the bidder has signed a
contract agreement and provided a performance security.

It is usual to enclose a form of bid/tender security with the bid/tender documents and the
bidder/tender is obliged to complete that form. Sometimes they may provide another form of
bid/tender security acceptable to the Employer. Whilst ultimately another form of bid/tender
security may well be acceptable to the employer, it is recommended that in order to avoid
protracted discussions and even the possibility of the bid/tender being rejected, the form enclosed
with the bid/tender documents should be used.

Performance Bonds/Guarantees

The performance bond/guarantee is probably the most common and possibly the most important
security encountered in major international construction contracts.

As stated earlier, a performance bond/guarantee can be defined as an undertaking to perform an

obligation of a bonded party, the principal, if and when that principal fails in performance. This
promised obligation can either be a simple one or a complex combination of numerous duties
expressly provided for in an agreement. The consequences of a default by the bonded party - the
principal - can be either: the proper completion of the contract (see Surety Bonds above), or the
payment of the whole amount of the bond. However, the wording of the bond must be specific in
this respect and must also specify the circumstances or the conditions which would set in motion
such consequences.

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Referring to the condition, sometimes imposed by standard forms of bond, that the guarantor may
perform the principal’s obligations under the contract and complete the works himself, upon default

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by the principal, consideration should be given regarding whether or not to accept such a condition.
In Ethiopia we should never accept this condition. The concern would be whether in either case, a)
the guarantor actually attempts to complete the contract himself or b) he employs others do so. The
work may then be performed at minimum cost and with inferior quality and with consequential
problems in exercising control of the standards required under the contract. In the case of a
performance guarantee issued by a bank, the bank would only pay the amount due and not attempt
to perform the principle’s obligations.

Advance Payment Bonds/Guarantees

Advance payment securities are generally in the form of a bank guarantee and the bank undertakes
by the guarantee to make, or to return, a certain payment should the guaranteed party, the principal,
fail to do so pursuant to the terms and conditions of an underlying contract.

For example, advance payments are often made by an employer to a contractor for the purchase of
certain plant and equipment and mobilisation at the commencement of a contract. Such advance
payments are usually recovered during the course of the contract either by a defined repayment
schedule or by pre-defined percentages of the interim certificate values. Any default in the agreed
repayment of such advance payments on the part of the contractor, would be safeguarded by the
issue of an advance payment guarantee.

In order to fully protect the employer against any such default, such guarantees are usually issued
by a bank on the basis of an unconditional or on-demand call. Sometimes, the amount secured by
the guarantee is reduced progressively during the course of the works, to reflect the repayments
made in respect of the original advance payment. The method used for reducing the amount
secured by the guarantee is generally automatic and usually the bond/guarantee contains wording
such as “…such amount to be reduced periodically by the amount recovered by you [the
beneficiary] from the proceeds of the contract.”

Advance payment bonds can also be issued by a bonding company but they differ from
performance bonds in that they cover only payment of monies and do not offer the alternative of
completion of the contract

Retention Bonds/Guarantees

These are bonds or guarantees issued in lieu of retention monies and can be used to allow the early
release of the final moiety of the retention held upon issue of the substantial or practical completion
certificate, or in some cases, in lieu of any retention monies. As above, in the former case, such
bonds or guarantees are normally requested by the contractor and are not normally specifically
included in the bid/tender documents. In the latter case the form of bond or guarantee would be
included in the contract documents. It is often considered that as the employer already has a
performance security, holding retention monies as well, could be held to be excessive especially as
this adversely affects the contractor’s cash flow.

It is recommended that the use of retention bonds or guarantees should be actively encouraged and
built into the Bid/Tender documents.

Other Bonds/Guarantees

The other type of bond, although usually in the form of a guarantee which is sometimes, but rarely
encountered, is where a payment guarantee is given by a bank at the request of an employer or
contractor in respect of payment of interim payment certificates to a contractor. In such a case, the
employer would be the principal under the guarantee and the contractor would therefore be the
beneficiary. This would give the contractor protection in the event that the employer became
bankrupt or simply refused to make payment against interim certificates.

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Part 4. Conditional and Unconditional Bonds/Guarantees

A conditional bond/guarantee sometimes termed an ‘on-default’ bond/guarantee can be called

when a contractor demonstrably fails to undertake obligations under the contract, i.e. the contractor
defaults.

An unconditional bond/guarantee sometimes referred to as an ‘on-demand’ bond/guarantee - in it’s

simplest form without any conditions attached - may be called upon by the employer even when
there may be no justifiable cause for such calling.

For example, a ‘falling-out’ between the employer and the contractor, particularly on overseas
contracts, might lead to an unjustifiable call on an on-demand bond.

It can be seen from the above, that a financial institution is likely to charge more to provide an
unconditional bond than for a conditional bond, due to the increased risk.

It should be borne in mind that notwithstanding any contractual provision to the contrary, the
employer will ultimately pay for the bond premium as it will be reflected somewhere in the
contractor’s price. The employer should therefore seriously consider which type of bond he
requires i.e. ‘on-default’ or ‘on-demand’. It is strongly recommended that an ‘on-default’ bond is
used, unless there very good reasons for insisting on an ‘on-demand’ bond.

It should be noted that a contractor may not escape the financial consequences of default by
providing a bond, since a Surety has common law rights of recovery against the contractor. Under
the Ethiopian Civil Code such rights of recovery may also be possible dependant upon the wording
of the bond. Under common law systems such rights of recovery are usually reinforced by the
Surety requiring a written form of counter-indemnity or other security from the contractor, or the
contractor’s parent company.

In the United Kingdom, the industry’s traditional use of conditional bonds, was for a time
undermined by a Court of Appeal decision which significantly reduced the distinction between
conditional and unconditional bonds.

In Trafalgar House Construction (Regions) Ltd v. General Surety & Guarantee Co Ltd (1994) 66
BLR 42, C.A., House of Lords [1996] 1 AC 199 it was held, contrary to what have previously been
believed, that an employer demanding payment on a bond need not prove what loss has been
suffered; the surety must pay whatever the employer in good faith asserts due. However, the
widespread consternation caused by this decision was fleeting, for the House of Lords allowed an
appeal and restored what had been thought to be the legal position.

Whilst it is generally considered that unconditional ‘on-demand’ bonds are onerous and
inequitable, in many international construction contracts, particularly in the Middle East and
Africa, they are insisted upon by the Employer.

The International Bank for Reconstruction and Development (IBRD) however states that any
unjustified calling of such a bond, or unreasonable pressure exercised by an employer, would be
regarded by the IBRD as contrary to the spirit and basic principles of international procurement.

In addition to Trafalgar House Construction (Regions) Ltd v. General Surety & Guarantee Co Ltd
case (see above), four other particularly well publicised cases are Edward Owen Ltd. v. Barclays
Bank [1978] 1 QB 159, Mercers Co. v. New Hampshire Insurance Ltd. [1992] 2 Lloyd’s Rep 365
and Harbottle R.D. (Mercantile) Ltd v. National Westminster Bank Ltd [1978] QB 146; [1977] 2
All ER 862.

The above are commented on in seriatim. [in the same order ]

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Edward Owen Ltd. v. Barclays Bank [1978] 1 QB 159

Edward Owen Engineering, an English company, was awarded a contract which was subject to
Libyan laws. Payment was to be by letter of credit issued by a Libyan bank on behalf of the Libyan
buyers. The engineering company was to provide a performance guarantee in favour of the Libyan
buyers. The bond was duly opened by Barclays Bank which gave the following undertaking as a
counter indemnity to the Libyan bank: ‘We confirm our guarantee payable on demand without
proof or conditions’.

The Libyan bank issued their guarantee to the Libyan beneficiary. However, the Libyan bank, for
unknown reasons, failed to issue the letter of credit in favour of Owen Engineering and the Libyan
buyers claimed on the guarantee. The Libyan bank claimed from Barclays, the instructing bank, but
an injunction was sought by Owen Engineering, to prevent them from making a payment. In a
lengthy judgment the following comments summed up the judges’ decision which went against the
English company:

‘So, as one takes instance after instance, these performance guarantees are virtually promissory
notes payable on demand. So long as the Libyan customers make an honest demand, the banks are
bound to pay: and the banks will rarely, if ever, be in a position to know whether the demand is
honest or not. At any rate they will not be able to prove it to be dishonest. So they will have to
pay.’

and

‘The position of a Bank which has given a bond payable on demand is similar to that of a Bank
which has opened an Irrecoverable Letter of Credit. Such obligations are the life blood of
International Commerce and it is only in exceptional cases, such as fraud, that the courts will
interfere.’

The Court further stated that the:

‘Performance Bonds must be honoured to the letter between Banks and that questions between the
buyers and sellers must be dealt with between themselves - in this case presumably by Libyan
Law.’

The judge enumerated the instances in which such a guarantee might be called and referred to the
extreme case where mere allegations are made without any proof as one bearing the appearance of
a discount. He stated:

‘It is obvious that that course of action can be followed, not only when there are substantial
breaches of contract, but also when the breaches are insubstantial or trivial, in which case they bear
the colour of a penalty rather than liquidated damages: or even when the breaches are merely
allegations by the customer without proof at all: or even when the breaches are non-existent. The
performance guarantee then bears the colour of a discount on the price of 10% or 5% as the case
may be. The customer can always enforce payment by making a claim on the guarantee and it will
be passed down the line to the English supplier. This possibility is so real that the English supplier,
if he is wise, will have taken it into account when quoting his price for the contract.’

Mercers Co. v. New Hampshire Insurance Ltd.

In this case in the English Court of Appeal, it was commented that:

‘The construction of the bond is not assisted by its archaic language’.

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Harbottle R.D. (Mercantile) Ltd v. National Westminster Bank Ltd

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In this case, the English National Westminster Bank was taken to court, in similar circumstances to
the previously cited case, by R.R. Harbottle who claimed that a demand under a guarantee issued
by the National Westminster Bank on their behalf was unjustified or even fraudulent as the goods
had been supplied by them as per the contract.

Once again the court ruled in favour of the Bank stating that:

‘Performance guarantees in such unqualified terms seem astonishing but apparently they were not
unusual particularly with customers in the Middle East. In effect, the sellers rely on the probity and
reputation of their buyers and on the good relations with them. But this trust is inevitably
sometimes abused, and I consider that such guarantees are sometimes drawn upon, partly or
wholly, without any or any apparent justification, almost as though they represented a discount in
favour of the buyers. In such cases the sellers are then left merely with claims for breaches of
contract against their buyers and the difficulty of establishing and enforcing such claims.’

The judgment further stated that the:

‘Courts were not concerned with enforcing claims and counterclaims between buyers and sellers -
these were the risks merchants took. Harbottle had taken the risk on the unconditional wording of
the guarantee. The commitments of a Bank were on a different level and must be allowed to be
honoured free from interference by the courts, otherwise trust in International Commerce could be
irreparably damaged.’

FIDIC and the international contracting community strongly object to the use of on-demand
guarantees, for the reason that such guarantees can be called without justification, and their use is
likely to increase the tender sum to reflect this risk. The World Bank however, considers that the
on-demand form has the merit of simplicity and of being universally known and accepted by
commercial banks. The World Bank, in their Standard Bidding Documents, includes both
conditional and unconditional forms of Performance Guarantee. The writer of these guidelines
considers that the use of on-demand guarantees is not fair on the contractor however, whilst bearing
in mind the likely additional cost to the employer of insisting on these forms, ultimately, it is for
the employer to decide on which form he desires. It should be noted that in the case of an on-
demand guarantee, any unjustified calling of such a guarantee, or unreasonable pressure exercised
by an employer, would be regarded by the IBRD as contrary to the spirit and basic principles of
international procurement. Furthermore, the World Bank states that employers should recognise the
contractual conditions governing non-performance by the contractor and should normally act only
on the advice of the engineer in calling a performance guarantee.

It should also be noted that the World Bank is currently insisting on the unconditional on-demand
form and whilst it is considered that this is onerous upon the contractor, it would appear that
contractors here are not strongly objecting to this stipulation. One final point of note is that in the
past there have been cases where, notwithstanding the fact that the performance security is of the
unconditional on-demand form, the contractor has managed to pressure the financial organisation
who has issued the security, into delaying or refusing payment due to lack of proof of non-
performance.

Various authoritative writers have also condemned these types of securities and the following
comments were made in a book entitled Construction Contracts, Principles in Tort and Contract,
Volume 2.

(a) Owners who have no intention of calling such a bond irresponsibly may well find that
tendering contractors, influenced by adverse experience of the unwarranted calling of
bonds elsewhere, may increase their prices excessively to cover the contingency. Indeed
the mere requirement of such a bond inevitably suggests an unwillingness by the owner to
accept, in a potential future dispute, the decisions of an independent tribunal, so that the
psychological effect on pricing may be much more substantial than realised.]
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(b) In any event, the direct cost of obtaining such bonds (which must inevitably enter the
contract price) may be very substantial, and is increased still further by the fact that two,

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and sometimes three or more banks or bondsmen can involve themselves simultaneously in
one project. Thus a frequently met arrangement is for the owner/buyer to require the bond
or guarantee to be furnished to him by a bank in his own country (which is likely to be a
docile payer on demand and may even be closely linked to the buyer) with an
unconditional counter-indemnity provided to that bank by a trading bank in
seller’s/contractor’s country, with possibly a further counter-indemnity to that bank from
the contractor’s own domestic bank.

All these banks will charge for these guarantees and indemnities (notwithstanding that only the
contractor’s domestic bank, or the last bank in line, will be effectively at risk, since the remainder
are only guaranteeing the solvency of other banks). Not only, however, must the contractor price
directly for all these banks’ direct charges, but since the string of indemnities will result in prompt
debiting of the contractor’s own bank account, should the bond be called by the owner, the
contractor will need to price in addition for the contingent effect on his own finances of an
irresponsible and unjustified call.’

An analysis carried out on 40 construction arbitration awards rendered under the Rules of
Conciliation and Arbitration of the International Chamber of Commerce in Paris between 1988 and
1990 showed from the legal point of view, conflict between the parties arose in matters relating to
bank guarantees and performance bonds in 25% of the cases. The comparable figure in relation to
interpretation and qualification of the contract was 25%; 17,5% in relation to repudiation or
termination of the contract; 12.5% in respect of retention of monies due and 20% in respect of other
matters such as formation of contract, the arbitrator’s power to adopt agreement, warranties,
novation or monetary conversion. This is a very high percentage indeed for guarantees and bonds.

In some countries, it is possible to arrange insurance cover against unfair calling or performance
securities, but such insurance is difficult to obtain and expensive.

Additionally under the UK Export Credits Guarantee Department (ECGD) a bond support scheme
is provided for their nationals who import goods and services, which insures banks who issue
performance securities. Under this scheme, banks may claim from the ECGD which then reserves
the right to claim from the customer/supplier. If

the customer/supplier has suffered an unfair call, then the ECGD will refund the customer/supplier
100% of the loss. Germany and France have similar schemes.

Part 5. Issuers of Securities

Bonds are usually issued by banks or insurance companies and there are advantages and
disadvantages attaching to both.

Banks regard securities (usually issued in the form of a guarantee) as an extension to their line of
credit to a contractor and as they usually know a contractor better than an insurance company
would, the bonds can normally be issued more speedily. When a bond is issued by a bank however,
the magnitude of the bond may affect the availability of that bank’s line of credit to the contractor,
which could have adverse repercussions on the contractor’s ability to adequately fund the contract
or indeed other contracts taking place during the same period of risk. Banks are however, generally
more prompt in paying out on bonds as they are usually less willing to argue or investigate the
merits of any claim than an insurance company.

Bonds issued by insurance companies will usually only be issued after the insurance company has
made detailed enquiries into a contractor’s financial background and ability to perform the contract
in question.

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Such detailed enquiries can be reassuring to an employer as if the insurance company issues the
bond then the company is satisfied with the risk. Conversely, if the company refuse to issue the

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requisite bond and the employer is aware of such a decision, the employer might decide to question
the suitability of the contractor he has selected.

Regarding the recommendations given here, whilst banks are the usual sources for guarantees,
insurance companies should be encouraged to enter the market of the provision of securities -
usually in the form of bonds. Furthermore, the use of Ethiopian institutions should be encouraged.

Part 6. The ICC Uniform Rules for Demand Guarantees

As a result of the abuse of the principles of demand guarantees by unfair calling, in 1992 the
International Chamber of Commerce in Paris, produced the publication Uniform Rules for Demand
Guarantees (URDG).

The URDG comprise 28 articles and provide in Article 2(a) a definition of a demand guarantee as
follows:

‘…..any guarantee, bond or other payment undertaking, however named or described, by a bank,
insurance company or other body or person (hereinafter called “the Guarantor”) given in writing
for the payment of money on presentation in conformity with the terms of the undertaking of a
written demand for payment and such other document(s) (for example, a certificate by an architect
or engineer, a judgment or an arbitral award) as may be specified in the Guarantee, such
undertaking being given

(a) at the request or on the instructions and under the liability of a party (hereinafter called “the
Principal”); or
(b) at the request or on the instructions and under the liability of a bank, insurance company or
any other body or person (hereinafter “the Instructing Party”) acting on the instructions of a
Principal to another party (hereinafter the “Beneficiary”)’.

The main features of these Rules are as follows:

(a) Demand guarantees are invoked only if the principal has defaulted;
(b) The Rules do not apply to suretyship or conditional bonds or guarantees or other accessory
undertakings;
(c) The Principal can expect on the grounds of equity and good faith to be informed in writing
of any claim made in which it is alleged that he is in breach of his obligations in the
underlying contract and also in what respect such a claim is made; and
(d) The demand guarantees should not contain any condition other than the presentation of a
written demand and other specified documents.

The specified documents required to be presented in demand guarantees vary widely. At one end is
the guarantee which is payable on simple written demand, without a statement of default or other
documentary requirements. At the other end is the guarantee which requires presentation of a
judgment or arbitral award. Between these two extremes lie various indeterminate forms of
guarantee, such as guarantees requiring a statement of default by the beneficiary, or the
presentation of a certificate by and engineer or another professional. All these fall within the scope
of the URDG Rules.

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Part 7. The ICC Uniform Rules for Contract Bonds

After the successful launch of the Uniform Rules for Demand Guarantees (see above) the
International Chamber of Commerce in Paris published its Uniform Rules for Contract Bonds,
URCB in 1993. As explained in the introductory section of these Rules, they have been drawn up
by an ICC working party of members representing the ICC Commission on insurance and the
building and engineering industry for world-wide application. They came into effect on 1st January
1994. Essentially, they come from the insurance industry and are intended to apply to suretyship
guarantees.

The URCB relate to contract bonds which create obligations of an accessory nature, where the
liability of the surety or guarantor arises and is conditional upon an established default by the
contractor of an obligation set out in the underlying contract. The contractor is referred to as the
principal The Rules are intended therefore to apply where the intention of the parties is that the
obligations of the guarantor will depend upon the duties or liabilities of the principal under the
relevant contract. Furthermore, these Rules are intended to operate so as to confer upon the
beneficiary in each case security for the performance or execution of the contract obligations or
payment which may fall due to the beneficiary as a result of any breach of obligation or default by
the principal under the underlying contract. Accordingly, subject to its financial limits, either the
obligations set out in the underlying contract will be performed or executed, or upon default, the
beneficiary will recover any sum properly due, notwithstanding the insolvency of the principal or
the principal's failure for any other reason to satisfy or discharge his liability.

The relationship between the parties under a bond governed by the URCB differs from that arising
under the URDG. In the URCB, the beneficiary obtains security for the obligations of the principal
arising pursuant to the underlying contract but the guarantor's liability would only arise in case of
an established default under that contract. Thus, in the event of a dispute arising as to the liability
of a guarantor, the URCB contemplate that such dispute will be determined by reference to the
underlying contract. The guarantor and the principal are protected in that liability will arise only
when default is established. The beneficiary is protected by the assurance that any judgment or
award will be discharged by the guarantor if the principal fails to do so. On the other hand the
guarantee under the URDG should not stipulate any condition for payment other than the
presentation of a written demand and other specified documents without requiring the guarantor to
decide whether the beneficiary and principal have or have not fulfilled their obligations under the
underlying contract.

Of course, both sets of Rules apply only where expressly incorporated by the parties in their
underlying contract. By adopting these Rules, it is expected that some uniformity of practice in the
operation and enforcement of bonds would be established in the face of the difficulties created by
first, unconditional bonds and secondly, by the uncertainty in defining what is and what is not
conditional.

The first of these two problems can be highlighted by reference to the case of Edward Owen
Engineering v. Barclays Bank International which has been extensively discussed in the legal texts
(see above). The second problem can be highlighted by reference to the two recent cases in the last
few years mentioned above. The first is the Trafalgar House case, and the second is the Perar case
which revolved around a design and build contract.

New forms of bonds were hastily prepared by various organisations in the face of the criticism and
the conflicting judgments in these cases. It is hoped that if both sets of Rules are extensively
applied, such confusion would not arise.

The URCB contain eight articles, under the following headings: scope and application; definitions;
form of bond and liability of the guarantor to the beneficiary; release and discharge of guarantor;
return of the bond; amendments and variations to and of the contract and the bond and extensions
of time; submission of claims and claims procedure; and jurisdiction and settlement of disputes.
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Article 2 of these Rules defines the various forms of bond which fall within the application of these
Rules. They are: advance payment bond; maintenance bond; performance bond; retention bond;
and tender bond.

Article 3 of these Rules sets out first, the information which must be stipulated in a bond issued for
a particular purpose under these Rules and secondly, the principles of liability of the guarantor to
the beneficiary. Sub-paragraphs (ix), (xii) and (xiii) of Article 3 pose three important questions
which must be carefully considered and answered for each specific bond. These are as follows:

(a) Whether the Guarantor shall be entitled at its option to perform or execute the Contract or
any Contractual Obligation.
(b) Whether sub-paragraph (i) of Article 7(j) is to apply and the name of the third party to be
nominated thereunder for the purpose of Article 7 below (claims procedure).
(c) How disputes or differences between the Beneficiary, the Principal and the Guarantor in
relation to the Bond are to be settled.’

In answer to the first of these questions, it is submitted that it should be answered in the negative.
In this connection, reference should be made to the arguments presented in Part 4, above.

The second question deals with the most interesting aspect of these Rules, Article 7 (j), which, if
answered in the affirmative, requires the appointment of a referee to settle the question of whether
or not there is default by the contractor of any of his obligations under the underlying contract.
Article 7 (j) provides as follows:
‘Notwithstanding any dispute or difference between the Principal and the Beneficiary in relation to
the performance of the Contract or any Contractual Obligation, a Default shall be deemed to be
established for the purposes of these Rules:

(a) upon issue of a certificate of Default by a third party (who may without limitation be an
independent architect or engineer or a Pre-Arbitral referee of the ICC) if the Bond so
provides and the service of such certificate or a certified copy thereof upon the Guarantor;
or

(b) if the Bond does not provide for the issue of a certificate by a third party, upon the issue of a
certificate of Default by the Guarantor; or

(c) by the final judgment, order or award of a court or tribunal of competent jurisdiction, and
the issue of a certificate of Default under paragraph (i) or (ii) shall not restrict the rights of
the parties to seek or require the determination of any dispute or difference arising under the
Contract or the Bond or the review of any certificate of Default or payment made pursuant
thereto by a court or tribunal of competent jurisdiction.’

The appropriate answer to the question under sub-paragraph xii of Article 3 should therefore be in
the affirmative and the name of the third party or an appointing authority should be inserted in the
bond.

As to the question under sub-paragraph xiii of Article 3, it is submitted that any dispute or
difference between the beneficiary, the principal and the guarantor in relation to the bond should be
settled in the same manner as stipulated in the underlying contract. The reason for this proposal is
to permit uniformity in the area of dispute resolution between the bond and the underlying contract,
thus reducing the possibility of conflicting decisions being given under the same circumstances.

There is one other aspect of the URCB worthy of note which should be carefully considered once a
surety guarantee is chosen as the appropriate method of obtaining security. This concerns Article
6(b) which relates to a tender bond and contains the words ‘substantial or material variation of or
amendment to the original tender’. This is an ambiguous wording which should be clarified for the
sake of avoiding any doubt. If it is intended to be applied to a form of bond other than a tender
Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-46
 Ethiopian Roads Authority

bond, it should be clarified to mean a variation which transforms the project into one which is
either beyond the financial capacity or the expertise of the contractor.

FINANCIAL CONTROL
Part 8. Conclusion and Recommendations

As can be concluded from the previous parts of this document, the pitfalls of performance
securities are many without the complications from the use of ambiguous or archaic wording.

In accordance with the comments made above and the recommendations of both FIDIC and many
other international bodies, in general, the form of security that should be employed wherever
possible, is that of the on-default rather that the on-demand form. Notwithstanding this
recommendation, as regards construction projects within Ethiopia, attention is drawn to the specific
recommendations hereunder.

If the employer insists upon the on-demand form especially an unconditional on-demand form of
security, he should be appraised of the financial implications which he will incur by adopting such
a form of security. It may also be wise to consider the possibility of incorporation of either the
URDG and/or the URCB Rules into the underlying contract.

Specific recommendations on the forms of security that should be utilised for construction projects
in Ethiopia. (See Part 3)

Bid or Tender Bonds/Guarantees

It is recommended that the form of bond or preferably guarantee as in the World Bank Standard
Bidding Documents, is of an unconditional on-demand form.

Performance Bonds/Guarantees

Whilst generally it is felt that performance securities should be of the conditional form, the World
Bank is currently insisting on unconditional on-demand securities and therefore there is not really
any choice in this matter on World Bank projects.

Advance Payment Bonds/Guarantees

It is recommended that the form of bond or preferably guarantee, as in the World Bank Standard
Bidding Documents, is of an unconditional on-demand form.

Retention Bonds/Guarantees

It is recommended that the form of bond or preferably is of an unconditional on-demand form.

Other Bonds/Guarantees

As these are unusual, no specific recommendation is given here except that should such securities
be requested or required, then it is recommended that generally they would be in the unconditional
on-demand form.

Examples - extracted from the World Bank Standard Bidding Documents - are attached in
Appendix 1 of these guidelines.

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-47

 Ethiopian Roads Authority

FINANCIAL CONTROL
Appendix 1 Examples of standard forms of securities

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-48

 Ethiopian Roads Authority

Form of Bid Security (Bank Guarantee)5

WHEREAS, [name of Bidder] (hereinafter called “the Bidder”) has submitted his Bid

FINANCIAL CONTROL
dated [date] for the execution of [name of Contract] (hereinafter called “the Bid”).

KNOW ALL PEOPLE by these presents that We [name of Bank] of [name of country]
having our registered office at [address] (hereinafter called “the Bank”) are bound unto
[name of Employer] (hereinafter called “the Employer”) in the sum of [amount]6 for
which payment well and truly to be made to the said Employer the Bank binds himself,
his successors, and assigns by these presents.

SEALED with the Common Seal of the said Bank this day of _______ 20 ___

THE CONDITIONS of this obligation are:

(1) if the Bidder withdraws his Bid during the period of Bid validity specified in the
Form of Bid; or

(2) if the Bidder refuses to accept the correction of errors in his Bid; or

(3) if the Bidder, having been notified of the acceptance of his Bid by the Employer
during the period of Bid validity;

(a) fails or refuses to execute the Form of Agreement in accordance with the
Instructions to Bidders, if required; or

(b) fails or refuses to furnish the Performance Security, in accordance with

the Instruction to Bidders;

we undertake to pay to the Employer up to the above amount upon receipt of his first
written demand, without the Employer having to substantiate his demand, provided that
in his demand the Employer will note that the amount claimed by him is due to him
owing to the occurrence of one or both of the two conditions, specifying the occurred
condition or conditions.

This Guarantee will remain in force up to and including the date 28 days after the date of
expiration of the Bid Validity, as stated in the Instructions to Bidders, or as it may be
extended by the Employer, notice of which extension(s) to the Bank is hereby waived.
Any demand in respect of this Guarantee should reach the Bank not later than the above
date.

DATE SIGNATURE OF THE BANK

WITNESS _____________________________ SEAL

[signature, name, and address]

5
The Bidder shall complete either this form of Bank Guarantee or may provide another security
acceptable to the Employer.
6
The Bidder should insert the amount of the guarantee in words and figures denominated in the currency
of the Employer’s country or an equivalent amount in a freely convertible currency. This figure should
be the same as shown in Clause 17.1 of the Bidding Data. The attention of joint venture bidders is drawn
to Clause 17.3 of the Instructions to Bidders.
Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-49
 Ethiopian Roads Authority

Annex A Form: Alternative 1

Performance Bank Guarantee (Unconditional)7

FINANCIAL CONTROL
To: [name and address of Employer]

WHEREAS [name and address of Employer] (hereinafter called “the Contractor”) has
undertaken, in pursuance of Contract No. dated to execute [name of Contract and
brief description of Works] (hereinafter called “the Contract.”);

AND WHEREAS it has been stipulated by you in the said Contract that the Contractor
shall furnish you with a Bank Guarantee by a recognised bank for the sum specified
therein as security for compliance with his obligations in accordance with the Contract;

AND WHEREAS we have agreed to give the Contractor such a Bank Guarantee;

NOW THEREFORE we hereby affirm that we are the Guarantor and responsible to
you, on behalf of the Contractor, up to a total of [amount of Guarantee], [amount in
words],8 such sum being payable in the types and proportions of currencies in which the
Contract Price is payable, and we undertake to pay you, upon your first written demand
and without cavil or argument, any sum or sums within the limits of [amount of
Guarantee] as aforesaid without your needing to prove or to show grounds or reasons
for your demand for the sum specified therein.

We hereby waive the necessity of your demanding the said debt from the Contractor
before presenting us with the demand.

We further agree that no change or addition to or other modification of the terms of the
Contract or of the Works to be performed thereunder or of any of the Contract
documents which may be made between you and the Contractor shall in any way
release us from any liability under this guarantee, and we hereby waive notice of any
such change, addition or modification.

This guarantee shall be valid until a date 28 days from the date of issue of the Taking-
Over Certificate.

SIGNATURE AND SEAL OF THE GUARANTOR

Name of Bank:
Address:
Date:

7
The unconditional (or “on-demand”) bank guarantee has the merit of simplicity and of being universally
known and accepted by commercial banks. The contracting community, however, strongly objects to this
type of security because the guarantee can be called (or threatened to be called) by Employers without
justification. Employers should recognize the contractual conditions governing non performance by the
Contractor and should normally act only on the advice of the Engineer in calling a performance
guarantee. Any unjustified calling of a bank guarantee, or unreasonable pressure exercised by an
Employer, would be regarded by IBRD as contrary to the spirit and basic principles of international
procurement. This type of guarantee is called a “bond” in a number of countries; however, it should be
distinguished from the U.S.-style “performance bond” as shown in Alternative 3.
8
An amount is to be inserted by the Guarantor, representing the percentage of the Contract Price
specified in the Contract, and denominated either in the currency(ies) of the Contract or in a freely
convertible currency acceptable to the Employer.
Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-50
 Ethiopian Roads Authority

Annex A Form: Alternative 2

FINANCIAL CONTROL
Performance Bank Guarantee (Conditional)9

THIS AGREEMENT is made on the day of

19

between [name of bank] of [address of bank] (hereinafter called “the Guarantor”) of the
one part and [name of Employer] of [address of Employer] (hereinafter called “the
Employer”) of the other part.

WHEREAS

(1) this Agreement is supplemental to a contract (hereinafter called the Contract)

made between [name of Contractor] of [address of Contractor] (hereinafter called
the Contractor) of the one part and the Employer of the other part whereby the
Contractor agreed and undertook to execute the Works of [name of Contract and
brief description of the Works] for the sum of [amount in Contract currency]
being the Contract Price; and

(2) the Guarantor has agreed to guarantee the due performance of the Contract
in the manner hereinafter appearing.

NOW, THEREFORE, the Guarantor hereby agrees with the Employer as follows:

(a) If the Contractor (unless relieved from the performance by any clause
of the Contract or by statute or by the decision of a tribunal of
competent jurisdiction) shall in any respect fail to execute the Contract
or commit any breach of his obligations thereunder then the Guarantor
will indemnify and pay the Employer the sum of [amount of
Guarantee], [amount in words],10 such sum being payable in the types
and proportions of currencies in which the Contract Price is payable,
provided that the Employer or his authorised representative has
notified the Guarantor to that effect and has made a claim against the
Guarantor before the issue of the Defects Liability Certificate.

(b) The Guarantor shall not be discharged or released from his guarantee
by an arrangement between the Contractor and the Employer, with or
without the consent of the Guarantor, or by any alteration in the
obligations undertaken by the Contractor, or by any forbearance on the

9
The triggering of this form of performance guarantee is conditional (see sub-clause (a) of the Guarantee)
upon the Contractor “failing to execute the Contract or committing a breach of his obligations
thereunder” and requires a statement by the Employer and/or the Engineer to that effect, and an exercise
of judgment by the Guarantor as to whether the required conditions of default have been fulfilled. Some
forms of guarantee contain further qualifying conditions, and are not triggered until an agreement has
been reached on the amount of damages payable, or until an award has been made under the applicable
settlement of disputes procedures. The construction industry favours this form of guarantee over the
unconditional guarantee whenever it is available. However, not all commercial banks (as Guarantors) are
willing to issue conditional guarantees, and not all Employers are prepared to accept this form of
performance security.
10
An amount is to be inserted by the Guarantor, representing the percentage of the Contract price
specified in the Contract, and denominated either in the currency(ies) of the Contract or in a freely
convertible currency acceptable to the Employer.
Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-51
 Ethiopian Roads Authority

part of the Contractor, whether as to the payment, time, performance,

or otherwise, and any notice to the Guarantor of any such arrangement,
alteration, or forbearance is hereby expressly waived.

FINANCIAL CONTROL
This Guarantee shall be valid until a date 28 days from the date of issue of the Taking-
Over Certificate.

Given under our hand on the date first mentioned above.

SIGNED BY

for and on behalf of the Guarantor in the presence of:

(Witness)

SIGNED BY

for and on behalf of the Employer in the presence of:

(Witness)

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-52

 Ethiopian Roads Authority

Annex B Form

FINANCIAL CONTROL
Bank Guarantee for Advance Payment

To: [name and address of Employer]

[name of Contract]

Gentlemen:

In accordance with the provisions of the Conditions of Contract, Sub-clause 60.7

(“Advance Payment”) of the above-mentioned Contract, [name and address of
Contractor] (hereinafter called “the Contractor”) shall deposit with [name of Employer]
a bank guarantee to guarantee his proper and faithful performance under the said Clause
of the Contract in an amount of [amount of Guarantee], [amount in words]. 11

We, the [bank or financial institution], as instructed by the Contractor, agree

unconditionally and irrevocably to guarantee as primary obligator and not as Surety
merely, the payment to [name of Employer] on his first demand without whatsoever
right of objection on our part and without his first claim to the Contractor, in the amount
not exceeding [amount of Guarantee], [amount in words], such amount to be reduced
periodically by the amounts recovered by you from the proceeds of the Contract.

We further agree that no change or addition to or other modification of the terms of the
Contract or of Works to be performed thereunder or of any of the Contract documents
which may be made between [name of Employer] and the Contractor, shall in any way
release us from any liability under this guarantee, and we hereby waive notice of any
such change, addition, or modification.

No drawing may be made by you under this guarantee until we have received notice in
writing from you that an advance payment of the amount listed above has been paid to
the Contractor pursuant to the Contract.

This guarantee shall remain valid and in full effect from the date of the advance
payment under the Contract until [name of Employer] receives full repayment of the
same amount from the Contractor.

Yours truly,

SIGNATURE AND SEAL:

Name of Bank or Financial Institution:

Address:

Date:

11
An amount is to be inserted by the bank or financial institution representing the amount of the Advance
Payment, and denominated either in the currency(ies) of the Advance Payment as specified in the
Contract, or in a freely convertible currency acceptable to the Employer.
Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-53
 Ethiopian Roads Authority

Appendix 6-2- Standard Forms of Security

FINANCIAL CONTROL

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-54

 Ethiopian Roads Authority

Form of Bid Security (Unconditional Bank Guarantee)12

WHEREAS, [name of Bidder] (hereinafter called “the Bidder”) has submitted his Bid dated

FINANCIAL CONTROL
[date] for the execution of [name of Contract] (hereinafter called “the Bid”).

KNOW ALL PEOPLE by these presents that We [name of Bank] of [name of country] having
our registered office at [address] (hereinafter called “the Bank”) are bound unto [name of
Employer] (hereinafter called “the Employer”) in the sum of [amount]13 for which payment
well and truly to be made to the said Employer the Bank binds himself, his successors, and
assigns by these presents.

SEALED with the Common Seal of the said Bank this ___ day of ______ 20________

THE CONDITIONS of this obligation are:

(1) if the Bidder withdraws his Bid during the period of Bid validity specified in the Form
of Bid; or

(2) if the Bidder refuses to accept the correction of errors in his Bid; or

(3) if the Bidder, having been notified of the acceptance of his Bid by the Employer during
the period of Bid validity;

(a) fails or refuses to execute the Form of Agreement in accordance with the
Instructions to Bidders, if required; or

(b) fails or refuses to furnish the Performance Security, in accordance with the
Instruction to Bidders;

we undertake to pay to the Employer up to the above amount upon receipt of his first written
demand, without the Employer having to substantiate his demand, provided that in his demand
the Employer will note that the amount claimed by him is due to him owing to the occurrence of
one or both of the two conditions, specifying the occurred condition or conditions.

This Guarantee will remain in force up to and including the date 28 days after the date of
expiration of the Bid Validity, as stated in the Instructions to Bidders, or as it may be extended
by the Employer, notice of which extension(s) to the Bank is hereby waived. Any demand in
respect of this Guarantee should reach the Bank not later than the above date.

DATE SIGNATURE OF THE BANK

WITNESS SEAL

_______________________________________________

[signature, name, and address]

12
The Bidder shall complete either this form of Bank Guarantee or may provide another security
acceptable to the Employer.
13
The Bidder should insert the amount of the guarantee in words and figures denominated in the currency
of the Employer’s country or an equivalent amount in a freely convertible currency. This figure should
be the same as shown in Clause 17.1 of the Bidding Data. The attention of joint venture bidders is drawn
to Clause 17.3 of the Instructions to Bidders.
Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-55
 Ethiopian Roads Authority

Form of Performance Guarantee (Unconditional Bank Guarantee)14

To: [name and address of Employer]

FINANCIAL CONTROL
WHEREAS [name and address of Employer] (hereinafter called “the Contractor”) has
undertaken, in pursuance of Contract No. dated to execute [name of Contract and
brief description of Works] (hereinafter called “the Contract.”);

AND WHEREAS it has been stipulated by you in the said Contract that the Contractor shall
furnish you with a Bank Guarantee by a recognised bank for the sum specified therein as
security for compliance with his obligations in accordance with the Contract;

AND WHEREAS we have agreed to give the Contractor such a Bank Guarantee;

NOW THEREFORE we hereby affirm that we are the Guarantor and responsible to you, on
behalf of the Contractor, up to a total of [amount of Guarantee], [amount in words],15 such sum
being payable in the types and proportions of currencies in which the Contract Price is payable,
and we undertake to pay you, upon your first written demand and without cavil or argument,
any sum or sums within the limits of [amount of Guarantee] as aforesaid without your needing
to prove or to show grounds or reasons for your demand for the sum specified therein.

We hereby waive the necessity of your demanding the said debt from the Contractor before
presenting us with the demand.

We further agree that no change or addition to or other modification of the terms of the Contract
or of the Works to be performed thereunder or of any of the Contract documents which may be
made between you and the Contractor shall in any way release us from any liability under this
guarantee, and we hereby waive notice of any such change, addition or modification.

This guarantee shall be valid until a date 28 days from the date of issue of the Taking-Over
Certificate.

SIGNATURE AND SEAL OF THE GUARANTOR

_____________________________________________________________________________

Name of Bank: ____________________________________

Address: ____________________________________

Date: ____________________________________

14
The unconditional (or “on-demand”) bank guarantee has the merit of simplicity and of being
universally known and accepted by commercial banks. The contracting community, however, strongly
objects to this type of security because the guarantee can be called (or threatened to be called) by
Employers without justification. Employers should recognize the contractual conditions governing non
performance by the Contractor and should normally act only on the advice of the Engineer in calling a
performance guarantee. Any unjustified calling of a bank guarantee, or unreasonable pressure exercised
by an Employer, would be regarded by IBRD as contrary to the spirit and basic principles of international
procurement. This type of guarantee is called a “bond” in a number of countries; however, it should be
distinguished from the U.S.-style “performance bond” as shown in Alternative 3.
15
An amount is to be inserted by the Guarantor, representing the percentage of the Contract Price
specified in the Contract, and denominated either in the currency(s) of the Contract or in a freely
convertible currency acceptable to the Employer.
Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-56
 Ethiopian Roads Authority

Form of Performance Guarantee (Conditional Bank Guarantee)16

THIS AGREEMENT is made on the day of ______________ 20___

FINANCIAL CONTROL
between [name of bank] of [address of bank] (hereinafter called “the Guarantor”) of the one
part and [name of Employer] of [address of Employer] (hereinafter called “the Employer”) of
the other part.

WHEREAS

(1) this Agreement is supplemental to a contract (hereinafter called the Contract) made
between [name of Contractor] of [address of Contractor] (hereinafter called the Contractor)
of the one part and the Employer of the other part whereby the Contractor agreed and
undertook to execute the Works of [name of Contract and brief description of the Works] for
the sum of [amount in Contract currency] being the Contract Price; and

(2) the Guarantor has agreed to guarantee the due performance of the Contract in the
manner hereinafter appearing.

NOW, THEREFORE, the Guarantor hereby agrees with the Employer as follows:
(a) If the Contractor (unless relieved from the performance by any clause of the Contract
or by statute or by the decision of a tribunal of competent jurisdiction) shall in any
respect fail to execute the Contract or commit any breach of his obligations thereunder
then the Guarantor will indemnify and pay the Employer the sum of [amount of
Guarantee], [amount in words],17 such sum being payable in the types and proportions
of currencies in which the Contract Price is payable, provided that the Employer or his
authorised representative has notified the Guarantor to that effect and has made a
claim against the Guarantor before the issue of the Defects Liability Certificate.
(b) The Guarantor shall not be discharged or released from his guarantee by an
arrangement between the Contractor and the Employer, with or without the consent of
the Guarantor, or by any alteration in the obligations undertaken by the Contractor, or
by any forbearance on the part of the Contractor, whether as to the payment, time,
performance, or otherwise, and any notice to the Guarantor of any such arrangement,
alteration, or forbearance is hereby expressly waived.
This Guarantee shall be valid until a date 28 days from the date of issue of the Taking-Over
Certificate.

Given under our hand on the date first mentioned above.

SIGNED BY _________________________ SIGNED BY _______________________

for and on behalf of the Guarantor in the presence of: for and behalf of the Employer

16
The triggering of this form of performance guarantee is conditional (see sub clause (a) of the
Guarantee) upon the Contractor “failing to execute the Contract or committing a breach of his obligations
thereunder” and requires a statement by the Employer and/or the Engineer to that effect, and an exercise
of judgment by the Guarantor as to whether the required conditions of default have been fulfilled. Some
forms of guarantee contain further qualifying conditions, and are not triggered until an agreement has
been reached on the amount of damages payable, or until an award has been made under the applicable
settlement of disputes procedures. The construction industry favours this form of guarantee over the
unconditional guarantee whenever it is available. However, not all commercial banks (as Guarantors) are
willing to issue conditional guarantees, and not all Employers are prepared to accept this form of
performance security.
17
An amount is to be inserted by the Guarantor, representing the percentage of the Contract price
specified in the Contract, and denominated either in the currency(s) of the Contract or in a freely
convertible currency acceptable to the Employer.
Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-57
 Ethiopian Roads Authority

Form of Performance Bond (Conditional Bond)

FINANCIAL CONTROL
BY THIS BOND_____________________________________[name and address of
Contractor] as Principal (hereafter called “the Contractor”) and ___________________
________________ [name, legal title, and address of surety, bonding company or insurance
company] as Surety (hereinafter called “the Surety”), are held and firmly bound unto the
Ethiopian Roads Authority, Post Office Box 1770, Addis Ababa, as Obligee (hereinafter called
“the Employer,) in the amount of __________ [amount of Bond = 10 percent of the contract
price] ___________________________, [in words], for the payment of which sum well and
truly to be made in the types and proportions of currencies in which the Contract Prices payable,
the Contractor and the Surety bind themselves, their heirs, executors, administrators, successors
and assigns, jointly and severally, firmly by these presents.

WHEREAS the Contractor has entered into a written Agreement with the Employer dated the
_____ day of __________, 20____, for ___________________________ [name of Contract] in
accordance with the documents, plans, specifications and amendments thereto, which to the
extent herein provided for, are by reference made part hereof and are hereinafter referred to as
the Contract.

NOW, THEREFORE, the Condition of this Obligation is such that, if the Contractor shall
promptly and faithfully perform the said Contract (including any amendments thereto) then this
obligation shall be null and void; otherwise it shall remain in full force and effect. Whenever the
Contractor shall be, and declared by the Employer to be, in default under the Contract, the
Employer having performed the Employer’s obligations thereunder, the Surety may promptly
remedy the default, or shall promptly pay the Employer the amount required by Employer to
complete the Contract in accordance with its terms and conditions up to a total not exceeding
the amount of this Bond.

The Surety shall not be liable for a greater sum than the specified penalty18 of this Bond.

Any suit under this Bond must be instituted before the expiration of one year from the date of
the issuing of the Taking-Over Certificate.

No right of action shall accrue on this Bond to or for the use of any person or corporation other
than the Employer named herein or the heirs, executors, administrators, successors, and assigns
of the Employer.

In testimony whereof, the Contractor has hereunto set his hand and affixed his seal, and the
Surety has caused these presents to be sealed with his corporate seal duly attested by the
signature of his legal representative, this __________ day of _________________20____.

SIGNED ON _______________________ SIGNED ON __________________________

On behalf of ________________________ On behalf of___________________________

By______________________________ By___________________________________

In the capacity of _____________________ In the capacity of ______________________

In the presence of _____________________ In the presence of ______________________

18
Penalty is the word used by ERA in its standard bid document. It is assumed that penalty and value are
synonymous in this instance
Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-58
 Ethiopian Roads Authority

Form of Retention Guarantee

To: [name and address of Employer]

FINANCIAL CONTROL
Contract no:

Our retention guarantee number: [insert bank's guarantee reference number]

Whereas [insert name and address of contractor on behalf of whom the guarantee is being
issued] (hereinafter called “the contractor”), has been awarded the contract for [insert the
official contract name/description] (hereinafter called “the contract”).

And whereas it has been stipulated in the contract that the company furnish you with a bank
guarantee for the sum specified therein as security for compliance with the contractor’s
performance obligations during the warranty period.

And whereas we, the undersigned [insert name and address of bank issuing the guarantee] have
agreed to give the contractor a bank guarantee.

Therefore we hereby guarantee to you as primary obligator and not merely as security, on behalf
of the contractor, the payment to you upon receipt of your first written demand declaring the
contractor to be in default under the contract, of any sum or sums up to the total of [insert the
total value of the retention required to be retained at the time of issuing the guarantee] (only),
without contestation and without your needing to prove or to show grounds or reasons for your
demand for the sum specified therein.

We take note that your release of this guarantee and your advice or release in accordance with
article [insert the clause reference for the issue of the defects liability certificate] of the general
conditions of contract will follow within 14 days of the issue of the defects liability certificate.

No variations to the terms and/or conditions on this guarantee are permitted without prior
written agreement of all the contracting parties who are legally bound thereby.

This guarantee is neither negotiable nor transferable and is restricted to the payment of money
only.

The law and jurisdiction applicable to the guarantee shall be that of the Federal Democratic
Republic of Ethiopia.

Signed at [insert the location of signature], for and on behalf of [insert the name of the bank
issuing the guarantee], this [insert the date] day of [insert the month and year]

........................................................................

Manager

As witnesses. 1. …….........…………… 2. ………………………………..

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-59

 Ethiopian Roads Authority

Bank Guarantee for Advance Payment

To: [name and address of Employer]

FINANCIAL CONTROL
[name of Contract]

Gentlemen:

In accordance with the provisions of the Conditions of Contract, Sub Clause 60.7
(“Advance Payment”) of the above-mentioned Contract, [name and address of
Contractor] (hereinafter called “the Contractor”) shall deposit with [name of Employer]
a bank guarantee to guarantee his proper and faithful performance under the said Clause
of the Contract in an amount of [amount of Guarantee], [amount in words]. 19

We, the [bank or financial institution], as instructed by the Contractor, agree

unconditionally and irrevocably to guarantee as primary obligator and not as Surety
merely, the payment to [name of Employer] on his first demand without whatsoever
right of objection on our part and without his first claim to the Contractor, in the amount
not exceeding [amount of Guarantee], [amount in words], such amount to be reduced
periodically by the amounts recovered by you from the proceeds of the Contract.

We further agree that no change or addition to or other modification of the terms of the
Contract or of Works to be performed thereunder or of any of the Contract documents
which may be made between [name of Employer] and the Contractor, shall in any way
release us from any liability under this guarantee, and we hereby waive notice of any
such change, addition, or modification.

No drawing may be made by you under this guarantee until we have received notice in
writing from you that an advance payment of the amount listed above has been paid to
the Contractor pursuant to the Contract.

This guarantee shall remain valid and in full effect from the date of the advance
payment under the Contract until [name of Employer] receives full repayment of the
same amount from the Contractor.

Yours truly,

SIGNATURE AND SEAL:

Name of Bank or Financial Institution:

Address:

Date:

19
An amount is to be inserted by the bank or financial institution representing the amount of the Advance
Payment, and denominated either in the currency(s) of the Advance Payment as specified in the Contract,
or in a freely convertible currency acceptable to the Employer.
Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-60
 Ethiopian Roads Authority

Appendix 6-3 - Insurance Summary

FINANCIAL CONTROL

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-61

 Clause In Contractor's In Employer's
To Cover Insurance Type Value Cross Indemnity
Ref. Name Name
All Risks excl
The Works, materials and plant to be 100% of the
21.1(a) clause 21.4 Yes Yes No
included in the Works Contract
risks
The additional costs of and incidental
to the rectification of any damage
All Risks excl
including professional fees and the
21.1(b) clause 21.4 Yes Yes 15% of the Contract No
cost of demolishing and removing
risks
any part of the works and of
removing debris of whatever nature

Contract Administration Manual Draft April 2007

The Contractor's Equipment and other
21.1(c) things brought onto the site for All Risks Yes No Replacement Cost No
undertaking the works
No. Contractor to
Contractor to decide
Damage to persons and property Contractor's Yes indemnify
22.1 No but in the region of
excluding exceptions of Clause 22.2 decision (if taken out) Employer
Min USD 500 000
against claims
No. Employer to
Employer to decide
Damage to persons and property Employer's Yes indemnify
22.3 No but in the region of
including exceptions of Clause 22.2 Decision (if taken out) Contractor
Min USD 500 000
against claims
Varies but in the
Liabilities for death or injury to any
range of USD100-
person or loss of or damage to any
250 000 per
23.1 property (other than the works) Third Party Yes Yes Yes
occurrence with
arising out of the performance of
unlimited number
the Contract
of occurrences
Liability for death or injury to any
No. Contractor to
workman or other person in the Workman's Varies but = GoE
indemnify
24.2 employment of the Contractor or Compensatio Yes No legislation as a
Employer
any Subcontractor, his agents or n minimum
against claims
servants.
Varies but in the
Liability for any losses resulting from
Professional range of 3 to 5
errors in of failures from design by Yes No No
Indemnity times the
the Contractor's designers
Designer's fee
Ethiopian Roads Authority

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FINANCIAL CONTROL

6-62
 Ethiopian Roads Authority

Appendix 6-4 - FIDIC IV/IDA/NCT/ICB Insurance Clauses

FINANCIAL CONTROL

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-63

 Where the FIDIC IV wording is common to all forms of contract the cells have been merged. Where a cell is left blank it indicates that that form
uses the FIDIC IV wording

Cl. IDA SBD May 2002 Rev March

Headings FIDIC IV ERA NCT SBD 2002 ERA ICB SBD 2002
No 2003
Care of Works 20.1 The Contractor shall take full responsibility for the care of the Works and materials and Plant for incorporation therein from the Commencement Date until

Contract Administration Manual Draft April 2007

the date of issue of the Taking-Over Certificate for the whole of the Works, when the responsibility for the said care shall pass to the Employer. Provided
that:

(a) if the Engineer issues a Taking-Over Certificate for any Section or part of the Permanent, Works the Contractor shall cease to be liable for the care of
that Section or part from the date of issue of the Taking-Over Certificate, when the responsibility for the care of that Section or part shall pass to the
Employer, and

(b) the Contractor shall take full responsibility for the care of any outstanding Works and materials and Plant for incorporation therein which he undertakes
to finish during the Defects Liability Period until such outstanding Works have been completed pursuant to Clause 49.
Responsibility 20.2 Amend Clause 20.2 to read as
to Rectify follows: "
Loss or
Damage If any loss or damage happens to the If any loss or damage happens to the
Works, or any part thereof, or Works, or any part thereof, or
materials or Plant for incorporation materials or Plant for incorporation
therein, during the period for which therein, during the period for which
the Contractor is responsible for the the Contractor is responsible for the
care thereof, from any cause care thereof, from any cause
whatsoever, other than the risks whatsoever, other than by Force
defined in Sub-Clause 20.4, the Majeure defined in Sub-Clause 65.2,
Contractor shall, at his own cost, the Contractor shall, at his own cost,
rectify such loss or damage so that rectify such loss or damage so that
the Permanent Works conform in the Permanent Works conform in
every respect with the provisions of every respect with the provisions of
the Contract to the satisfaction of the the Contract to the satisfaction of the
Engineer. The Contractor shall also Engineer. The Contractor shall also
be liable for any loss or damage to be liable for any loss or damage to
the Works occasioned by him in the the Works occasioned by him in the
course of any operations carried out course of any operations carried out
by him for the purpose of complying by him for the purpose of complying
with his obligations under Clauses with his obligations under Clauses
49 and 50. 49 and 50.”
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 Cl. IDA SBD May 2002 Rev March
Headings FIDIC IV ERA NCT SBD 2002 ERA ICB SBD 2002
No 2003
Loss or 20.3 Amend Sub-Clause 20.3 to read as
Damage Due follows:
to Employer’s
Risks In the event of any such loss or “In the event of any such loss or
damage happening from any of the damage happening as a result of any
risks defined in Sub-Clause 20.4, or occurrence defined in Sub-Clause
in combination with other risks, the 65.2, the Contractor shall, if and to
Contractor shall, if and to the extent the extent required by the Engineer,
required by the Engineer, rectify the rectify the loss or damage and the

Contract Administration Manual Draft April 2007

loss or damage and the Engineer Engineer shall determine an addition
shall determine an addition to the to the Contract Price in accordance
Contract Price in accordance with with Clause 52 and shall notify the
Clause 52 and shall notify the Contractor accordingly, with a copy
Contractor accordingly, with a copy to the Employer.”
to the Employer. In the case of a
combination of risks causing loss or
damage any such determination
shall take into account the
proportional responsibility of the
Contractor and the Employer.
Employer’s 20.4 Amend Sub-Clause 20.4 to read as 1.1.1.1.1.1 Delete Sub-Clause Amend Sub-Clause 20.4 to read as
Risks follows: 20.4 follows:
“The Employer’s risks are limited to
The Employer’s risks are: The Employer’s risks are: the following;
(a) insofar as they directly affect the a) Insofar as they directly affect the
execution of the Works in the execution of the Permanent Works
country where the Permanent Works in Ethiopia:
are to be executed: i) War and hostilities (whether war
(a) war, hostilities (whether war be (i) war and hostilities (whether war be declared or not), invasion, act of
declared or not), invasion, act of be declared or not), invasion, act of foreign enemies;
foreign enemies, foreign enemies; ii) Rebellion, acts of terrorism,
(b) rebellion, revolution, (ii) rebellion, revolution, revolution, insurrection, or military
insurrection, or military or usurped insurrection, military or usurped or usurped power, or civil war,
power, or civil war, power, or civil war; international embargo.
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 Cl. IDA SBD May 2002 Rev March
Headings FIDIC IV ERA NCT SBD 2002 ERA ICB SBD 2002
No 2003
(c) ionising radiations, or (iii) ionizing radiations, or (i) Ionizing, radiation, or
contamination by radio-activity from contamination by radioactivity from contamination by radioactivity from
any nuclear fuel, or from any any nuclear fuel, or from any any nuclear fuel, or from any
nuclear waste from the combustion nuclear waste from the combustion nuclear waste from the combustion
of nuclear fuel, radio-active toxic of nuclear fuel, radioactive toxic of nuclear fuel, radioactive toxic
explosive or other hazardous explosive, or other hazardous explosive or other hazardous
properties of any explosive nuclear properties of any explosive nuclear properties of any explosive nuclear
assembly or nuclear component assembly or nuclear component assembly or nuclear component
thereof, thereof; thereof;

Contract Administration Manual Draft April 2007

(d) pressure waves caused by (iv) pressure waves caused by (viii) Pressure waves caused by
aircraft or other aerial devices aircraft or other aerial devices aircraft or other aerial devices
travelling at sonic or supersonic traveling at sonic or supersonic traveling at sonic or supersonic
speeds, speeds; speeds;
(e) riot, commotion or disorder, (v) riot, commotion, or disorder, (ii) Riot, commotion or disorder,
unless solely restricted to employees unless solely restricted to the unless solely restricted to the
of the Contractor or of his employees of the Contractor or of employees of the Contractor or of
Subcontractors and arising from the his Subcontractors and arising from his Subcontractors and arising from
conduct of the Works, the conduct of the Works; the conduct of the Works;
(f) loss or damage due to the use or (b) loss or damage due to the use or b) Loss or damage due to the use or
occupation by the Employer of any occupation by the Employer of any occupation by the Employer of any
Section or part of the Permanent Section or part of the Permanent Section or part of the Permanent
Works, except as may be provided Works, except as may be provided Works, except as may be provided
for in the Contract, for in the Contract; for in the Contract;
(g) loss or damage to the extent that (c) loss or damage to the extent c) Loss or damage to the extent that
it is due to the design of the Works, that it is due to the design of the it is due to the design of the Works,
other than any part of the design Works, other than any part of the other than any part of the design
provided by the Contractor or for design provided by the provided by the Contractor or for
which the Contractor is responsible, Contractor or for which the which the Contractor is responsible;
and Contractor is responsible; and and
(h) any operation of the forces of (d) any operation of the forces of d) Any operation of the forces of
nature against which an experienced nature (insofar as it occurs on the nature (insofar as it occurs on the
contractor could not reasonably have Site) that an experienced contractor: Site) which an experienced
been expected to take precautions contractor:
(i) could not have reasonably i) Could not have reasonably
foreseen, or foreseen, or
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 Cl. IDA SBD May 2002 Rev March
Headings FIDIC IV ERA NCT SBD 2002 ERA ICB SBD 2002
No 2003
Scope of 21.2 The insurance in paragraphs (a) and
Cover (b) of Sub-Clause 21.1 shall be in
the joint names of the Contractor
and the Employer and shall cover:
(a) the Employer and the Contractor
against all loss or damage from Amend sub-para. (a) of Sub-Clause Amend sub-paragraph (a) of Sub-
whatsoever cause arising, other than 21.2 by deleting the words Amend sub-paragraph (a) of Sub- Clause 21.2 by deleting the words
as provided in Sub-Clause 21.4, Clause 21.2 by deleting the words
from the start of work at the Site “from the start of work at the Site” “from the start of work at the Site”
until the date of issue of the relevant and by substituting therefore the “from the start of work at the Site” and by substituting therefore the

Contract Administration Manual Draft April 2007

Taking-Over Certificate in respect words “from the first working day and by substituting therefore the words “from the first working day
of the Works or any Section or part after the Commencement Date.” words “from the first working day after the Commencement Date.”
thereof as the case may be, and after the commencement date.”
(b) the Contractor for his liability:
(i) during the Defects Liability
Period for loss or damage arising
from a cause occurring prior to the
commencement of the Defects
Liability Period, and
(ii) for loss or damage occasioned
by the Contractor in the course of
any operations carried out by him Add the following as Sub-Clause (c) Add the following as sub-paragraph
for the purpose of complying with under Sub-Clause 21.2: (c) under Sub-Clause 21.2:
his obligations under Clauses 49 and Add the following as sub-paragraph
50. (c) It shall be the responsibility of (c) under Sub-Clause 21.2: c) It shall be the responsibility of the
the Contractor to notify the Contractor to notify the insurance
insurance company of any change in (C) It shall be the responsibility of company of any change in the nature
the nature and extent of the Works the contractor to notify the insurance and extent of the Works and to
and to ensure the adequacy of the company of any change in the nature ensure the adequacy of the insurance
insurance coverage at all times and extent of the Works and to coverage at all times during the
during the period of the Contract. ensure the adequacy of the insurance period of the Contract.
coverage at all times during the
period of the Contract.
Responsibility 21.3 Amend Clause 21.3 to read as
for Amounts follows: “
not Recovered Any amounts not insured or not Any amounts not insured or not
recovered from the insurers shall be recovered from the insurers
borne by the Employer or the shall be borne by theEmployer
Ethiopian Roads Authority

Contractor in accordance with their

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FINANCIAL CONTROL

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 Cl. IDA SBD May 2002 Rev March
Headings FIDIC IV ERA NCT SBD 2002 ERA ICB SBD 2002
No 2003
Exclusions 21.4 Amend Sub-Clause 21.4 to read as Amend Sub-Clause 21.4 to read as
follows: follows:

There shall be no obligation for the “There shall be no obligation for the “There shall be no obligation for the
insurances in Sub-Clause 21.1 to insurances in Sub-Clause 21.1 to insurance in Sub-Clause 21.1 to
include loss or damage caused by: include loss or damage caused by include loss or damage caused by
(a) war, hostilities (whether war be the risks listed under Sub-Clause the risks listed under Sub-Clause
declared or not), invasion, act of 20.4 sub-paras. (a) (i) to (iv) of the 20.4 sub-paragraphs (a) (i) to (iv) of
foreign enemies, Conditions of Particular the Conditions of Particular

Contract Administration Manual Draft April 2007

(b) rebellion, revolution, Application.” Application.
insurrection, or military or usurped
power, or civil war,
(c) ionising radiations, or
contamination by radio-activity from
any nuclear fuel, or from any
nuclear waste from the combustion
of nuclear fuel, radio-active toxic
explosive or other hazardous
properties of any explosive nuclear
assembly or nuclear component
thereof, or
(d) pressure waves caused by
aircraft or other aerial devices
travelling at sonic or supersonic
speeds.
Damage to 22.1 The Contractor shall, except if and so far as the Contract provides otherwise, indemnify the Employer against all losses and claims in respect of:
Persons and (a) death or injury to any person, or
Property (b) loss of or damage to any property (other than the Works),
which may arise out of or in consequence of the execution and completion of the Works and the remedying of any defects therein, and against all claims,
proceedings, damages, costs, charges and expenses whatsoever in respect thereof or in relation thereto, subject to the exceptions defined in Sub-Clause 22.2.
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 Cl. IDA SBD May 2002 Rev March
Headings FIDIC IV ERA NCT SBD 2002 ERA ICB SBD 2002
No 2003
Exceptions 22.2 The “exceptions” referred to in Sub-Clause 22.1 are:
(a) the permanent use or occupation of land by the Works, or any part thereof,
(b) the right of the Employer to execute the Works, or any part thereof, on, over, under, in or through any land,
(c) damage to property which is the unavoidable result of the execution and completion of the Works, or the remedying of any defects therein, in
accordance with the Contract, and
(d) death of or injury to persons or loss of or damage to property resulting from any act or neglect of the Employer, his agents, servants or other contractors,
not being employed by the Contractor, or in respect of any claims, proceedings, damages, costs, charges and expenses in respect thereof or in relation
thereto or, where the injury or damage was contributed to by the Contractor, his servants or agents, such part of the said injury or damage as may be just and
equitable having regard to the extent of the responsibility of the Employer, his servants or agents or other contractors for the injury or damage.

Contract Administration Manual Draft April 2007

Indemnity by 22.3 The Employer shall indemnify the Contractor against all claims, proceedings, damages, costs, charges and expenses in respect of the matters referred to in
Employer the exceptions defined in Sub-Clause 22.2.
Third Party 23.1 Add the following at the beginning Add the following at the beginning
Insurance of this Clause: of this Clause:
(including
Employer’s “Prior to Commencement of the “Prior to Commencement of the
Property) Works…” Works…”
The Contractor shall, without
limiting his or the Employer's
obligations and responsibilities
under Clause 22, insure, in the joint
names of the Contractor and the
Employer, against liabilities for
death of or injury to any person
(other than as provided in Clause
24) or loss of or damage to any
property (other than the Works)
arising out of the performance of the
Contract, other than the exceptions
defined in paragraphs (a), (b) and (c)
of Sub-Clause 22.2.
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 Cl. IDA SBD May 2002 Rev March
Headings FIDIC IV ERA NCT SBD 2002 ERA ICB SBD 2002
No 2003
Minimum 23.2 Such insurance shall be for at least Sub-Clause 23.2 is amended to read Sub-Clause 23.2 is amended to read
Amount of the amount stated in the Appendix to as follows: as follows:
insurance Tender.
(i) The Contractor shall whenever (i) The Contractor shall whenever
required produce to the Engineer or required produce to the Engineer or
the Engineer's Representative the the Engineer's Representative the
policy or policies of insurance and policy or policies of insurance and
the receipts for payment of the the receipts for payment of the
current premiums. current premiums.

Contract Administration Manual Draft April 2007

(ii) The provision of such insurance (ii) The provision of such insurance
and the cost thereof shall be in all and the cost thereof shall be in all
respects at the expense of the respects at the expense of the
Contractor. Contractor.
(iii) Such insurance shall be for at (iii) Such insurance shall be for at
least the amount stated in the least the amount stated in the
Appendix to Bid with no limits to Appendix to Bid with no limits to
the number of occurrences the number of occurrences.
Cross 23.3 The insurance policy shall include a cross liability clause such that the insurance shall apply to the Contractor and to the Employer as separate insured.
Liabilities
Accident or 24.1 The Employer shall not be liable for or in respect of any damages or compensation payable to any workman or other person in the employment of the
Injury to Contractor or any Subcontractor, other than death or injury resulting from any act or default of the Employer, his agents or servants. The Contractor shall
Workmen indemnify and keep indemnified the Employer against all such damages and compensation, other than those for which the Employer is liable as aforesaid,
and against all claims, proceedings, damages, costs, charges, and expenses whatsoever in respect thereof or in relation thereto.
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 Cl. IDA SBD May 2002 Rev March
Headings FIDIC IV ERA NCT SBD 2002 ERA ICB SBD 2002
No 2003
Insurance 24.2 The Contractor shall insure against
Against such liability and shall continue such
Accident to insurance during the whole of the
Workmen time that any persons are employed
by him on the Works. Provided that,
in respect of any persons employed
by any Subcontractor, the
Contractor’s obligations to insure as
aforesaid under this Sub-Clause

Contract Administration Manual Draft April 2007

shall be satisfied if the Add the following at the end of this Add the following at the end of this
Subcontractor shall have insured Clause: Clause:
against the liability in respect of
such persons in such manner that the “The provision of such insurance “The provision of such insurance
Employer is indemnified under the and the costs thereof shall be in all and the costs thereof shall be in all
policy, but the Contractor shall respects at the expense of the respects at the expense of the
require such Subcontractor to Contractor.” Contractor.”
produce to the Employer, when
required, such policy of insurance
and the receipt for the payment of
the current premium.
Liaison with 24.3 Add to Clause 24 the following Sub- Add to Clause 24 the following Sub-
Police, Labour Clause 24.3: Clause 24.3:
Officers etc.
The Contractor shall keep in close The Contractor shall keep in close
contact with the Police, Labour contact with the Police, Labour
Officers and all other officials as Officers and all other officials as
appropriate regarding their appropriate regarding their
requirements for the control of requirements for the control of
workmen, restricted area permits, workmen, restricted area permits,
passage through townships, or other passage through townships, or other
matters and shall provide all matters and shall provide all
assistance and facilities which may assistance and facilities which may
be required by such officials in the be required by such officials in the
execution of their duties execution of their duties
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 Cl. IDA SBD May 2002 Rev March
Headings FIDIC IV ERA NCT SBD 2002 ERA ICB SBD 2002
No 2003
Evidence and 25.1 Amend Sub-Clause 25.1 by inserting Amend Sub-Clause 25.1 by inserting Amend Sub-Clause 25.1 by inserting
Terms The Contractor shall provide the words the words the words
of Insurances evidence to the Employer prior to “as soon as practicable after the “as soon as practicable after the “as soon as practicable after the
the start of work at the Site that the respective insurances have been respective insurance has been taken respective insurance has been taken
insurances required under the taken out but in any case” before the out but in any case” before the out but in any case” before the
Contract have been effected and words “prior to the start of work at words “prior to the start of work at words “prior to the start of work at
shall, within 84 days of the the Site.” the Site.” the Site.”
Commencement Date, provide the
insurance policies to the Employer.

Contract Administration Manual Draft April 2007

When providing such evidence and Add at the end of the paragraph: and Add at the end of the paragraph:
such policies to the Employer, the
Contractor shall notify the Engineer “Insurance Policies shall include a “Insurance Policies shall include a
of so doing. Such insurance policies clause forbidding both the clause forbidding both the
shall be consistent with the general Contractor and the Insurer to modify Contractor and the Insurer to modify
terms agreed prior to the issue of the the terms and conditions of the the terms and conditions of the
Letter of Acceptance. The insurance policies without the prior insurance policies without the prior
Contractor shall effect all insurances approval of the Employer.” approval of the Employer.”
for which he is responsible with
insurers and in terms approved by
the Employer.
Adequacy of 25.2 The Contractor shall notify the insurers of changes in the nature, extent or programme for the execution of the Works and ensure the adequacy of the
Insurances insurances at all times in accordance with the terms of the Contract and shall, when required, produce to the Employer the insurance policies in force and
the receipts for payment of the current premiums.
Remedy on 25.3 If the Contractor fails to effect and keep in force any of the insurances required under the Contract, or fails to provide the policies to the Employer within
Contractor’s the period required by Sub-Clause 25.1, then and in any such case the Employer may effect and keep in force any such insurances and pay any premium as
Failure to may be necessary for that purpose and from time to time deduct the amount so paid from any monies due or to become due to the Contractor, or recover the
Insure same as a debt due from the Contractor.

Compliance 25.4 In the event that the Contractor or the Employer fails to comply with conditions imposed by the insurance policies effected pursuant to the Contract, each
with Policy shall indemnify the other against all losses and claims arising from such failure.
Conditions
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 Cl. IDA SBD May 2002 Rev March
Headings FIDIC IV ERA NCT SBD 2002 ERA ICB SBD 2002
No 2003
Source of 25.5 Add the following Sub-Clause 25.5: Add the following Sub-Clause 25.5: Add the following Sub-Clause 25.5:
Insurance
“The Contractor shall be entitled to “The Contractor shall place all “The Contractor shall place all
place all insurance relating to the insurance relating to the Contract insurance relating to the Contract
Contract (including, but not limited (including, but not limited to, the (including, but not limited to, the
to, the insurance referred to in insurance referred to in Clauses 21, insurance referred to in Clauses 21,
Clauses 21, 23, and 24) with insurers 23, and 24) with insurers registered 23, and 24) with insurers from any
from any eligible source country as in Ethiopia and acceptable to the eligible source country acceptable by
defined in the Guidelines: Employer.” the Funding Agency and the

Contract Administration Manual Draft April 2007

Procurement under IBRD Loans and Employer.”
IDA Credits, which have been
determined to be acceptable to the
Employer.”
Insurance 25.6 lowing Sub-Clause 25.6 Add the following Sub-Clause 25.6
Notices
Each policy of insurance effected by Each policy of insurance effected by
the Contractor for purpose of the the Contractor for purpose of the
Contract shall be renewable and Contract shall be renewable and
shall include a provision to the shall include a provision to the
effect that the insurer shall have a effect that the insurer shall have a
duty to give notice in writing to the duty to give notice in writing to the
Contractor and Employer of the date Contractor and Employer of the date
when a premium becomes payable when a premium becomes payable
not more than thirty (30) days before not more than thirty (30) days before
that date and the policy shall remain that date and the policy shall remain
in force until thirty (30) days after in force until thirty (30) days after
the giving of such notice the giving of such notice.
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No 2003
Notification to 25.7 Add the following Sub-Clause 25.7 Add the following Sub-Clause 25.7
Insurers
It shall be the responsibility of the It shall be the responsibility of the
Contractor to notify the insurers Contractor to notify the insurers
under any of the insurance referred under any of the insurance referred
to in the preceding Clauses 21, 23 to in the preceding Clauses 21, 23
and 24 on any matter or event which and 24 on any matter or event which
by the terms of such insurance are by the terms of such insurance are
required to be so notified and the required to be so notified and the

Contract Administration Manual Draft April 2007

Contractor shall indemnify and keep Contractor shall indemnify and keep
indemnified the Employer against indemnified the Employer against
all losses, claims, demands, all losses, claims, demands,
proceedings, costs, charges and proceedings, costs, charges and
expenses whatsoever arising out of expenses whatsoever arising out of
or in consequence of any default by or in consequence of any default by
the contractor in complying with the the contractor in complying with the
requirements of this sub-clause requirements of this sub-clause
whether as a result of avoidance of whether as a result of avoidance of
such insurance or otherwise such insurance or otherwise.
No Liability 65.1 Amend Clause 65.1 to read as
for Special follows: "
Risks The Contractor shall be under no The Contractor shall be under no
(No Liability liability whatsoever in consequence liability whatsoever in consequence
for Force of any of the special risks referred to of any Force Majeure referred to in
Majeure ERA in Sub-Clause 65.2, whether by way Sub-Clause 65.2, whether by way of
NCB) of indemnity or otherwise, for or in indemnity or otherwise, for or in
respect of: respect of:
(a) destruction of or damage to the a. destruction of or damage to the
Works, save to work condemned Works, save to work condemned
under the provisions of Clause 39 under the provisions of Clause 39
prior to the occurrence of any of the prior to the occurrence of any of the
said special risks, said special risks,
(b) destruction of or damage to
property, whether of the Employer b. destruction of or damage to
or third parties, or property, whether of the Employer
(c) injury or loss of life. or third parties, or

c. injury or loss of life.”

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Special Risks 65.2 The special risks are: Amend Sub-Clause 65.2 to read as Amend Sub-Clause 65.2 to read as
(Force follows: “ follows:
Majeure ERA (a) the risks defined under (1) Force majeure results from
NCT) paragraphs (a), (c), (d) and (e) of an occurrence which the “The Special Risks are the risks
Sub-Clause 20,4, and Contractor could normally not defined under para. (a), sub-
foresee and which prevents paragraphs (i) to (v) of Sub-Clause
him absolutely from perfor- 20.4.”
(b) the risks defined under paragraph ming his obligations.
(b) of Sub-Clause 20.4 insofar as (2) Force majeure shall not exist

Contract Administration Manual Draft April 2007

these relate to the country in which where the occurrence could
the Works are to be executed. normally have been foreseen by the
Contractor or where it renders more
onerous the performance by the
debtor of his obligations.
(3) The following occurrences may,
according to the circumstances,
constitute cases of force majeure:
(a) the unforeseeable act of a third
party for whom the Contractor is not
responsible; or
(b) an official prohibition preventing
the performance of the contract; or
(c) a natural catastrophe such as an
earthquake, lightning or floods; or
(d) international or civil war; or
(e) the death or a serious accident or
unexpected serious illness of the
Contractor.
(4) Unless otherwise expressly
agreed, the following occurrences
shall not be deemed to be cases of
force majeure:
(a) a strike or lock-out taking place
in the undertaking of a party or
affecting the branch of business in
Ethiopian Roads Authority

which he carries out his activities; or

Volume 1 Section 6
FINANCIAL CONTROL

6-75
 Cl. IDA SBD May 2002 Rev March
Headings FIDIC IV ERA NCT SBD 2002 ERA ICB SBD 2002
No 2003
Special Risks 65.2 b) an increase or reduction in the price
(Force of raw materials necessary for the
Majeure ERA performance of the contract; or
NCT) (c) the enactment of new legislation
whereby the obligations of the
Contractor become more onerous.
Damage to 65.3 Amend Clause 65.3 to read as
Works by follows:
Special Risks If the Works or any materials or “If the Works or any materials or
Plant on or near or in transit to the Plant on or near or in transit to the

Contract Administration Manual Draft April 2007

(Force Site, or any of the Contractor's Site sustain destruction or damage
Majeure ERA Equipment, sustain destruction or by reason of any Force Majeure, the
NCT) damage by reason of any of the said Contractor shall be entitled to
special risks, the Contractor shall be payment in accordance with the
entitled to payment in accordance Contract for any Permanent Works
with the Contract for any Permanent duly executed and for any materials
Works duly executed and for any or Plant so destroyed or damaged
materials or Plant so destroyed or and, so far as may be required by the
damaged and, so far as may be Engineer or as may be necessary for
required by the Engineer or as may the completion of the Works, to
be necessary for the completion of payment for:
the Works, to payment for:
(a)rectifying any such destruction or a) rectifying any such destruction or
damage to the Works, and damage to the Works, and;
(b)replacing or rectifying such (b) replacing or rectifying such
materials or Contractor’s materials, and the Engineer shall
Equipment, and the Engineer shall determine an addition to the
determine an addition to the Contract Price in accordance with
Contract Price in accordance with Clause 52 and shall notify the
Clause 52 (which shall in the case of Contractor accordingly, with a copy
the cost of replacement of to the Employer.”
Contractor's Equipment include the
fair market value thereof as
determined by the Engineer) and
shall notify the Contractor
accordingly, with a copy to the
Employer.
Ethiopian Roads Authority

Volume 1 Section 6
FINANCIAL CONTROL

6-76
 Ethiopian Roads Authority

Appendix 6-5 - Guideline CA3 Financial Monitoring

FINANCIAL CONTROL

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-77

 Ethiopian Roads Authority

FINANCIAL CONTROL
Ethiopian Roads Authority
o

Guideline No CA3
Financial Monitoring

Contract Administration Manual

November 2006

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-78

 Ethiopian Roads Authority

FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA

ETHIOPIAN ROADS AUTHORITY
CONTRACT ADMINISTRATION DIVISION

FINANCIAL CONTROL
FINANCIAL MONITORING OF WORKS
CONTRACTS

November 2006

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-79

 Ethiopian Roads Authority

FINANCIAL CONTROL
THIS MANUAL CONTAINS AN EXPLANATION OF HOW TO USE

AND IMPLEMENT THE PROJECT FINANCIAL MANAGEMENT SYSTEM

AND

MAY BE USED FOR

The Financial Monitoring of all Contracts with

Consultants and

Contractors

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-80

 Ethiopian Roads Authority

FINANCIAL CONTROL
CONTENTS

1.0 INTRODUCTION

2.0 HOW TO INPUT DATA

APPENDIX 1 Sample Spreadsheets

APPENDIX 2 Abbreviations

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-81

 Ethiopian Roads Authority

FINANCIAL CONTROL
SECTION 1 INTRODUCTION

1.0 INTRODUCTION

1.1 PROJECT FUNDS

1.2 CONTRACT DISBURSEMENTS

1.3 SYSTEM STRUCTURE

1.4 METHOD OF OPERATION

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-82

 Ethiopian Roads Authority

1.0 INTRODUCTION

FINANCIAL CONTROL
The use of multi currency contracts has necessitated the development of a financial
system to monitor the drawdown of funds allocated to projects and funds disbursed to
Contractors/Consultants/Suppliers in each of the applicable currencies.

This system is based on an Excel spread sheet whose input data is derived from the
financial conditions of the contract and from invoices received.

This system is intended to be managed and operated by the CCID PEs as a project
management tool. It should be noted that this system is not an accounting system
but rather a management system.

A typical ERA contract will have funding provided by an international funding

agency, either a loan or a grant, and the GoE. The currencies of this funding may not
however be the same as the currency of the contract entered into by ERA e.g. A loan
from AfDB may be denominated in UA (units of account) whilst the contract to
which these funds are applied might be payable in Birr and USD.

This monitoring exercise is further complicated by fluctuations in the rates of

exchange between these various currencies. It is therefore also necessary to monitor
the rates of exchange.

1.1 PROJECT FUNDING

As stated above, Project Funding is generally shared between the GoE and a Funding
Agency(s). The proportion of GoE contribution to Funding Agency contribution is
typically in the range 0/100 to 40/60 with Consultancy contracts at the lower GoE
contribution end of the range and Maintenance Contracts at the upper GoE
contribution end of the range.

1.2 CONTRACT DISBURSEMENTS

The contracts entered into by ERA for undertaking their various projects generally
permit payments in currencies of the contractor’s choice, although they usually specify
that a certain percentage of the payments must be made in Birr.

In addition to the above, ERA usually also specifies a fixed rate of exchange between
the Birr and Foreign Currency for all payment purposes on the contract.

Accordingly disbursements in each currency are shared between GoE and the
Funding Agency in proportion to the combination of the funding ratio as described in
(1.1) above and the disbursement ratio as described above, In the above examples this
would result in each disbursement being effected via the issue of four separate
payments i.e. Funding Agency Forex, Funding Agency Birr, GoE Forex and GoE
Birr.

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-83

 Ethiopian Roads Authority

1.3 SYSTEM STRUCTURE

As stated above there are a number of funding agencies who provide either loans or

FINANCIAL CONTROL
grants. The fact that funds may be either a loan or a grant has no effect on the
monitoring process. However, the different conditions imposed by each of the
funding agencies require the design of the monitoring spreadsheets to be different.
Nevertheless, the input data remains the same e.g. some agencies agree to pay for
taxes and duties whilst others do not and GoE has to bear the total amount for taxes
and duties. In these cases it is necessary to deduct the taxes and duties from the
contract amount before calculating the amounts to be paid by the Agency and GoE
respectively. The deducted amount would then be added to the GoE share.

It is intended that the PE will maintain a work book for all of his projects and that the
tabs of each of the sheets will carry the name of the project.

If the RDPB wishes to make use of this system it would make more sense to create a
separate Excel Work Books for each funding agency (named WB.XLS, EU.XLS,
BAD.XLS etc.). Within each of these work books each project would utilise a
separate spreadsheet with the Sheet Tabs bearing the actual project name.

As an example you will find, in Appendix 1, the contents of the IDA work book
which comprises spreadsheets with the following path and file names as footers:

c:\Contracts Specialist\Admin Manual\aaa\App 6-4 Financial Monitoring\.......

\Financial Reconciliation Sheet ETB Blank & [Date]
\Financial Reconciliation Sheet ETB Formulae & [Date]
\Financial Reconciliation Sheet ETB Example & [Date]

The above system has been prepared on the assumption that all contracts are
denominated in Birr.

The “ETB Blank” sheets contain all of the formulae required by the system. The
intention of these blank sheets is to provide a model for use on new projects, which
can simply be copied.

The “ETB Formulae” sheets are included to provide hard copies of the various
formulae and relationships which exist on the sheets, for the assistance of the user.

The "ETB Example" sheets provide an example of a typical project and what the data
might look like.

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-84

 Ethiopian Roads Authority

1.4 METHOD OF OPERATION

The input information takes the following forms:

FINANCIAL CONTROL
Initial Contract Financial Data
Values of Amounts due for Payment obtained from Monthly Invoices
Actual Values of Amounts Paid
The dates on which payments were made
The exchange rate ruling on the date of payment
The dates on which payments were received20

It is envisaged that at the commencement of a project one will enter the initial
contract financial data. With the exception of the Contract Amount, this initial input
should never change. In the case of the Contract Amount it may be necessary to go
back and change the contract amount if a Variation is issued which causes the
Contract Amount to be increased.

The “Project Monthly Input Data” will tend to be input on a monthly basis. However,
it will be necessary to re-enter previous information on occasions i.e. for the
correction of errors or the insertion of information previously not available e.g. date of
receipt of payment (see footnote 1).

All of the cells have been formatted for the particular type of input anticipated and
require only Birr currency inputs in the case of a Birr denominated contract or USD
(or other) in the case of contracts denominated in these currencies.

20
The conditions of contract applicable to current ERA contracts state that interest on late payments is calculated
from the payment due date until payment is received. This requires feed back from Contractors to determine the
period upon which interest is payable. The conditions of contract for new contracts have, however, been amended so
that interest on late payments is calculated from the payment due date until payment is effected by ERA.

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-85

 Ethiopian Roads Authority

FINANCIAL CONTROL
SECTION 2 HOW TO INPUT DATA

2.0 INTRODUCTION

2.1 CONTRACTOR’S ACCOUNT

2.2 ERA’S ACCOUNT

2.3 RECONCILIATION CONTRACTOR vs. FUNDING

ACCOUNT'S (A55 TO AB55).

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-86

 Ethiopian Roads Authority

2.0 INTRODUCTION

The Financial Management System comprises two spreadsheets per project with each

FINANCIAL CONTROL
spreadsheet divided into two distinct sections viz. Cell A1 to N55 and Cell O1 to
AB55.

In the range A1 to N55 the drawdown on the Contract Ceiling21 Amount in terms of
the currencies of the contract is monitored i.e. how much of the original contract
amount remains at any time in both Foreign and Local currency. This information is
utilised to monitor the Contractor’s Account with ERA.

In the range O1 to AB55 the drawdown on the Available Funding22 is monitored i.e.
how much of the allocated funds remain at any time, in the currencies of the funding.
This information is utilised to monitor the Funding Account with the Funding
Agencies

The physical layout of the spreadsheets is illustrated in the sketch below. In some
cases the forty eight lines provided for invoice data entry (Rows 6 to 54) may not be
sufficient for the duration of the project. In these cases it will simply be necessary to
introduce a second set of spreadsheets directly below the two described above.

1 A N O AB

Monitor Contract Ceiling Amount in Monitor Drawdown on Available Funds in

Currencies of the Contract Currencies of the Funds

(Funding Agency & GOE combined) (Funding Agency & GOE separate)
55

2.1 CONTRACTOR’S ACCOUNT (Spreadsheet Range A1 to N46)

Sub Range A1 to N4

This range contains the contract amount, currencies of payment, percentage split
between foreign and local currencies, the contract exchange rate, the name of the
Contractor and the column titles. You are required to enter information into the
following cells:

Cell C2 Enter the contract amount in the currency of the contract i.e. Birr. It is not
necessary to define the currency in this cell.
Cell C3 Enter the currencies of payment to the Contractor. (See currency
abbreviations in Appendix 2)
Cell H2 Enter as a whole number the percentage of the total payment made in the
foreign currency e.g. 80 for 80%
Cell N3 Enter the contract exchange rate.
Cell N4 Enter Contractor’s name

21
The Ceiling Amount is the contract amount (including any Variations) above which no expenditure is
authorised

22
The funds made available by GOE and other funding agencies, in various currencies, for the financing
of the project.

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-87

 Ethiopian Roads Authority

The contents of all of the other cells in this range are locked and cannot be accessed.
Where input is necessary e.g. Cell M2 it is automatically calculated from previous
input.

FINANCIAL CONTROL
(Should the system operator wish to protect the above cells following the insertion of
the data this can be achieved by simply locking those cells.)

Sub Range A5 to N55

This range contains the data relating to the date on which invoices were received and
paid, the date on which payments were received by the Contractors, the value of each
of the invoices and payments in each currency and the balance of the contract amount
remaining in each currency.

Cells A6 to 54 Enter the invoice number. Note that only one line should be used
for each invoice or sub-invoice.
Cells B6 to 54 Enter the date on which Engineer receives the Contractor's
Statement
Cells C6 to 54 Enter the total value of the invoice in the currency of the contract
Cells D6 to 54 Enter the foreign currency value of the invoice
Cells E6 to 54 Enter the foreign currency value actually approved for payment
Cells G6 to 54 Enter the date on which the Contractor receives the Funding
agency portion of the approved foreign currency payment
Cells H6 to 54 Enter the date on which the Contractor receives the GOE portion
of the approved foreign currency payment
Cells I6 to 54 Enter the local currency value of the invoice
Cells J6 to 54 Enter the local currency value actually approved for payment
Cells L6 to 54 Enter the date on which the Contractor receives the Funding
agency portion of the approved local currency payment
Cells M6 to 54 Enter the date on which the Contractor receives the GOE portion
of the approved local currency payment
Cells N6 to 54 Enter comments as appropriate

The contents of all of the other cells in this range are locked and cannot be accessed.
Where input is necessary e.g. Cells F6 to 55 it is automatically calculated from
previous input.

(Should the system operator wish to protect the above cells following the insertion of
the data this can be achieved by simply locking those cells.)

2.2 FUNDING ACCOUNT (Spreadsheet Range O1 to AB55)

Sub Range O1 to AB4

This range contains the name of the Foreign Funding Agency, the total available
foreign funding, the total available local funding, the percentages of the total funding
carried by the Foreign Agency and GOE respectively and the column titles. You are
required to enter information into the following cells:

Cell Q2 Enter the name of the Foreign Funding Agency (see abbreviations in
Appendix 2)
Cell Q3 Enter as a whole number the percentage of the total foreign funding payable
by the Foreign Funding Agency e.g. 95 for 95%
Cell S2 Enter the total Foreign Agency Funds available, in the currency of the loan
Cell S3 Enter as a whole number the percentage of the total local funding payable
by the Foreign Funding Agency e.g. 95 for 95%
Cell U2 Enter the currencies of the funds available to the project. (See currency
abbreviations in Appendix 2)

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-88

 Ethiopian Roads Authority

Cell X2 Enter the total GOE funds available in foreign currency

Cell Z2 Enter the total GOE funds available in Birr

FINANCIAL CONTROL
The contents of all of the other cells in this range are locked and cannot be accessed.
Where input is necessary e.g. Cell X3 it is automatically calculated from previous
input.

(Should the system operator wish to protect the above cells following the insertion of
the data this can be achieved by simply locking those cells.)

Sub Range O5 to AB54

This range contains the data relating to the date on which payments are instructed, the
exchange rate applicable to those payments and the remaining foreign and local
funding funds.

Cells Q6 to 54 Enter the date on which RDPB issues the instruction for the
Foreign Funding Agency’s payment.
Cells R6 to 54 Enter the exchange rate ruling at the time of payment. It will be
necessary to estimate this at the time of the instruction to pay.
Only once the payment has been made and the actual date of
payment known will it be possible to determine the actual
exchange rate used.
Cells V6 to 54 Enter the date on which GOE makes their forex payment
Cells Y6 to 54 Enter the date on which GOE makes their local payment.
Cells AB6 Enter comments as appropriate

2.3 RECONCILIATION CONTRACTOR vs. FUNDING ACCOUNT'S (A55 TO AB55).

A comparison, in a single currency, of the total amount due to the Contractor as

detailed in cells C55 or (E55+I55) will not be the same as the total amount of the
available Funding "spent" as detailed in cells (S55+T55+W55+Z55).

The reason for this is that the rates of exchange which will be utilised by the Funding
Agency for its Birr payments will be the "current" rate and not the contract rate. In the
case of the attached example the exchange rate has effectively worsened and the
Funding Agency has therefore benefited i.e. they have had to use less USD to
purchase the necessary Birr than they would have had to had they used the contract
rate. A comparison of the Contractor's Account and the Funding Account at this stage
of the example will show that there has been a slight saving.

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-89

 Ethiopian Roads Authority

FINANCIAL CONTROL
APPENDIX 1

SAMPLE SPREADSHEETS

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-90

 A B C D E F G H I J K L M N
CONTRACTOR'S ACCOUNT CONTRACTOR'S FOREX ACCOUNT CONTRACTOR'S LOCAL ACCOUNT
1
2 Contract Amount FOREIGN CURRENCY 0% LOCAL CURRENCY 100% Contract Exchange Rate
3 Contract Currencies ???/ETB 8.5000
Date Remainder of Date IDA Date GoE Remainder of Date IDA Date GoE
Received by IPC Foreign IPC Foreign Contract Sum Pymt Recd Pym Recd IPC Local Value Contract Sum ETB Recd ETB Recd China Construction
4 Inv # Engineer Total Value of IPC Value Claimed Value Paid Foreign Contractor Contractor IPC Local Value Paid Local Contractor Contractor
5 Balances Brought Forward/ Opening Balances 0.00 0.00 Comment
6 0.00 0.00
7 0.00 0.00
8 0.00 0.00
9 0.00 0.00
10 0.00 0.00
11 0.00 0.00
12 0.00 0.00
13 0.00 0.00

Contract Administration Manual Draft April 2007

14 0.00 0.00
15 0.00 0.00
16 0.00 0.00
17 0.00 0.00
18 0.00 0.00
19 0.00 0.00
20 0.00 0.00
21 0.00 0.00
22 0.00 0.00
23 0.00 0.00
24 0.00 0.00
25 0.00 0.00
26 0.00 0.00
27 0.00 0.00
28 0.00 0.00
29 0.00 0.00
30 0.00 0.00
31 0.00 0.00
32 0.00 0.00
33 0.00 0.00
34 0.00 0.00
35 0.00 0.00
36 0.00 0.00
37 0.00 0.00
38 0.00 0.00
39 0.00 0.00
40 0.00 0.00
41 0.00 0.00
42 0.00 0.00
43 0.00 0.00
44 0.00 0.00
45 0.00 0.00
46 0.00 0.00
47 0.00 0.00
48 0.00 0.00
49 0.00 0.00
50 0.00 0.00
51 0.00 0.00
52 0.00 0.00
53 0.00 0.00
54 0.00 0.00
Ethiopian Roads Authority

Totals 0.00 0.00 0.00 0.00 0.00

55

Volume 1 Section 6
FINANCIAL CONTROL

6-91
 O P Q R S T U V W X Y Z AA AB
FUNDING ACCOUNT AGENCY FOREX & LOCAL GoE FOREX GoE LOCAL
1
2 Foreign Agency name Funding 0.00 Currencies ???/ETB Forex 0.00 ETB 0.00
3 Foreign Portion 0% Local Portion 0% Foreign Portion 100% Local Portion 100%
Date of Exchange Date of
Total Value of Instruction to Rate on date IPC Foreign Remaining Foreign IPC Foreign Remaining Date of ETB Remaining Local China Construction
4 Inv # IPC Pay of Payment Value IPC Local Value Foreign Funding Payment Value Foreign Funding Payment IPC Local Value Funding
5 Balance Brought Forward 8.5000 0.00 Balance B/Fwd 0.00 0.00 Comment
6 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
7 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
8 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
9 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
10 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
11 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
12 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
13 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Contract Administration Manual Draft April 2007

14 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
15 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
16 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
17 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
18 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
19 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
20 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
21 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
22 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
23 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
24 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
25 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
26 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
27 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
28 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
29 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
30 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
31 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
32 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
33 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
34 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
35 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
36 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
37 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
38 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
39 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
40 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
41 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
42 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
43 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
44 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
45 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
46 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
47 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
48 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
49 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
50 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
51 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
52 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
53 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Ethiopian Roads Authority

54 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Total 0.00 0.00 0.00 0.00 0.00

55

Volume 1 Section 6
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6-92
 A B C D E F G H I J K L M N
CONTRACTOR'S ACCOUNT CONTRACTOR'S FOREX ACCOUNT CONTRACTOR'S LOCAL ACCOUNT
1
2 Contract Amount Data (ETB) FOREIGN CURRENCY Data(??) LOCAL CURRENCY =-H2 Contract Exchange Rate
3 Contract Currencies Data (???/ETB) Data(??.????)
Date Remainder of Date IDA Date GoE Remainder of Date IDA Date GoE
Received by IPC Foreign IPC Foreign Contract Sum Pymt Recd Pym Recd IPC Local Value Contract Sum ETB Recd ETB Recd Name
4 Inv # Engineer Total Value of IPC Value Claimed Value Paid Foreign Contractor Contractor IPC Local Value Paid Local Contractor Contractor
5 Balances Brought Forward/ Opening Balances =C2*H2/$N$3 =C2*M2 Comment
6 Data Data Data Data Data =F5-E6 Data Data Data Data =K5-J6 Data Data
7 =F6-E7 =K6-J7
8
9
10
11
12
13

Contract Administration Manual Draft April 2007

14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
Ethiopian Roads Authority

Totals =SUM(C6:C54) =SUM(D6:D54) =SUM(E6:E54) =SUM(I6:I54) =SUM(J6:J54)

55

Volume 1 Section 6
FINANCIAL CONTROL

6-93
 O P Q R S T U V W X Y Z AA AB
FUNDING ACCOUNT AGENCY FOREX & LOCAL GoE FOREX GoE LOCAL
1
2 Foreign Agency Data (name) Funding Currencies Data Forex =(C2*H2*X3)/$N$3 ETB =C2*M2*Z3
3 Foreign Portion Data (??) Local Portion Data (??) =1-Q3 Foreign Portion =1-S3 Local Portion #VALUE!
Date of Exchange Date of
Total Value of Instruction to Rate on date IPC Foreign Remaining Foreign IPC Foreign Remaining Date of ETB Remaining Local =Q2
4 Inv # IPC Pay of Payment Value IPC Local Value Foreign Funding Payment Value Foreign Funding Payment IPC Local Value Funding
5 Balance Brought Forward Data(??.????) Balance B/Fwd =(C2*H2*X3)/$N$3 =C2*M2*Z3 Comment
6 Data Data Data Data =$E6*$Q$3 =U5-S6-T6 =$E6*$X$3 =X5-W6 =$J6*$Z$3 =AA5-Z6
7 =IF(R7=0,0,$J7*$S$3/R7) =U6-S7-T7 =$E7*$X$3 =X6-W7 =$J7*$Z$3 =AA6-Z7
8
9 =((C2*H2*Q3)+(C2*M2*S3))
10
11 =(S3*Q3*H2)+(S2*S3*M2)
12 =(S2-S5)*$N$3
13 =((C2*H2*Q3)+(C2*M2*S3))/$N$3

Contract Administration Manual Draft April 2007

14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
Ethiopian Roads Authority

54

Total =SUM(P6:P54) =SUM(S6:S54) =SUM(T6:T54) =SUM(W6:W54) =SUM(Z6:Z54)

Volume 1 Section 6
55

FINANCIAL CONTROL

6-94
 A B C D E F G H I J K L M N
CONTRACTOR'S ACCOUNT CONTRACTOR'S FOREX ACCOUNT CONTRACTOR'S LOCAL ACCOUNT
1
2 Contract Amount 300,000,000.00 FOREIGN CURRENCY 80% LOCAL CURRENCY 20% Contract Exchange Rate
3 Contract Currencies USD/ETB 8.4562
Date Remainder of Date IDA Date GoE Remainder of Date IDA Date GoE
Received by IPC Foreign IPC Foreign Contract Sum Pymt Recd Pym Recd IPC Local Value Contract Sum ETB Recd ETB Recd China Construction
4 Inv # Engineer Total Value of IPC Value Claimed Value Paid Foreign Contractor Contractor IPC Local Value Paid Local Contractor Contractor
5 Balances Brought Forward/ Opening Balances 28,381,542.54 60,000,000.00 Comment
6 Adv 25-Jun-06 45,000,000.00 4,257,231.38 4,257,231.38 24,124,311.16 21-Jul-06 15-Aug-06 9,000,000.00 9,000,000.00 51,000,000.00 25-Jul-06 20-Aug-06
7 1 25-Jul-06 5,000,000.00 473,025.71 473,025.71 23,651,285.45 25-Aug-06 16-Sep-06 1,000,000.00 1,000,000.00 50,000,000.00 20-Aug-06 25-Sep-06
8 2 25-Aug-06 9,500,000.00 898,748.85 898,748.85 22,752,536.60 30-Sep-06 30-Sep-06 1,900,000.00 1,900,000.00 48,100,000.00 29-Sep-06 3-Oct-06
9 3 25-Sep-06 12,500,000.00 1,182,564.27 1,182,564.27 21,569,972.33 5-Nov-06 21-Nov-06 2,500,000.00 2,500,000.00 45,600,000.00 12-Nov-06 30-Nov-06
10 4 25-Oct-06 15,000,000.00 1,419,077.13 1,419,077.13 20,150,895.20 2-Dec-06 28-Dec-06 3,000,000.00 3,000,000.00 42,600,000.00 10-Dec-06 30-Dec-06
11 5 25-Nov-06 20,000,000.00 1,892,102.84 1,892,102.84 18,258,792.37 4,000,000.00 4,000,000.00 38,600,000.00
12 6 18,258,792.37 38,600,000.00
13 7 18,258,792.37 38,600,000.00

Contract Administration Manual Draft April 2007

14 8 18,258,792.37 38,600,000.00
15 9 18,258,792.37 38,600,000.00
16 10 18,258,792.37 38,600,000.00
17 11 18,258,792.37 38,600,000.00
18 12 18,258,792.37 38,600,000.00
19 13 18,258,792.37 38,600,000.00
20 14 18,258,792.37 38,600,000.00
21 15 18,258,792.37 38,600,000.00
22 16 18,258,792.37 38,600,000.00
23 17 18,258,792.37 38,600,000.00
24 18 18,258,792.37 38,600,000.00
25 19 18,258,792.37 38,600,000.00
26 20 18,258,792.37 38,600,000.00
27 21 18,258,792.37 38,600,000.00
28 22 18,258,792.37 38,600,000.00
29 23 18,258,792.37 38,600,000.00
30 24 18,258,792.37 38,600,000.00
31 25 18,258,792.37 38,600,000.00
32 26 18,258,792.37 38,600,000.00
33 27 18,258,792.37 38,600,000.00
34 28 18,258,792.37 38,600,000.00
35 29 18,258,792.37 38,600,000.00
36 30 18,258,792.37 38,600,000.00
37 31 18,258,792.37 38,600,000.00
38 32 18,258,792.37 38,600,000.00
39 33 18,258,792.37 38,600,000.00
40 34 18,258,792.37 38,600,000.00
41 35 18,258,792.37 38,600,000.00
42 36 18,258,792.37 38,600,000.00
43 37 18,258,792.37 38,600,000.00
44 38 18,258,792.37 38,600,000.00
45 39 18,258,792.37 38,600,000.00
46 40 18,258,792.37 38,600,000.00
47 41 18,258,792.37 38,600,000.00
48 42 18,258,792.37 38,600,000.00
49 43 18,258,792.37 38,600,000.00
50 44 18,258,792.37 38,600,000.00
51 45 18,258,792.37 38,600,000.00
52 46 18,258,792.37 38,600,000.00
53 47 18,258,792.37 38,600,000.00
54 48 18,258,792.37 38,600,000.00
Ethiopian Roads Authority

Totals 107,000,000.00 10,122,750.17 10,122,750.17 21,400,000.00 21,400,000.00

55

Volume 1 Section 6
FINANCIAL CONTROL

6-95
 O P Q R S T U V W X Y Z AA AB
FUNDING ACCOUNT AGENCY FOREX & LOCAL GoE FOREX GoE LOCAL
1
2 Foreign Agency IDA Funding 31,929,235.35 Currencies USD/ETB Forex 2,838,154.25 ETB 6,000,000.00
3 Foreign Portion 90% Local Portion 90% Foreign Portion 10% Local Portion 10%
Date of Exchange Date of
Total Value of Instruction to Rate on date IPC Foreign Remaining Foreign IPC Foreign Remaining Date of ETB Remaining Local China Construction
4 Inv # IPC Pay of Payment Value IPC Local Value Foreign Funding Payment Value Foreign Funding Payment IPC Local Value Funding
5 Balance Brought Forward 8.4562 31,929,235.35 Balance B/Fwd 2,838,154.25 6,000,000.00 Comment
6 Adv 45,000,000.00 12-Jul-06 8.4550 3,831,508.24 958,013.01 27,139,714.10 10-Aug-06 425,723.14 2,412,431.12 8-Aug-06 900,000.00 5,100,000.00
7 1 5,000,000.00 11-Aug-06 8.4575 425,723.14 106,414.43 26,607,576.54 8-Sep-06 47,302.57 2,365,128.54 10-Sep-06 100,000.00 5,000,000.00
8 2 9,500,000.00 18-Sep-06 8.5002 808,873.96 201,171.50 25,597,531.08 18-Oct-06 89,874.88 2,275,253.66 6-Oct-06 190,000.00 4,810,000.00
9 3 12,500,000.00 29-Oct-06 8.5100 1,064,307.85 264,394.83 24,268,828.40 15-Nov-06 118,256.43 2,156,997.23 9-Nov-06 250,000.00 4,560,000.00
10 4 15,000,000.00 22-Nov-06 8.5150 1,277,169.41 317,087.49 22,674,571.49 12-Dec-06 141,907.71 2,015,089.52 3-Dec-06 300,000.00 4,260,000.00
11 5 20,000,000.00 20-Dec-06 8.5125 1,702,892.55 422,907.49 20,548,771.45 5-Jan-07 189,210.28 1,825,879.24 8-Jan-07 400,000.00 3,860,000.00
12 6 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00
13 7 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00

Contract Administration Manual Draft April 2007

14 8 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00
15 9 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00
16 10 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00
17 11 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00
18 12 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00
19 13 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00
20 14 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00
21 15 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00
22 16 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00
23 17 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00
24 18 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00
25 19 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00
26 20 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00
27 21 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00
28 22 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00
29 23 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00
30 24 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00
31 25 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00
32 26 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00
33 27 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00
34 28 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00
35 29 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00
36 30 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00
37 31 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00
38 32 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00
39 33 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00
40 34 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00
41 35 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00
42 36 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00
43 37 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00
44 38 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00
45 39 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00
46 40 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00
47 41 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00
48 42 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00
49 43 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00
50 44 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00
51 45 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00
52 46 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00
53 47 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00
54 48 0.00 0.00 0.00 20,548,771.45 0.00 1,825,879.24 0.00 3,860,000.00
Ethiopian Roads Authority

Total 107,000,000.00 9,110,475.15 2,269,988.75 1,012,275.02 2,140,000.00

55

Volume 1 Section 6
FINANCIAL CONTROL

6-96
 Ethiopian Roads Authority

FINANCIAL CONTROL
APPENDIX 2

ABBREVIATIONS

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-97

 Ethiopian Roads Authority

Agency
Abbreviation Agency Name

FINANCIAL CONTROL
AfDB African Development Bank
AfDF African Development Fund
ASDI Swedish International Development Authority
BADEA Arab Bank for Economic Development in Africa
CC Christian Council
CF Cooperation Française
DFID Department for International Development
EU European Union
GOE Government of Ethiopia
WB International Development Association
JICA Japanese International Cooperation Agency
KFAED Kuwait Fund for Arab Economic Development
KFW Kreditanstaldt Für Wiederaufbaum
MCD Multilateral Cooperation Department (MFED)
OPEC Organisation of Oil Producing Countries
UNDP United Nations Development Program
US USAID
WFP World Food Programme
Currency
Abbreviation Currency Name
AUD Australian Dollar
CHF Swiss Franc
DEM Deutsche Mark
Euro Euro
FUA Financial Unit of Account
GBP Great Britain Pound
KWD Kuwaiti Dinar
IRN Indian Rupee
JPY Japanese Yen
ETB Ethiopian Birr
SDR Special Drawing Rights
SEK Swedish Kröne
UA Units of Account
USD United States Dollar
ZAR South African Rand

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-98

 Ethiopian Roads Authority

FINANCIAL CONTROL
Appendix 6-6 - Monthly vs. Cumulative IPC

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-99

 Ethiopian Roads Authority

This Appendix has been included to illustrate the points made in section 6.3.4 Monthly vs.
Cumulative Accounting above.

FINANCIAL CONTROL
The spreadsheet entitled Monthly IPC details a set of three certificates, two of which contain errors
and one not. Once it had been identified that the errors had been made it would have been
necessary to correct each of the errors by issuing either Debit or Credit Notes or by reprocessing
that invoice or by adding or subtracting the necessary correction from later IPCs.

The spreadsheet entitled Cumulative IPC details the same set of three certificates but presented on
a cumulative (total work done to date) basis. It can be seen from this sheet that although the same
errors were made on certificates one and two these errors were automatically corrected in
certificate three by subtracting the total actually certified from the correct total value of work
completed to that date. It is important that one use the amounts certified and not paid. Using the
amount paid could result in underpayment or over invoicing.

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-100

 IPC Item Description Unit Rate This Month Amount IPC Item Description Unit Rate This Month Amount
1 1 Remove Top Soil m2 1.07 250 26.75 1 1 Remove Top Soil m2 1.07 250 267.50
2 Compact Sub Grade m2 1.25 250 300.00 2 Compact Sub Grade m2 1.25 250 312.50
3 Sub Base 150 thk m2 1.89 100 211.00 3 Sub Base 150 thk m2 1.89 100 189.00
4 Base m3 4.2 0 0.00 4 Base m3 4.2 0 0.00
Total Work Done this month 537.75 Total Work Done this month 769.00

Contract Administration Manual Draft April 2007

Amount Due this Month 537.75 Amount Due this Month 769.00

2 1 Remove Top Soil m2 1.07 250 280.00 2 1 Remove Top Soil m2 1.07 250 267.50
2 Compact Sub Grade m2 1.25 125 156.25 2 Compact Sub Grade m2 1.25 125 156.25
3 Sub Base 150 thk m2 1.89 150 283.50 3 Sub Base 150 thk m2 1.89 150 283.50
4 Base m3 4.2 150 630.00 4 Base m3 4.2 150 630.00
Total Work Done this month 1,349.75 Total Work Done this month 1,337.25

Amount Due this Month 1,349.75 Amount Due this Month 1,337.25
Monthly IPC.

3 1 Remove Top Soil m2 1.07 250 267.50 3 1 Remove Top Soil m2 1.07 250 267.50
2 Compact Sub Grade m2 1.25 125 156.25 2 Compact Sub Grade m2 1.25 125 156.25
3 Sub Base 150 thk m2 1.89 150 283.50 3 Sub Base 150 thk m2 1.89 150 283.50
4 Base m3 4.2 200 840.00 4 Base m3 4.2 200 840.00
Total Work Done this month 1,547.25 Total Work Done this month 1,547.25

Amount Due this Month 1,547.25 Amount Due this Month 1,547.25

Summary Certificate 1 537.75 Summary Certificate 1 769.00

Certificate 2 1,349.75 Certificate 2 1,337.25
Certificate 3 1,547.25 Certificate 3 1,547.25
Total Paid to Date (incorrect) 3,434.75 Total Paid to Date (correct) 3,653.50
Ethiopian Roads Authority

Volume 1 Section 6
FINANCIAL CONTROL

6-101
 Ethiopian Roads Authority

Cumulative IPC

IPC Item Description Unit Rate Total Previous This Month Amount

FINANCIAL CONTROL
1 1 Remove Top Soil m2 1.07 250 0 250 26.75
2 Compact Sub Grade m2 1.25 250 0 250 300.00
3 Sub Base 150 thk m2 1.89 100 0 100 211.00
4 Base m3 4.2 0 0 0 0.00

Total Work Done to Date 537.75

Less Previously Certified 0.00
Amount Due this Month 537.75

2 1 Remove Top Soil m2 1.07 500 250 250 530.00

2 Compact Sub Grade m2 1.25 375 250 125 468.75
3 Sub Base 150 thk m2 1.89 250 100 150 472.50
4 Base m3 4.2 150 0 150 630.00

Total Work Done to Date 2,101.25

Less Previously Certified 537.75
Amount Due this Month 1,563.50

3 1 Remove Top Soil m2 1.07 750 500 250 802.50

2 Compact Sub Grade m2 1.25 500 375 125 625.00
3 Sub Base 150 thk m2 1.89 400 250 150 756.00
4 Base m3 4.2 350 150 200 1,470.00

Total Work Done to Date 3,653.50

Less Previously Certified 2,101.25
Amount Due this Month 1,552.25

Summary Certificate 1 537.75

Certificate 2 1,563.50
Certificate 3 1,552.25

Total Paid to Date 3,653.50

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-102

 Ethiopian Roads Authority

Appendix 6-7 - ERA vs. WB ICB SBD Clause 60

FINANCIAL CONTROL

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-103

 Ethiopian Roads Authority

WB, in its standard bidding documents, modified the standard FIDIC IV Clause 60. This modified
version was subsequently adopted by AfDB and a number of the other Multilateral funding

FINANCIAL CONTROL
agencies.

In the 2002 ERA standard bidding documents for both ICB and NCB works contracts the WB
Clause 60 was further modified. The schedule below compares the two versions of Clause 60.

Comparison of ERA and WB Clause 60.1 & 60.1 for ICB

CERTIFICATES AND PAYMENTS

ERA WB

CLAUSE 60 Clause 60 of the General Conditions is Clause 60 of the General Conditions is

CERTIFICATES deleted and the following Sub-Clauses 60.1- deleted and the following Sub-Clauses 60.1–
AND PAYMENT 60.14 are substituted therefore: 60.14 are substituted therefore:
SUB-CLAUSE The Contractor shall submit a statement in The Contractor shall submit a statement in
60.1 the number of copies stipulated in the the number of copies stipulated in the
MONTHLY Appendix to Bid to the Engineer at the end Appendix to Bid to the Engineer at the end of
STATEMENTS of each month, in a tabulated form approved each month, in a tabulated form approved by
by the Engineer, showing the amounts to the Engineer, showing the amounts to which
which the Contractor considers himself to be the Contractor considers himself to be
entitled. The statement shall include the entitled. The statement shall include the
following items, as applicable, which shall following items, as applicable, which shall be
be taken into account in the sequence listed: taken into account in the sequence listed:
(a) The estimated Contract value of the (a) the estimated contract value of the
Temporary and Permanent Works executed Temporary and Permanent Works executed
up to the end of the month in question, up to the end of the month in question,
determined in accordance with Sub-Clause determined in accordance with Sub-Clause
56.1, at the unit rates and prices included in 56.1, at the unit rates and prices included in
the Contract; the Contract, in the various currencies of the
Contract Price
(b)the actual value certified for payment for
the Temporary and Permanent Works
executed up to the end of the previous month,
at the unit rates and prices included in the
Contract, in the various currencies of the
Contract Price;
(c)the estimated contract value at the unit
rates and prices included in the Contract of
the Temporary and Permanent Works for the
month in question, in the various currencies
of the Contract Price, obtained by deducting
(b) from (a);
(b) The value of any variations executed up (d) the value of any variations executed up to
to the end of the month in question, less the the end of the month in question, less the
amount certified in the previous Interim amount certified in the previous Interim
Payment Certificate, pursuant to Clause 52; Payment Certificate, expressed in the relevant
amounts of foreign and local currencies,
pursuant to Clause 52;
(c) Amounts approved in respect of Day (e) amounts approved in respect of Day
work executed up to the end of the month in work executed up to the end of the month in
question, less the amount for Day work question, less the amount for Daywork
certified in the previous Interim Payment certified in the previous Interim Payment
Certificate, as determined from the Day Certificate, indicating the amounts of foreign
work schedule of the Bill of quantities and local currencies as determined from the
Day work Schedule of the Bill of Quantities;

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-104

 Ethiopian Roads Authority

ERA WB
(d) Amounts reflecting changes in cost and (f)amounts reflecting changes in cost and

FINANCIAL CONTROL
legislation, pursuant to Clause 70; legislation, pursuant to Clause 70, expressed
in the relevant amounts of foreign and local
currencies;
(e)Any amount to be withheld under the (g)any credit or debit for the month in
retention provisions of Sub-Clause 60.5, question in respect of materials and Plant for
determined by applying the percentage set the Permanent Works, in the relevant
forth in Sub-Clause 60.5 to the amount due amounts in foreign and local currencies, and
under paragraphs 60.1 (b), (c) and (d); under the conditions set forth in Sub-Clause
60.3;
(f)Any credit in respect of materials and (h)any amount to be withheld under the
Plant for the Permanent Works, and under provisions of Sub-Clause 60.5, determined by
the conditions set forth in Sub-Clause 60.3; applying the percentage set forth in Sub-
Clause 60.5 to the amounts in foreign and
local currencies due under Paragraphs 60.1
(c), (d), (e), and (f);

(g) Any amount to be deducted as (i)any amounts to be deducted as repayment

repayment of the Advance under the of the Advance under the provisions of Sub-
provisions of Sub-Clause 60.7; and Clause 60.8; and
(h) Any other sum to which the Contractor (j)any other sum, expressed in the applicable
may be entitled under the Contract or currency or currencies, to which the
otherwise Contractor may be entitled under the
Contract or otherwise
(i) The amount certified for payment up to
the end of the previous month

The differences between the two versions of clause 60 are highlighted in the schedule above.

The modifications which WB made, solved a previous problem which existed with the standard
FIDIC IV version i.e. that of defining the order in which the various elements of the IPC's should
be included on the IPCs. By changing the order of the various elements one could obtain different
amounts for payment.

ERA's modification of the WB modification has resulted in the Contractor's not receiving the
correct sums in foreign and local currencies. The principle difference between the WB and ERA
formats is that the WB format assumes (correctly) that Variations, Dayworks, CPA and MoS will
not reflect the same Foreign/Local currency split as the Works, which result from the BoQ and the
ERA format converts everything into local currency, does all of the calculations in local currency
and only finally splits the "bottom line". A second difference between the two formats is that the
WB format calculates Retention on MoS whilst the ERA format does not. In the long run, this
makes no difference to the Contractor other than affecting his cash flow.

Using ERA's format and with particular reference to CPA, where the local and foreign CPA will
not be in the required payment percentages the Contractor will receive part of his local CPA in
foreign currency at the exchange rate of the contract. The Contract is therefore being "double"
compensated for a portion of the increased costs.

The following pages contain suggested formats for the current FIDIC IV based WB SBD Clause
60, the current FIDIC IV based ERA SBD Clause 60 with the suggestion that the ERA Clause 60
revert to the WB Clause 60 and the WB IPC format.

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-105

 Ethiopian Roads Authority

ERA Clause 60 IPC Format

Project Name: Road A to B Funding Agency: ??

FINANCIAL CONTROL
Contractor : CMC di Ravenna Contract No: 163/OBR/MP/2003
Contract Value Birr 0 Contract Period 450
Interim Payment Certificate ?? ??
IPC Nº : 1 RoE 8.5634 10.2761 Funding Proportion
Period: March-06 ?? 60.00% ?? 80.00% Birr
Currencies: Birr ?? 20.00% ?? 100.00% ??
?? Birr 20.00% ?? 100.00% ??
??
GENERAL SUMMARY
Birr
Clause 60.1 Description
Total
(a) Work Done 0.00
(b) Add VO this mnth 0.00
(c) Add Daywork this mnth 0.00
(d) Add CPA this mnth 0.00
Sub-total 0.00
(e) Less Retention 0.00
Sub-total 0.00
(f) Add MoS this mnth 0.00
Sub-total 0.00
(g) Less Adv Repaymnt 0.00
Sub-total 0.00
(h) Any Other 0.00
Sub-total 0.00
(i) Less Prev Certified 0.00
Amount Due Birr 0.00

Birr ?? 0.00 ?? ?? 0.00 ?? ?? 0.00

Payment ERA 0.00 Payment ERA 0.00 Payment ERA 0.00
Source Source Source

On behalf of [Name of Company ] I, [Name of theEngineer's Representative ], hereby certify i.t.o Clause 60.2 that the
amounts shown above are a true reflection of the works undertaken during this period.

Date: 3-Apr-06 Signature: Last Payment Date: 29-May-06

Note:
1. The Soft copy version of this spreadsheet includes all of the formulae necessary for the use
of the sheet.
2. All cells except those into which data should be inserted have been locked
3. The Funding Agency and Currency cells have flop down menus for the input to those cells.

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-106

 Ethiopian Roads Authority

ERA Clause 60 IPC Format -Example (Work Only)

Project Name: Road A to B Funding Agency: AfDB

FINANCIAL CONTROL
Contractor : CMC di Ravenna Contract No: 163/OBR/MP/2003
Contract Value Birr 0 Contract Period 450
Interim Payment Certificate USD ZAR
IPC Nº : 1 RoE 8.5634 1.2354 Funding Proportion
Period: March-06 USD 60.00% AfDB 80.00% Birr
Currencies: Birr ZAR 25.00% AfDB 80.00% USD
USD Birr 15.00% AfDB 80.00% ZAR
ZAR
GENERAL SUMMARY
Birr
Clause 60.1 Description
Total
(a) Work Done 300,000,000.00
(b) Add VO this mnth 0.00
(c) Add Daywork this mnth 0.00
(d) Add CPA this mnth 0.00
Sub-total 300,000,000.00
(e) Less Retention 30,000,000.00
Sub-total 270,000,000.00
(f) Add MoS this mnth 0.00
Sub-total 270,000,000.00
(g) Less Adv Repaymnt 0.00
Sub-total 270,000,000.00
(h) Any Other 0.00
Sub-total 270,000,000.00
(i) Less Prev Certified 0.00
Amount Due Birr 270,000,000.00

Birr AfDB 32,400,000.00 USD AfDB 15,134,175.68 ZAR AfDB 43,710,539.10

Payment ERA 8,100,000.00 Payment ERA 3,783,543.92 Payment ERA 10,927,634.77
Source Source Source

On behalf of [Name of Company ] I, [Name of theEngineer's Representative ], hereby certify i.t.o Clause 60.2 that the
amounts shown above are a true reflection of the works undertaken during this period.

Date: 3-Apr-06 Signature: Last Payment Date: 29-May-06

Note:
1. The Soft copy version of this spreadsheet includes all of the formulae necessary for the use
of the sheet.
2. All cells except those into which data should be inserted have been locked

3. The Funding Agency and Currency cells have flop down menus for the input to those cells.

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-107

 Ethiopian Roads Authority

ERA Clause 60 IPC Format - Example (Work and CPA)

Project Name: Road A to B Funding Agency: AfDB

FINANCIAL CONTROL
Contractor : CMC di Ravenna Contract No: 163/OBR/MP/2003
Contract Value Birr 0 Contract Period 450
Interim Payment Certificate USD ZAR
IPC Nº : 1 RoE 8.5634 1.2354 Funding Proportion
Period: March-06 USD 60.00% AfDB 80.00% Birr
Currencies: Birr ZAR 25.00% AfDB 80.00% USD
USD Birr 15.00% AfDB 80.00% ZAR
ZAR
GENERAL SUMMARY
Birr
Clause 60.1 Description
Total
(a) Work Done 300,000,000.00
(b) Add VO this mnth 0.00
(c) Add Daywork this mnth 0.00
(d) Add CPA this mnth 19,800,000.00
Sub-total 319,800,000.00
(e) Less Retention 31,980,000.00
Sub-total 287,820,000.00
(f) Add MoS this mnth 0.00
Sub-total 287,820,000.00
(g) Less Adv Repaymnt 0.00
Sub-total 287,820,000.00
(h) Any Other 0.00
Sub-total 287,820,000.00
(i) Less Prev Certified 0.00
Amount Due Birr 287,820,000.00

Birr AfDB 34,538,400.00 USD AfDB 16,133,031.27 ZAR AfDB 46,595,434.68

Payment ERA 8,634,600.00 Payment ERA 4,033,257.82 Payment ERA 11,648,858.67
Source Source Source

On behalf of [Name of Company ] I, [Name of theEngineer's Representative ], hereby certify i.t.o Clause 60.2 that the
amounts shown above are a true reflection of the works undertaken during this period.

Date: 3-Apr-06 Signature: Last Payment Date: 29-May-06

Note:
1. The Soft copy version of this spreadsheet includes all of the formulae necessary for the use
of the sheet.
2. All cells except those into which data should be inserted have been locked

3. The Funding Agency and Currency cells have flop down menus for the input to those cells.

4. The value of the CPA indicated in this example is the equivalent to the CPA indicated in
the WB example (page 6-93), but converted into Birr. It can be seen that the Contractor
would be over compensated in USD and further that ERA would increase their
commitment in USD.

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-108

 Ethiopian Roads Authority

WB Clause 60 IPC Format

Project Name: RoadA to B Funding Agency: ??
Contractor : CMC di Ravenna Contract No: 163/OBR/MP/2003

FINANCIAL CONTROL
Contract Value Birr 300,000,000.00 Contract Period 450 days
Interim Payment Certificate ?? ??
IPC Nº : 1 Rates of Exchange 8.5634 10.2761 Funding Proportion
Period: March-06 ?? 60.00% ?? 80.00% Birr
Currencies: Birr ?? 20.00% ?? 100.00% ??
?? Birr 20.00% ?? 100.00% ??
??
GENERAL SUMMARY
Clause
Description
Birr ?? ??
60.1 This Prev Total This Prev Total This Prev Total
(a) Work Done 0.00 0.00 0.00
(b) Less Previous 0.00 0.00 0.00
(c) Work Done This Mnth 0.00

Birr ?? ??
(c) Currency Equiv 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
(d) Add Variation Orders 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
(e) Add Daywork 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
(f) Add CPA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
(g) Add MoS 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Sub-total 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
(h) Less Retention 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Sub-total 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
(i) Less Adv Repayment 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Sub-total 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
(j) Any Other 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Sub-total 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Less Prev 0.00 0.00 0.00
Amounts Due Birr 0.00 ?? 0.00 ?? 0.00

Birr ?? 0.00 ?? ?? 0.00 ?? ?? 0.00

Payment ERA 0.00 Payment ERA 0.00 Payment ERA 0.00
Source Source Source

On behalf of [Name of Company ] I, [Name of theEngineer's Representative ], hereby certify i.t.o Clause 60.2 that the amounts
shown above are a true reflection of the works undertaken during this period.

Date: 3-Apr-06 Signature: Last Payment Date: 29-May-06

Note:
1. The Soft copy version of this spreadsheet includes all of the formulae necessary for the use
of the sheet.
2. All cells except those into which data should be inserted have been locked

3. The Funding Agency and Currency cells have flop down menus for the input to those cells.

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-109

 Ethiopian Roads Authority

WB Clause 60 IPC Format - Example (Work Only)

Project Name: RoadA to B Funding Agency: AfDB
Contractor : CMC di Ravenna Contract No: 163/OBR/MP/2003

FINANCIAL CONTROL
Contract Value Birr 300,000,000.00 Contract Period 450 days
Interim Payment Certificate USD ZAR
IPC Nº : 1 Rates of Exchange 8.5634 1.2354 Funding Proportion
Period: March-06 USD 60.00% AfDB 80.00% Birr
Currencies: Birr ZAR 25.00% AfDB 80.00% USD
USD Birr 15.00% AfDB 80.00% ZAR
ZAR
GENERAL SUMMARY
Clause
Description
Birr USD ZAR
60.1 This Prev Total This Prev Total This Prev Total
(a) Work Done 300,000,000.0 0.0 300,000,000.0
(b) Less Previous 0.0 0.0 0.0
(c) Work Done This Mnth 300,000,000.0

Birr USD ZAR

(c) Currency Equiv 45,000,000.00 0.00 45,000,000.00 21,019,688.44 0.00 21,019,688.44 60,709,082.08 0.00 60,709,082.08
(d) Add Variation Orders 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
(e) Add Daywork 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
(f) Add CPA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
(g) Add MoS 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Sub-total 45,000,000.00 0.00 45,000,000.00 21,019,688.44 0.00 21,019,688.44 60,709,082.08 0.00 60,709,082.08
(h) Less Retention 4,500,000.00 0.00 4,500,000.00 2,101,968.84 0.00 2,101,968.84 6,070,908.21 0.00 6,070,908.21
Sub-total 40,500,000.00 0.00 40,500,000.00 18,917,719.60 0.00 18,917,719.60 54,638,173.87 0.00 54,638,173.87
(i) Less Adv Repayment 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Sub-total 40,500,000.00 0.00 40,500,000.00 18,917,719.60 0.00 18,917,719.60 54,638,173.87 0.00 54,638,173.87
(j) Any Other 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Sub-total 40,500,000.00 0.00 40,500,000.00 18,917,719.60 0.00 18,917,719.60 54,638,173.87 0.00 54,638,173.87
Less Prev 0 0.00 0.00
Amounts Due Birr 40,500,000.00 USD 18,917,719.60 ZAR 54,638,173.87

Birr AfDB 32,400,000.00 USD AfDB 15,134,175.68 ZAR AfDB 43,710,539.10

Payment ERA 8,100,000.00 Payment ERA 3,783,543.92 Payment ERA 10,927,634.77
Source Source Source

On behalf of [Name of Company ] I, [Name of theEngineer's Representative ], hereby certify i.t.o Clause 60.2 that the amounts
shown above are a true reflection of the works undertaken during this period.

Date: 3-Apr-06 Signature: Last Payment Date: 29-May-06

Note:
1. The Soft copy version of this spreadsheet includes all of the formulae necessary for the use
of the sheet.
2. All cells except those into which data should be inserted have been locked

3. The Funding Agency and Currency cells have flop down menus for the input to those cells.

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-110

 Ethiopian Roads Authority

WB Clause 60 IPC Format - Example (Work and CPA)

Project Name: RoadA to B Funding Agency: AfDB
Contractor : CMC di Ravenna Contract No: 163/OBR/MP/2003

FINANCIAL CONTROL
Contract Value Birr 300,000,000.00 Contract Period 450 days
Interim Payment Certificate USD ZAR
IPC Nº : 1 Rates of Exchange 8.5634 1.2354 Funding Proportion
Period: March-06 USD 60.00% AfDB 80.00% Birr
Currencies: Birr ZAR 25.00% AfDB 80.00% USD
USD Birr 15.00% AfDB 80.00% ZAR
ZAR
GENERAL SUMMARY
Clause
Description
Birr USD ZAR
60.1 This Prev Total This Prev Total This Prev Total
(a) Work Done 300,000,000.0 0.0 300,000,000.0
(b) Less Previous 0.0 0.0 0.0
(c) Work Done This Mnth 300,000,000.0

Birr USD ZAR

(c) Currency Equiv 45,000,000.00 0.00 45,000,000.00 21,019,688.44 0.00 21,019,688.44 60,709,082.08 0.00 60,709,082.08
(d) Add Variation Orders 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
(e) Add Daywork 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
(f) Add CPA 3,600,000.00 0.00 3,600,000.00 840,878.54 0.00 840,878.54 7,285,089.85 0.00 7,285,089.85
(g) Add MoS 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Sub-total 48,600,000.00 0.00 48,600,000.00 21,860,566.98 0.00 21,860,566.98 67,994,171.93 0.00 67,994,171.93
(h) Less Retention 4,860,000.00 0.00 4,860,000.00 2,186,056.70 0.00 2,186,056.70 6,799,417.19 0.00 6,799,417.19
Sub-total 43,740,000.00 0.00 43,740,000.00 19,674,510.28 0.00 19,674,510.28 61,194,754.74 0.00 61,194,754.74
(i) Less Adv Repayment 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Sub-total 43,740,000.00 0.00 43,740,000.00 19,674,510.28 0.00 19,674,510.28 61,194,754.74 0.00 61,194,754.74
(j) Any Other 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Sub-total 43,740,000.00 0.00 43,740,000.00 19,674,510.28 0.00 19,674,510.28 61,194,754.74 0.00 61,194,754.74
Less Prev 0 0.00 0.00
Amounts Due Birr 43,740,000.00 USD 19,674,510.28 ZAR 61,194,754.74

Birr AfDB 34,992,000.00 USD AfDB 15,739,608.23 ZAR AfDB 48,955,803.79

Payment ERA 8,748,000.00 Payment ERA 3,934,902.06 Payment ERA 12,238,950.95
Source Source Source

On behalf of [Name of Company ] I, [Name of theEngineer's Representative ], hereby certify i.t.o Clause 60.2 that the amounts
shown above are a true reflection of the works undertaken during this period.

Date: 3-Apr-06 Signature: Last Payment Date: 29-May-06

Note:
1. The Soft copy version of this spreadsheet includes all of the formulae necessary for the use
of the sheet.
2. All cells except those into which data should be inserted have been locked
3. The funding Agency and Currency cells have flop down menus for the input to those cells.
4. The value of the CPA indicated in this example is the equivalent to the CPA indicated in
the ERA example (page 6-89), but split into its respective currencies to correctly reflect the
actual CPAs in each currency. This format results in the correct amounts being paid to the
Contractor.

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-111

 Ethiopian Roads Authority

Appendix 6-8 - CPA Indices and Weightings

FINANCIAL CONTROL

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-112

 Ethiopian Roads Authority

When a contract makes provision for the calculation of CPA it will normally allow the use of two
separate formulae, one for the local currency portion of the payments and one for the foreign

FINANCIAL CONTROL
currency element. Both formulae will have the same form as that indicated under section 5.4 but
the factor (a,b,c,d etc.) weightings and indices (LL, FL, E, A ...) will be different for each
formulae.

It is however possible, depending on the nature of the particular project that there could be many
formulae.

The tables below have been extracted from the ERA standard contract document

Table 3: Weightings for use with Local Currency (ETB)

Weightings
Description of Input Index Code Factor Permitted Range of Bidder's
Values Proposed Value
Fixed - a 0.1 0.1

Local Labour LL b 0.2 - 0.4

Foreign Labour FL c 0 0
Equipment E d 0 0
Aggregate A e 0.2 - 0.4
Bitumen B f 0 0
Fuel F g 0.2 - 0.5
Reinforcing Steel S s 0,05-0,10
Cement C h 0.05 - 0.1
Total (must equal 1.0) 1.0

Note 1: Sources of cost price adjustment indices shall be recognized national or international organizations
and shall be acceptable to the Employer.

Note 2: The Base Values of Indices shall be those prevailing at the date 28 days prior to the latest date for
submission of Bids and shall be substantiated by Bidders by appending copies of the relevant publication.

Note 3: The Employer shall give details of the sources and Base Values of local indices 14 days prior to the
latest date for submission of Bids.

Note 4: The Bidders Proposed Values are subject to the approval of the Engineer

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-113

 Ethiopian Roads Authority

Table 4 Weightings for use with Foreign Currency 1:

Specify Currency______________________

FINANCIAL CONTROL
Weightings
Description of Input Index Code Factor Permitted Range Bidder's
of Values Proposed Value
Fixed - a 0.1 0.1
Local Labour LL b 0 0
Foreign Labour FL c 0.1 - 0.2
Equipment E d 0.25 - 0.65
Aggregate A e 0 0
Bitumen B f 0.1 - 0.2
Fuel F g 0
Reinforcing steel S s 0,05-0,10
Cement C h 0
Total (must equal 1.0) 1.0

Note 1: Sources of cost price adjustment indices shall be recognized national or international organizations
and shall be acceptable to the Employer.

Note 2: The Base Values of Indices shall be those prevailing at the date 28 days prior to the latest date for
submission of Bids and shall be substantiated by Bidders by appending copies of the relevant publication.

Note 3: The Employer shall give details of the sources and Base Values of local indices 14 days prior to the
latest date for submission of Bids.

Note 4: The Bidders Proposed Values are subject to the approval of the Engineer.

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-114

 Ethiopian Roads Authority

Appendix 6-9 - Guideline CA4 Consultant's Invoice

FINANCIAL CONTROL

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-115

 Ethiopian Roads Authority

FINANCIAL CONTROL
o Ethiopian Roads Authority

Guideline No CA4
Consultant's Invoice

Contract Administration Manual

September 1998
Rev November 2006

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-116

 Ethiopian Roads Authority

FINANCIAL CONTROL
FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA
ETHIOPIAN ROADS AUTHORITY
CONTRACT ADMINISTRATION DIVISION

CONSULTANT'S INVOICES

November 2006

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-117

 Ethiopian Roads Authority

FINANCIAL CONTROL
CONTENTS

1 INTRODUCTION

2 CONSULTANCY SERVICE INVOICE FORMAT

2.1 INVOICES FOR CONSULTANCY SERVICES

2.2 STAFF DAILY WORK SHEET

2.3 FOREIGN REMUNERATION

2.4 LOCAL REMUNERATION

2.5 FOREIGN REIMBURSABLES

2.6 LOCAL REIMBURSABLES

2.7 ADVANCE PAYMENT REPAYMENT SCHEDULE

2.8 ???? SCHEDULE

3 INVOICE BACKUP DOCUMENTATION

4 ERA PE'S RESPONSIBILITY

4.1 PAYMENT CURRENCIES

4.2 INVOICE RECORD

APPENDIX

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-118

 Ethiopian Roads Authority

1. INTRODUCTION

At the time of preparation of this document ERA did not have a standardised format for

FINANCIAL CONTROL
Consultant's Monthly invoices. Although Consultant's would normally be appointed prior to the
Construction phase of a project it is possible that a Consultant may only be appointed for the
supervision of construction works. For the completeness of this contract administration manual this
guideline has therefore been included to assist PEs in the event of them having to start a
supervision contract.

Because of the nature of the preparation and presentation of Consultant's financial proposals it is
rare that Consultancy contracts have the same content or even format. They will all, however,
contain sections for local and foreign remuneration for the various man month inputs of the team
members as well as reimbursable expenditure for the team.

This guideline is therefore presented on this basis.

2. CONSULTANCY SERVICE INVOICE FORMAT

This guideline, as stated above, is presented in a general format. It will therefore be necessary at the
commencement of the project (see Contract Administration Manual 5.3.4) to agree on the final
presentation of the invoice with the Consultant at the Project Management Meeting (see Contract
Administration Manual 5.3).

This format is presented as a series of eight linked excel spreadsheets, one for each of the
following:

• Invoice for Consultancy Services (a summary sheet)

• Staff Daily Worksheet
• Foreign Remuneration
• Local Remuneration
• Foreign Reimbursable Costs
• Local Reimbursable Costs
• Advance Payment Repayment Schedule
• ????? Schedule

These spreadsheets are included as an Appendix to this guideline.

2.1 INVOICES FOR CONSULTANCY SERVICES

This sheet serves as a summary of the other sheets making up the invoice. The electronic copy of
the sheet requires the following information to be input in the cells indicated below:

Cell I1 The month to which the invoice is applicable in the format mm-dd-yy
CellM2 The invoice number, consecutively numbered from 1 to the Final Invoice
Cell M3 The date of preparation/submission of the invoice in the format mm-dd-yy
Cell C4 The Project Name (short version e.g. Rehabilitation of A to B)
Cell M4 The ERA project number
Cell C6 The Consultant's name (this must be the organisation who has been contracted and
in whose name the payments will be made)
Cell D9 The Foreign currency of the contract (the cell has a drop down menu with a
selection of currencies)
Cell E9 The Local currency of the contract (the cell has a drop down menu with a selection
of currencies)

Range J23 to M27 The details of the bank account for foreign currency payments.
Range J31to M35 The details of the bank account for local currency payments.
Headers and Footers The Consultant's Name and logo (if required), The Consultant's project
number (if required) and the name of the Consultancy Contract).
Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-119
 Ethiopian Roads Authority

All cells on this sheet which "receive" their data from the other sheets in the invoice i.e. which do
not require any physical inputting of data have been locked. Similarly that information which is
inserted in the cells above is automatically transferred to the other sheets and is therefore only

FINANCIAL CONTROL
required to be inserted once.

Each of the cells which require input also has a comment attached to it explaining the nature of the
information required in that cell.

2.2 STAFF DAILY WORK SHEET

ERA requires a daily register of the Consultant's team members, which indicates if they were
present and working on site, on holiday or sick.

The electronic copy of the sheet requires the following information to be input in the cells indicated
below:

Cells C9 to AG9 The first letter of the day of the week

Cells A10 to B19 The names and positions of the various team members
Cells C10 to AG19 Enter P, H or S if member is Present and Working, on Holiday or Sick
respectively.

All cells on this sheet which "receive" their data from the other sheets in the invoice i.e. which do
not require any physical inputting of data have been locked. Similarly that information which is
inserted in the cells above is automatically transferred to the other sheets and is therefore only
required to be inserted once. In this case, this is the names and positions of the team members.

Each of the cells which require input also has a comment attached to it explaining the nature of the
information required in that cell.

2.3 FOREIGN REMUNERATION

This schedule contains the details of the actual; man month inputs for each of the team members
and their remuneration in foreign currency.

The electronic copy of this sheet requires the following information to be input in the cells
indicated below:

Cells B10 to B19 The monthly rate in foreign currency for each of the team members.
Cells C10 to C19 The contract's man month input budget for each of the team members.
Cells E10 to E19 The man months claimed in the previous invoice for each team member
Cells G10 to G19 The man months claimed in this months invoice for each team member

The result of the input data as reflected in Cell H20 is automatically transferred to the summary
sheet INVOICE FOR CONSULTANCY SERVICES Cell H10.

All cells on this sheet which "receive" their data from the other sheets in the invoice i.e. which do
not require any physical inputting of data have been locked. Similarly that information which is
inserted in the cells above is automatically transferred to the other sheets and is therefore only
required to be inserted once. In this case, this is the man month rates and inputs of the team
members.

Each of the cells which require input also has a comment attached to it explaining the nature of the
information required in that cell.

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-120

 Ethiopian Roads Authority

2.4 LOCAL REMUNERATION

This schedule contains the details of the actual; man month inputs for each of the team members

FINANCIAL CONTROL
and their remuneration in Local currency.

The electronic copy of this sheet requires the following information to be input in the cells
indicated below:

Cells B10 to B19 The monthly rate in local currency for each of the team members.
Cells C10 to C19 The contract's man month input budget for each of the team members.
Cells E10 to E19 The man months claimed in the previous invoice for each team member
Cells G10 to G19 The man months claimed in this months invoice for each team member

The result of the input data as reflected in Cell H20 is automatically transferred to the summary
sheet INVOICE FOR CONSULTANCY SERVICES Cell I10.

All cells on this sheet which "receive" their data from the other sheets in the invoice i.e. which do
not require any physical inputting of data have been locked. Similarly that information which is
inserted in the cells above is automatically transferred to the other sheets and is therefore only
required to be inserted once. In this case, this is the man month rates and inputs of the team
members.

Each of the cells which require input also has a comment attached to it explaining the nature of the
information required in that cell.

2.5 FOREIGN REIMBURSABLE COSTS

The activities and expenses which are likely to be reflected on this schedule are likely to differ
from contract to contract. The line items included on this schedule have only been included to
indicate the type of information which will be included on this schedule. It is not intended or
anticipated that the items on this example will be used on other projects. The schedule should
reflect the actual reimbursable line items contained in the actual contract.

Cells A11 to M36 Insert the details of reimbursable for the contract in question.

The result of the input data as reflected in Cell I37 is automatically transferred to the summary
sheet INVOICE FOR CONSULTANCY SERVICES Cell H11.

All cells on this sheet which "receive" their data from the other sheets in the invoice i.e. which do
not require any physical inputting of data have been locked. Similarly that information which is
inserted in the cells above is automatically transferred to the other sheets and is therefore only
required to be inserted once.

Each of the cells which require input also has a comment attached to it explaining the nature of the
information required in that cell.

2.6 LOCAL REIMBURSABLE COSTS

The activities and expenses which are likely to be reflected on this schedule are likely to differ
from contract to contract. The line items included on this schedule have only been included to
indicate the type of information which will be included on this schedule. It is not intended or
anticipated that the items on this example will be used on other projects. The schedule should
reflect the actual reimbursable line items contained in the actual contract.

Cells A11 to M36 Insert the details of reimbursable for the contract in question.

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-121

 Ethiopian Roads Authority

The result of the input data as reflected in Cell I37 is automatically transferred to the summary
sheet INVOICE FOR CONSULTANCY SERVICES Cell I11.

FINANCIAL CONTROL
All cells on this sheet which "receive" their data from the other sheets in the invoice i.e. which do
not require any physical inputting of data have been locked. Similarly that information which is
inserted in the cells above is automatically transferred to the other sheets and is therefore only
required to be inserted once.

Each of the cells which require input also has a comment attached to it explaining the nature of the
information required in that cell.

2.7 ADVANCE PAYMENT REPAYMENT SCHEDULE

Every Consultancy contract is likely to have a different advance payment and repayment
conditions. For this reason the sheet entitled ADVANCE PAYMENT REPAYMENT SCHEDULE has
been left blank.

At the commencement of the project the PE and Consultant must agree on the method and
presentation of the Advance Payment and Repayment calculations. The Consultant will then need
to link the "bottom line" of this schedule to the summary sheet INVOICE FOR CONSULTANCY
SERVICES Cells H15 and I15 for the Foreign and Local currency Payments and Repayments,
respectively.

All cells on this sheet which "receive" their data from the other sheets in the invoice i.e. which do
not require any physical inputting of data have been locked. Similarly that information which is
inserted in the cells above is automatically transferred to the other sheets and is therefore only
required to be inserted once.

Each of the cells which require input also has a comment attached to it explaining the nature of the
information required in that cell.

2.8 ????? SCHEDULE

It is likely that future Consultancy contracts will include some items for which no provision has
been made in this invoice format. For this reason sheet eight entitled ???? SCHEDULE has been
included.

The intention is that at the commencement of the project the PE and Consultant will agree on the
method and presentation of whatever "additional" items there are. The Consultant will then need to
link the "bottom line" of this schedule to the summary sheet INVOICE FOR CONSULTANCY
SERVICES Cells HH13 and I13 for the Foreign and Local currency Payments and Repayments,
respectively.

All cells on this sheet which "receive" their data from the other sheets in the invoice i.e. which do
not require any physical inputting of data have been locked. Similarly that information which is
inserted in the cells above is automatically transferred to the other sheets and is therefore only
required to be inserted once.

Each of the cells which require input also has a comment attached to it explaining the nature of the
information required in that cell.

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-122

 Ethiopian Roads Authority

3 INVOICE BACKUP DOCUMENTATION

The data utilised in pages 5, 6 and possibly 8 of the invoice will be required to be substantiated by

FINANCIAL CONTROL
documentary evidence e.g. air tickets and boarding passes, receipts etc.

All such documentation is required to be presented in the same order as the amounts appear on
pages 5, 6 and 8. In addition each item of documentation should be referenced to the items as they
appear on pages 5, 6 and 8.

4. ERA PE'S RESPONSIBILITY

The consultant's contract agreement will contain details with regards the amount or percentage and
the timing of payments to the consultant. In addition the agreement will also include the
consultant's financial proposal which gives full details of the costs of the consultancy services. It is
the PE's responsibility to check that:

• The timing and percentage payment for consultant's invoices is in accordance with the
Contract Agreement.
• The quantity claimed plus the rates and currencies included in the invoice are in
accordance with the contract agreement.
• All necessary backup documentation such as staff time sheets, payment receipts etc. are
submitted with the invoice.
• Payments to the consultant for each item do not exceed the budget given in the financial
proposal included in the Contract Agreement.
• The invoice is presented in the same name as that of the company which signed the
contract.

The invoice summary sheet INVOICE FOR CONSULTANCY SERVICES provides the financial
record and budget control necessary for the PE. It does not however, provide a record of all of the
invoices submitted to ERA for the project. For this reason a final sheet entitled INVOICE RECORD
has been included for the use of the PE.

This final sheet has not been linked to the INVOICE FOR CONSULTANCY SERVICES as this will
be generated by the Consultant whilst the INVOICE RECORD sheet will be generated and
maintained by the PE. The input for this sheet will be obtained from the Consultant's invoice
summary page INVOICE FOR CONSULTANCY SERVICES.

4.1 PAYMENT CURRENCIES

Section 6.3.2 of the contract administration manual addresses the subject of contract currencies and
the need to monitor invoices received and paid against the available project budgets from any
number of funding agencies. The same requirement exists in the financial monitoring of
Consultancy contracts, in which payments may be made in more than one currency and both the
GoE and a funding agency might provide the funding.

It is therefore possible that each of the Consultant's invoices may be settled by as many as four
payments and or transfers i.e.

• Foreign currency portion by Funding Agency

• Foreign currency portion by GoE
• Local currency portion by Funding Agency and
• Local currency portion by GoE

The schedule entitled INVOICE RECORD makes provision for the monitoring of all four of these
elements of each payment.

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-123

 Ethiopian Roads Authority

4.2 INVOICE RECORD

FINANCIAL CONTROL
This schedule contains the details of the invoices received, processing dates, payment dates and
Advance Payment status in two currencies. The remainder of the information required to be
monitored can be found on the invoice summary page INVOICE FOR CONSULTANCY
SERVICES.

The electronic copy of this sheet requires the following information to be input in the cells
indicated below:

Cell O1 The ERA project number

Cell B2 The project short name e.g. Rehabilitation of Road A to B
Cell B4 The Consultant's Name
Cell H4 The foreign currency budget/contract amount
Cell H5 The local currency budget/contract amount
Cell L4 The foreign funding agency (select from a drop down menu)
Cell M4 The local funding agency (select from a drop down menu)
Cell B7 The foreign currency of payment (select from a drop down menu)
Cell C7 The local currency of payment (select from a drop down menu)
Cells B8 to O55 The Invoice amounts and processing dates.

All cells on this sheet which "receive" their data from the other sheets in the invoice i.e. which do
not require any physical inputting of data have been locked.

Each of the cells which require input also has a comment attached to it explaining the nature of the
information required in that cell.

The final sheet of the Appendix is an example of the type of data and information required to be
input and which is generated.

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-124

 Ethiopian Roads Authority

FINANCIAL CONTROL
APPENDIX

CONSULTANT'S INVOICE FORMAT & PE MONITORING SCHEDULE

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-125

 A B C D E F G H I J K L M

1
INVOICE FOR CONSULTANCY SERVICES FOR THE MONTH OF May-07

2 Invoice No. ??
3 Date: 14-May-2007
4 PROJECT: [Enter Project Name] ERA Project No. ??
5 CLIENT: Ethiopian Roads Authority
6 CONSULTANT: [Enter Consultant's Name]
7
8 Original Contract Sum Previously Paid NOW REQUESTING Total Paid to Date Balance Remaining
No. ITEM
9 ?? ?? ?? ?? ?? ?? ?? ?? ?? ??

1.00 Remuneration 1,440,000.00 153,000.00 308,400.00 28,780.00 11,600.00 1,160.00 320,000.00 29,940.00 1,120,000.00 123,060.00

Contract Administration Manual Draft April 2007

10
2.00 Reimbursables 179,000.00 5,447,173.00 43,209.12 3,154,095.85 2,900.00 87,565.56 46,109.12 3,241,661.41 132,890.88 2,205,511.59
11
3.00 Total 1,619,000.00 5,600,173.00 351,609.12 3,182,875.85 14,500.00 88,725.56 366,109.12 3,271,601.41 1,252,890.88 2,328,571.59
12
Non-contract Reimbursables
4.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
13 Vehicle VAT & Registration
5.00 Total incl VAT etc. 1,619,000.00 5,600,173.00 351,609.12 3,182,875.85 14,500.00 88,725.56 366,109.12 3,271,601.41 1,252,890.88 2,328,571.59
14
6.00 Advance Payment 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
15

7.00 Total Now Requested 14,500.00 88,725.56

16

17

18 Payment checked by:-

19 Project Engineer Consultant - Team Leader
20
21 FOREIGN PAYMENT
22 Payment of ?? 14,500.00 to be made by Bank transfer to
23 Bank:
24 Branch:
25 Swift No.
26 Certified by:- Account No.
27 ERA Section Head Account Name:
28
29 LOCAL PAYMENT
30 Payment of ?? 88,725.56 to be made by Bank transfer to
31 Bank:
32 Branch:
33 Swift No.
34 Account No.
35 Approved and Recommended by:- Account Name:
36 ERA Construction Contract Implementation Branch I Head
37
Ethiopian Roads Authority

Volume 1 Section 6
FINANCIAL CONTROL

6-126
 A B C D E F G H I J K L M N O P Q R S T U V W X Y Z AA AB AC AD AE AF AG

1 STAFF DAILY WORKSHEET FOR THE MONTH OF: May-07

Invoice No. ??
2

3 Date: 14-May-2007

PROJECT: [Enter Project Name] ERA Project No. ??

4

Contract Administration Manual Draft April 2007

5
CLIENT: Ethiopian Roads Authority

6
CONSULTANT: [Enter Consultant's Name]
7
8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31
NAME Position
9

[Name 1] [Position 1]
10

[Name 2] [Position 2]
11

[Name 3] [Position 3]
12

[Name 4] [Position 4]
13

[Name 5] [Position 5]
14

[Name6] [Position 6]
15

[Name 7] [Position 7]
16

[Name 8] [Position 8]
17

[Name 9] [Position 9]
18

19 [Name 10] [Position 10]

20
21 NOTE: Insert one of the following in each cell for each staff member for eacgh day of the month.
22
23 P Present and Working
24 H Holiday
25 S Sick
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Volume 1 Section 6
FINANCIAL CONTROL

6-127
 A B C D E F G H I J K L

1 FOREIGN REMUNERATION BREAKDOWN FOR THE MONTH OF:

May-07

2 Invoice No. ??

3 Date: 14-December-2006

4 PROJECT: [Enter Project Name] ERA Project No. ??

Contract Administration Manual Draft April 2007

5
CLIENT: Ethiopian Roads Authority

6 CONSULTANT:
[Enter Consultant's Name]
7
8 Contract Previously paid NOW REQUESTING Total to Date Balance
Staff Position
9 Rate Time Input ?? Time Input ?? Time Input ?? Time Input ?? Time Input ??

[Position 1] 20,000.00 36.00 720,000.00 11.30 226,000.00 0.58 11,600.00 11.88 237,600.00 24.12 482,400.00
10
[Position 2] 20,000.00 36.00 720,000.00 4.12 82,400.00 0.00 0.00 4.12 82,400.00 31.88 637,600.00
11
[Position 3] 20,000.00 36.00 0.00 0.00 0.00 0.00 36.00 0.00
12
[Position 4] 20,000.00 36.00 0.00 0.00 0.00 0.00 36.00 0.00
13
[Position 5] 20,000.00 36.00 0.00 0.00 0.00 0.00 36.00 0.00
14
[Position 6] 20,000.00 36.00 0.00 0.00 0.00 0.00 36.00 0.00
15
[Position 7] 20,000.00 36.00 0.00 0.00 0.00 0.00 36.00 0.00
16
[Position 8] 20,000.00 36.00 0.00 0.00 0.00 0.00 36.00 0.00
17
[Position 9] 20,000.00 36.00 0.00 0.00 0.00 0.00 36.00 0.00
18

19 [Position 10] 20,000.00 36.00 0.00 0.00 0.00 0.00 36.00 0.00

Totals 360.00 1,440,000.00 15.42 308,400.00 0.58 11,600.00 16.00 320,000.00 344.00 1,120,000.00
20
Ethiopian Roads Authority

Volume 1 Section 6
FINANCIAL CONTROL

6-128
 A B C D E F G H I J K L

1 LOCAL REMUNERATION BREAKDOWN FOR THE MONTH OF:

May-07

2 Invoice No. ??

3 Date: 14-December-2006

4 PROJECT:
[Enter Project Name] ERA Project No. ??

Contract Administration Manual Draft April 2007

5
CLIENT: Ethiopian Roads Authority

6
CONSULTANT: [Enter Consultant's Name]
7
8 Contract Previously paid NOW REQUESTING Total to Date Balance
Staff Position
9 Rate Time Input ?? Time Input ?? Time Input ?? Time Input ?? Time Input ??

[Position 1] 2,000.00 36.00 72,000.00 11.30 22,600.00 0.58 1,160.00 11.88 23,760.00 24.12 48,240.00
10
[Position 2] 1,500.00 6.00 9,000.00 4.12 6,180.00 0.00 0.00 4.12 6,180.00 1.88 2,820.00
11
[Position 3] 1,500.00 6.00 9,000.00 0.00 0.00 0.00 9,000.00
12
[Position 4] 1,500.00 6.00 9,000.00 0.00 0.00 0.00 9,000.00
13
[Position 5] 1,500.00 6.00 9,000.00 0.00 0.00 0.00 9,000.00
14
[Position 6] 1,500.00 6.00 9,000.00 0.00 0.00 0.00 9,000.00
15
[Position 7] 1,500.00 6.00 9,000.00 0.00 0.00 0.00 9,000.00
16
[Position 8] 1,500.00 6.00 9,000.00 0.00 0.00 0.00 9,000.00
17
[Position 9] 1,500.00 6.00 9,000.00 0.00 0.00 0.00 9,000.00
18

19 [Position 10] 1,500.00 6.00 9,000.00 0.00 0.00 0.00 9,000.00

Totals 90.00 153,000.00 15.42 28,780.00 0.58 1,160.00 16.00 29,940.00 26.00 123,060.00
20
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Volume 1 Section 6
FINANCIAL CONTROL

6-129
 A B C D E F G H I J K L M

1 FOREIGN REIMBURSABLE COST BREAKDOWN FOR THE MONTH OF: May-07

2 Invoice No. ??

3 Date: 14-May-2007

4 PROJECT: [Enter Project Name] ERA Project No. ??

5 CLIENT: Ethiopian Roads Authority

CONSULTANT: [Enter Consultant's Name]

Contract Administration Manual Draft April 2007

6
7

8 Contract Previously Paid NOW REQUESTING Total to Date Balance

9 Description Unit Price Total Amount Amount Amount Amount

Unit Quantity Quantity Quantity Quantity Quantity
10 ?? ?? ?? ?? ?? ??
11 ACTIVITY
12 International flights
13 [Position 1] Trips 6 3,200.00 19,200.00 1 2,069.24 0 0.00 1 2,069.24 5 17,130.76
14 [Position 2] Trips 2 3,200.00 6,400.00 1 3,200.00 0 0.00 1 3,200.00 1 3,200.00
15 [Position 3] Trips 2 3,200.00 6,400.00 1 2,547.56 0 0.00 1 2,547.56 1 3,852.44
16 [Position 4] Trips 2 3,200.00 6,400.00 0 0.00 0 0.00 0 0.00 2 6,400.00
17 [Position 5] Trips 2 3,200.00 6,400.00 0 0.00 0 0.00 0 0.00 2 6,400.00
18 [Position 6] Trips 2 3,200.00 6,400.00 1 3,200.00 0 0.00 1 3,200.00 1 3,200.00
19 [Position 7] Trips 2 3,200.00 6,400.00 1 3,026.12 0 0.00 1 3,026.12 1 3,373.88
20 [Position 8] Trips 2 2,000.00 4,000.00 1 1,825.32 0 0.00 1 1,825.32 1 2,174.68
21 [Position 9] Trips 4 3,200.00 12,800.00 2 3,818.39 0 0.00 2 3,818.39 2 8,981.61
22 [Position 10] Trips 2 3,200.00 6,400.00 1 832.49 0 0.00 1 832.49 1 5,567.51
23 26 9 0 9 17
24 Miscellaneous Travel Expenses
25 Passport and car rental overseas Trips 26 100.00 2,600.00 9.00 900.00 0.00 0.00 9.00 900.00 17.00 1,700.00
26 Subsistence allowance
27 Expatriate personnel perdiem Days 1,200 45.00 54,000.00 434.00 19,530.00 60.00 2,700.00 494.00 22,230.00 706.00 31,770.00
28 Short-term Training
29 Additional cost of Record Management Person-days 28 800.00 22,400.00 0.00 0.00 0.00 0.00 0.00 0.00 28.00 22,400.00
30 Long-term training Program
31 HO support Lump Sum 12,000.00 0.00 0.00 0.00 12,000.00
32
33 MISCELLANEOUS EXPENSES
34 Communication costs between
35 ??? - Ethiopia Lump Sum 36 200.00 7,200.00 11.30 2,260.00 1.00 200.00 12.30 2,460.00 23.70 4,740.00
36

37 Totals ?? 179,000.00 ?? 43,209.12 ?? 2,900.00 ?? 46,109.12 ?? 132,890.88

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FINANCIAL CONTROL

6-130
 A B C D E F G H I J K L M

1
LOCAL REIMBURSABLE COST BREAKDOWN FOR THE MONTH OF: May-07

2 Invoice No. ??

3 Date: 14-May-2007

4
PROJECT: [Enter Project Name] ERA Project No. ??

5
CLIENT: Ethiopian Roads Authority

6
CONSULTANT: [Enter Consultant's Name]
7

8 Contract Previously Paid NOW REQUESTING Total to Date Balance

9 Description Unit Price Total Amount Amount Amount Amount

Unit Quantity Quantity Quantity Quantity Quantity
10 ?? ?? ?? ?? ?? ??

Contract Administration Manual Draft April 2007

11 ACTIVITY
12 Subsistence allowance
13 Expatriate short-term personnel Hotel Days 1,200 360.00 432,000.00 392.00 141,120.00 60.00 21,600.00 452.00 162,720.00 748.00 269,280.00
14 Housing for long-term staff Months 102 8,000.00 816,000.00 21.30 170,400.00 2.00 16,000.00 23.30 186,400.00 78.70 629,600.00
15 Equipments, Vehicles Computers Etc.
16 Vehicle as specifications * No 3 774,783.00 2,324,348.00 3.00 2,321,739.13 0.00 0.00 3.00 2,321,739.13 0.00 2,608.87
17 Desk PC as specified No 3 8,700.00 26,100.00 3.00 26,100.00 0.00 0.00 3.00 26,100.00 0.00 0.00
18 Plotter as specified No 1 61,000.00 61,000.00 0.00 0.00 0.00 0.00 0.00 0.00 1.00 61,000.00
19 UPS700 VA No 3 2,200.00 6,600.00 3.00 6,600.00 0.00 0.00 3.00 6,600.00 0.00 0.00
20 Office equipment and furniture rentals Lump Sum 200,000.00 200,000.00 66,666.72 5,555.56 72,222.28 0.00 127,777.72
21 Stationary and consumables Months 36 4,000.00 144,000.00 11.30 45,200.00 1.00 4,000.00 12.30 49,200.00 23.70 94,800.00
22 Office Accommodation 0.00
23 Office accommodation Months 36 8,000.00 288,000.00 11.30 90,400.00 1.00 8,000.00 12.30 98,400.00 23.70 189,600.00
24 Short-term Training
25 Venue cost and lunch Person-days 4,065 35.00 142,275.00 528.00 18,480.00 182.00 6,370.00 710.00 24,850.00 3,355.00 117,425.00
26 Training material Person-days 4,065 30.00 121,950.00 528.00 15,840.00 218.00 6,540.00 746.00 22,380.00 3,319.00 99,570.00
27
28 MISCELLANEOUS EXPENSES
29 Communication costs between
30 Ethiopia - ??? Lump Sum 36 2,000.00 72,000.00 11.30 22,600.00 0.00 0.00 11.30 22,600.00 24.70 49,400.00
31 Drafting, reproduction of reports
32 Inception Report (Draft) No 10 100.00 1,000.00 10.00 1,000.00 0.00 0.00 10.00 1,000.00 0.00 0.00
33 Inception Report (Final) No 9 150.00 1,350.00 0.00 0.00 0.00 0.00 0.00 0.00 9.00 1,350.00
34 Bi-monthly Reports No 119 50.00 5,950.00 30.00 1,500.00 0.00 0.00 30.00 1,500.00 89.00 4,450.00
35 Human Res Development (Draft) No 30 100.00 3,000.00 0.00 0.00 0.00 0.00 0.00 0.00 30.00 3,000.00
36 Human Res Development (Final) No 30 150.00 4,500.00 0.00 0.00 0.00 0.00 0.00 0.00 30.00 4,500.00
37 Project Planning (Draft) No 10 100.00 1,000.00 0.00 0.00 0.00 0.00 0.00 0.00 10.00 1,000.00
38 Project Planning (Final) No 10 150.00 1,500.00 0.00 0.00 0.00 0.00 0.00 0.00 10.00 1,500.00
39 Design Review Manual (Draft) No 10 200.00 2,000.00 0.00 0.00 0.00 0.00 0.00 0.00 10.00 2,000.00
40 Design Review Manual (Final) No 35 300.00 10,500.00 0.00 0.00 0.00 0.00 0.00 0.00 35.00 10,500.00
41
42
43 Local Transportation Cost, office rental
44 Car Insurance Vehicle-years 9 8,900.00 80,100.00 3.00 26,700.00 0.00 0.00 3.00 26,700.00 6.00 53,400.00
45 Vehicle running cost Months 108 2,000.00 216,000.00 29.30 58,600.00 3.00 6,000.00 32.30 64,600.00 75.70 151,400.00
46 Clerical Assistance
47 Driver Months 108 1,500.00 162,000.00 26.30 39,450.00 3.00 4,500.00 29.30 43,950.00 78.70 118,050.00
48 Secretary Months 36 3,500.00 126,000.00 11.30 39,550.00 1.00 3,500.00 12.30 43,050.00 23.70 82,950.00
49 Accountant Months 36 4,500.00 162,000.00 11.30 50,850.00 1.00 4,500.00 12.30 55,350.00 23.70 106,650.00
50 Software Lump Sum 36 1,000.00 36,000.00 11.30 11,300.00 1.00 1,000.00 12.30 12,300.00 23.70 23,700.00

51 Total ?? 5,447,173.00 ?? 3,154,095.85 ?? 87,565.56 ?? 3,241,661.41 ?? 2,205,511.59

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6-131
 A B C D E F G H I J K L M

1 ADVANCE PAYMENT REPAYMENT SCHEDULE FOR THE MONTH OF May-07

2 Invoice No. ??

3 Date: 14-May-2007

Contract Administration Manual Draft April 2007

4
PROJECT: [Enter Project Name] ERA Project No. ??

5
CLIENT: Ethiopian Roads Authority

6 CONSULTANT:
[Enter Consultant's Name]
7
8
9
10
11
12
13
14
15
16
17
18 ???????
19
20
21
22
23
24
25
26
27
28
29
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Volume 1 Section 6
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6-132
 A B C D E F G H I J K L M

1 ?????? SCHEDULE FOR THE MONTH OF May-07

2 Invoice No. ??

3 Date: 14-May-2007

Contract Administration Manual Draft April 2007

4 PROJECT: [Enter Project Name] ERA Project No. ??

5 CLIENT:
Ethiopian Roads Authority

6 CONSULTANT: [Enter Consultant's Name]

7
8
9
10
11
12
13
14
15
16
17
18 ???????
19
20
21
22
23
24
25
26
27
28
29
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6-133
 A B C D E F G H I J K L M N O

CONSULTANT'S INVOICE RECORD ERA Project No. hb123

1

2 PROJECT: [Enter Project Name]

3 CLIENT: Ethiopian Roads Authority ?? ??

CONSULTANT: [Enter Consultant's Name] Budget ?? ?? Funding ?? ??

4
5
6 Amount Amount Approved Remaining Budget ?? Date Paid ?? Date Paid Advance Paymnt/Repaymnt
Inv No. Date Received Date Approved
7 ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ??
8 1
9 2
10 3
11 4
12 5
13 6

Contract Administration Manual Draft April 2007

14 7
15 8
16 9
17 10
18 11
19 12
20 13
21 14
22 15
23 16
24 17
25 18
26 19
27 20
28 21
29 22
30 23
31 24
32 25
33 26
34 27
35 28
36 29
37 30
38 31
39 32
40 33
41 34
42 35
43 36
44 37
45 38
46 39
47 40
48 41
49 42
50 43
51 44
52 45
53 46
54 47
55 48

Total 0.00 0.00 0.00 0.00 0.00 0.00

56
Ethiopian Roads Authority

Volume 1 Section 6
FINANCIAL CONTROL

6-134
 CONSULTANT'S INVOICE RECORD EXAMPLE ERA Project No. hb123

PROJECT: [Enter Project Name]

CLIENT: Ethiopian Roads Authority USD ETB

CONSULTANT: [Enter Consultant's Name] Budget 3,000,000.00 6,000,000.00 Funding IDA GOE

Amount Amount Approved Remaining Budget IDA Date Paid GOE Date Paid Advance Paymnt/Repaymnt
Inv No. Date Received Date Approved
USD ETB USD ETB USD ETB USD ETB USD ETB USD ETB
1 300,000.00 600,000.00 25-Oct-06 300,000.00 600,000.00 30-Oct-06 2,700,000.00 5,400,000.00 15-Nov-06 12-Nov-06 25-Nov-06 20-Nov-06 300,000.00 600,000.00
2 60,000.00 90,000.00 30-Nov-06 60,000.00 90,000.00 5-Dec-06 2,640,000.00 5,310,000.00 18-Dec-06 24-Dec-06 24-Dec-06 20-Dec-06 -6,000.00 -9,000.00
3 66,000.00 60,000.00 29-Dec-06 66,000.00 60,000.00 6-Jan-07 2,574,000.00 5,250,000.00 16-Jan-07 18-Jan-07 20-Jan-07 15-Jan-07 -6,600.00 -6,000.00
4 72,000.00 65,000.00 26-Jan-07 72,000.00 65,000.00 2,502,000.00 5,185,000.00
5
6
7

Contract Administration Manual Draft April 2007

8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48

Total 498,000.00 815,000.00 498,000.00 815,000.00 287,400.00 585,000.00

Ethiopian Roads Authority

Volume 1 Section 6
FINANCIAL CONTROL

6-135
 Ethiopian Roads Authority

Appendix 6-10 - Guideline CA5 Liquidated Damages

FINANCIAL CONTROL

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-136

 Ethiopian Roads Authority

FINANCIAL CONTROL
o Ethiopian Roads Authority

Guideline No CA5
Liquidated Damages

Contract Administration Manual

October 1998
Rev November 2006

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-137

 Ethiopian Roads Authority

FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA

ETHIOPIAN ROADS AUTHORITY
CONTRACT ADMINISTRATION DIVISION

FINANCIAL CONTROL
Liquidated Damages and Penalties

OCTOBER 1998
Rev Nov 2006

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-138

 Ethiopian Roads Authority

FINANCIAL CONTROL
Legal Services Division - Contracts and Claims Branch

Construction and Contract Guidelines

Liquidated Damages and Penalties

CONTENTS

Pages

Part 1. Introduction 6-139

Part 2. Difference between Liquidated Damages and Penalties 6-139

Part 3. Enforceability of Penalties in various Countries 6-143

Part 4. Recommendations 6-151

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Liquidated Damages and Penalties

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Part 1. Introduction

Every breach of contract carries with it the potential for dispute. There may be those who thrive on
disputes but they rarely include the parties to the contract. Not surprisingly, it has long been
accepted as good commercial practice for the parties to include in their contracts provisions for
dealing with the most likely breaches. This is how standard forms of contract and the use of
liquidated damages began to develop.

In the construction industry breaches of contract are commonplace to the point of being routine.
Did any employer ever wholly avoid impeding the contractor in the performance of his obligations
and did any contractor ever wholly fulfil his obligations without fault? Not often. This is reflected
in the standard forms of contract and most contain clauses detailing the procedures to be applied
and the recovery permitted in the event of those specified breaches identified and described with
the benefit of centuries of experience.

In most standard forms of contract, the employer’s position is significantly different from that of
the contractor’s. Whereas the contractor has a financial remedy for numerous and various breaches,
the employer has his for only one breach of common occurrence - failure by the contractor to
complete on time. And whereas the financial effects of the employer’s breach on the contractor can
rarely be estimated in advance of the breach, not least because of factors including but not limited
to the involvement of sub-contractors, the financial effects of the contractor’s late completion can
usually be estimated with some degree of certainty.

Consequently most standard forms of construction contract are drafted to permit the parties to fix in
advance the damages payable for late completion When these damages are a genuine pre-estimate
of the loss likely to be suffered or a lesser sum they can rightly be termed liquidated damages.

In essence, liquidated damages are fixed in advance of the breach, whereas general or unliquidated
damages are proven damages assessed after the breach.

Part 2. Difference between Liquidated Damages and Penalties

Questions of penalty and liquidated damages clauses (“pld clauses”) have attracted an increasing
amount of interest in recent years by both international institutions concerned with the
improvement of international law such as the ICC and UNCITRAL and by practitioners in the
field. The subject is at the same time an important and a difficult one, but the borderline between
them is not distinct.

In very general terms, it can be said that a pld clause provides, in the event of non-performance of
an obligation, for a payment of a sum of money determined in advance (or determinable by
reference to factors known or calculated in advance) such as percentage of the contract price,
multiplied by the number of days constituting the delay. It is usual that a maximum figure is
stipulated, normally stated as a percentage of the contract price.

The difference between liquidated damages and a penalty may be said to be that the former
purports to define the damage suffered by a party i.e. a genuine pre-estimate of the loss likely to be
suffered, whereas a penalty goes further than that by including an element of in terrorem (to
intimidate), intended to stimulate performance. Sometimes a clause will serve both purposes. In
short, liquidated damages are fixed in advance of the breach, whereas general or unliquidated
damages are proven damages assessed after the breach.
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Various legal systems deal with pld clauses quite differently. Firstly, certain aspects of the legal
regime of such clauses are mandatory in many countries. In English law, so called penalty clauses
are not enforceable, but clauses for liquidated damages are. In continental legal systems (as in the

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Federal Republic of Germany and in Switzerland) penalty clauses are valid, however if the amount
is excessive it may sometimes be modified by a court. It should be noted here that in Ethiopia,
penalty clauses are valid and it is highly unlikely that a court could or would modify the amount
stated in the contract unless there was a extremely good reason for doing so. The term used in a
contract to denote the sum payable may have an influence, albeit not decisive, on the extent to
which the clause may be considered valid or effective.

As stated above, penalty clauses are invalid per se in some countries, notably under common law
countries, whereas a clause which purports to assess and define a future loss in the form of
liquidated damages is valid and enforceable. A distinction is then made that a penalty is a sum
payable in terrorem in order to induce a party to perform his obligation, whereas liquidated
damages are a pre-assessment of the loss which is likely to follow from a party’s breach. In other
legal systems this distinction is not relevant, but nevertheless penalty or liquidated damages clauses
may be held invalid and non-enforceable.

The invalidity may not be absolute (as described above in the case of penalty clauses under English
law) but only partial and conditional upon the particular circumstances of the case, (e, g, where the
sum to be paid as defined in the clause is excessive compared to the actual loss or to other
particular circumstances and consequently has to be reduced). The latter is the case in a number of
countries in Europe, as well as in Scandinavia.

The means to ensure the validity of a pld clause will then become very important and its drafting a
delicate task.

The way in which a clause is styled and named may have an influence upon its validity. It is
obvious that when contracting under English or common law the very term “penalty” should be
avoided. However, one can not be sure that by using the term “liquidated damages” in the clause it
will be valid. Sometimes a penalty ( as in the “General Conditions for the delivery of Machinery
and Plant {ECE 188 A Para 20.3}), is termed “Price Reduction”, and the term penalty avoided. It
seems doubtful to the writer that such drafting would save the validity of the clause which by
essence under common law is a penalty clause.

The main purpose of a clause may be to define damages in terms of money in order to avoid
disputes over their amount. This may favourably influence the validity of the clause.

A pld clause which could be declared invalid or have its content modified under the law of one
country, may have its validity preserved if parties make reference to another legal system. Even if a
particular legal system is favourable to the validity of a pld clause, parties may hesitate about
submitting their contract to that law, as they may not be able to foresee all the other consequences
of submitting the entire contract to that system. As indicated earlier, the rules invalidating or
modifying pld clauses may be considered in some countries to be matter of public policy (ordre
public) and therefore applicable irrespective of the proper law of contract. It could help, however if
the choice of law clause is combined with an appropriate arbitration clause.

Matters of interpretation are closely linked to questions of validity. Interpretation often implies a
search for the true intention of the parties. If a rule is mandatory and a deviation from it implies
invalidity, then searching the true intentions of the parties may be superfluous. In many legal
systems the autonomy of the parties prevails in pld clauses.

Matters of interpretation are generally governed by the proper law of the contract. An explicit
choice of law made by the parties in respect of the contract as a whole may, in general, lay the basis
for further interpretation of the clause.

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One may first ask whether naming a provision a penalty clause, a clause for liquidated damages, or
a price reduction will influence its interpretation. Questions whether a clause is to be considered
valid or not may, to some extent, be influenced by the wording chosen by the parties. It is advisable

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not to use the term penalty in a common law jurisdiction, although the mere fact that a clause has
been styled a provision for liquidated damages may not save its validity if it is really meant as a
penalty in terrorem. If a provision (to avoid being considered a penalty) is styled price reduction,
the obligor could possibly have to pay damages over and above the price reduction. However, if the
provision is made out strictly as a penalty or liquidated damages clause, this would have resulted in
a limitation if his liability to pay damages. The choice of terminology may, therefore, sometimes
influence the interpretation in an unexpected or surprising way.

Generally, a pld clause can be understood to be limitative, i.e. it excludes claims for damages over
and above the sum defined in the clause. Insofar as the clause refers to

“defective delivery” or “failure to abstain” (e.g. from competition) the presumption that it is
limitative may be less strong than where the clause is considered to be “price reduction”.
Furthermore, a usual presumption is that the clause is considered to be exclusive, so as to be paid
irrespective of the loss (if any) suffered. Exceptionally, there may be a presumption or
understanding that the clause is additive, i.e. in addition to damages calculated in some other way,
which may make the clause a real “penalty” clause operating in terrorem.

However, the agreed sum may be intended to cover only a certain type of damage, leaving other
damages to be claimed separately. The sum to be paid is sometimes styled penalty (or similar),
sometimes pre-estimated (or liquidated) damages, and sometimes price reduction. The sum to be
paid is often related to the length of delay, sometimes a maximum is defined, after which the
Obligee may exercise other remedies such as determination (termination) of the contract.

A typical example of this under a standard international form of contract such as FIDIC or World
Bank, would be e.g. ‘the sum to be paid in the event of delayed performance will be 0.05% per
calendar day to a maximum of 10% of the contract price’. It is also fairly common to have sectional
completion dates which attract specific percentages or sums for delayed performance for
individually pre-valued sections of the contract, together with an overall sum for delayed
completion to the whole of the contract.

The 0.50% quoted above, however, should be a pre-estimate. In which case if a figure has been
determined it is preferable to use it as it suggests more clearly that it is a pre-estimated amount.
Why use 10% as a maximum?

The clause should preferably be as elaborate and explicit as possible on the above issues. However,
very often the wording is not and then one may have to rely on presumptions or other rules of
interpretation. Such presumptions vary, not only from one type of transaction to another (e.g. in
case of non-delivery, late delivery, defective delivery of goods or services; or failure to abstain
from some type of action such as competition) but also from one legal system to another in the way
that in one and the same respect the presumption for its interpretation is different in two legal
systems.

A clause may, sometimes, be considered only a first estimate for the convenience of the Obligee,
which, if he can prove that his damage is higher, may claim the higher amount (i.e. the clause is not
limitative - see above). Sometimes a clause may enable the obligor to prove that the Obligee’s
damage is less than would arise from the clause and have the sum owed by the obligor reduced
accordingly.

Finally the relation between the sum payable under the clause and the performance of the contract
may have to be considered. A sum payable under a clause may sometimes be understood as an
alternative for the obligor to perform the contract e.g. in cases where the obligor has to abstain
from doing something. If this is not meant, it is advisable to make the clause explicit in this respect.
Sometimes a sum payable under a pld clause may be the only way in which a contract can be
enforced, as in some legal systems specific performance may not be available.
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Usually, however, a pld clause as applied to a situation of non-performance will not exclude the
Obligee from claiming performance of the contract from the obligor.

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The events upon which penalties and liquidated damages are payable should be defined in the
contract rather than referring generally to a breach of contract. The choice of that event depends
quite naturally upon the nature of the contract and the weight the Obligee attaches to various parts
of the obligor’s performance. It could be a case of non-performance or late performance, such as
non-delivery or late delivery of goods and/or services. It may be partial non-performance as in the
case of failure to deliver certain quantities of sold goods, delivery of defective goods or only partial
completion of a construction contract. Often penalties or liquidated damages are made payable
upon the obligor’s failure to refrain from doing something e.g. competition or delivering goods
from contractually prohibited areas.

A distinction may sometimes be called for between an event rendering a penalty or liquidated
damages payable and the basis for liability. The latter refers to legal concepts such as fault, strict
liability or force majeure, whereas the event refers only to a fact, e.g. a specific action or failure to
act.

Some legal systems recognise as a general principle that a penalty is due only if the debtor is liable
for non-performance of the principal obligation. This implies that whenever the debtor’s liability
for non-performance or damages can be excluded (e.g. because of non-fault, force majeure, or
creditor’s failure to perform) no penalty shall be due.

Certain laws expressly state that a penalty is not due if the debtor proves that the performance has
become impossible owing to circumstances for which he is not responsible; other laws follow a
stricter approach. At the same time, it seems that courts in certain countries use stricter rules for
appreciating whether the debtor is liable for non-performance in the framework of penalty clauses.
Moreover, if the law does not recognise (or recognises only to a limited extent) the debtor’s right to
disclaim responsibility for damages; this will apply to the penalty clause.

Whenever the law requires that the creditor give notice to the other party before claiming damages,
the same may be supposed to apply to a penalty clause. Under Belgian and French law, the
application of the penalty clause requires formal notice. It is understood by the writer that under
Ethiopian law notice is not required if a fixed contract period has been agreed and has expired or
the parties have agreed to waiver the notice requirement.

The principle that the penalty is due only if the debtor is liable for non-performance of the main
obligation is not normally considered mandatory; the parties may, therefore, agree that the penalty
is due whatever the reason for non-performance and are advised to be explicit on that point. In
those situations, the main problem will be to ascertain if such an agreement is implied in the
contract if it is not sufficiently explicit. Whenever the law admits this possibility, the courts will
have wide discretionary powers to introduce strict liability through the interpretation of the
contract.

Since one of the purposes of the penalty clause is to avoid disputes over the amount of damages,
some legal systems set the principle that the penalty is due whether or not there is any actual loss or
damage. However some countries follow a different approach and provide that the penalty is not
due if the debtor proved that the creditor has not suffered any loss.

The extent of the liability under a pld clause will vary substantially from case to case because:

(a) the extent of the liability for non-performance may be different from one legal system to
another;
(b) the courts may interpret a certain clause as implying a warranty to pay (even in the case of
no liability); and
(c) the extent of liability may have been changed contractually (e.g. by a force majeure
clause).

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In other words, the contractual and legal environment in which the clause is situated will influence
its construction and application.

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When drafting a pld clause, it can be particularly advisable to provide expressly:

(a) Whether or not a notification of breach is necessary;

(b) Whether and to what extent the fault of the employer in performing obligations which are
conditional to the contractor’s performance is a justification for the non-payment of the
penalty;
(c) Whether the pld clause is meant to be limitative, exclusive or additive;
(d) whether the amount payable under a pld clause is an alternative for the obligor to perform
the contract or is meant to allow the obligee to also claim performance of the contract by
the obligor; and
(e) Whether or not the obligor shall be liable for the liquidated damages irrespective of his
liability for failure (e.g. a case of force majeure or absence of fault).

Part 3. Enforceability of Penalties in various Countries

According to Professor René David, the drafter of the 1960 Civil Code of the Empire of Ethiopia,
the provisions of the said code were adopted from the laws of France, Switzerland, Greece, Italy
and Egypt.

A review of the national legislation of United Kingdom, France, Switzerland and Italy and Ethiopia
in relation to penalties follows.

United Kingdom

As stated earlier in these Guidelines, common law systems distinguish between penalty clauses,
which are not allowed and liquidated damages which are permitted. To re-iterate a point made
previously, the difference between the two is that the essence of a penalty is a payment of money
stipulated in terrorem, whereas the essence of liquidated damages is a genuine pre-estimate of
damages. The distinction between the two, when used in their legal sense, and the tests to be
applied, are regarded as authoritatively stated in the following passage from the judgment of Lord
Dunedin in Dunlop Pneumatic Tyre Co. Ltd v. New Garage and Motor Co. Ltd (1915) A. C. 79, at
p. 86.

“1. Though the parties to a contract who use the words ‘penalty’ or ‘liquidated damages’
may prima facie be supposed to mean what they say, yet the expression used is not
conclusive. The court must find out whether the payment stipulated is in truth a penalty or
liquidated damages.

2. The essence of a penalty is a payment of money stipulated in terrorem of the offending

party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage.

3. The question whether a sum stipulated is a penalty or liquidated damages is a question of

construction to be decided upon the terms and inherent circumstances of each particular
contract, judged of as at the time of making the contract, not as at the time of the breach.

4. To assist this task of construction, various tests have been suggested, which if applicable
to the case under consideration may prove helpful, or even conclusive. Such are:

(a) It will be held to be a penalty if the sum stipulated is extravagant and

unconscionable in amount in comparison with the greatest loss that could
conceivably be proved to have followed from the breach.

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(b) It will be held to be a penalty if the breach consists only in not paying a sum of
money, and the sum stipulated is a sum greater than the sum which ought to have
been paid. This, though one of the most ancient instances, is truly a corollary to

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the last test.

(c) There is a presumption (but no more) that it is a penalty when ‘a single sum is
made payable by way of compensation, on the occurrence of one or more or all of
several events, some of which may occasion serious and others but trifling
damages’.

(d) It is no obstacle to the sum stipulated being a genuine pre-estimate of damage that
the consequences of the breach are such as to make precise pre-estimation almost
an impossibility. On the contrary, that is just the situation when it is probable the
pre-estimated damage was the true bargain between the parties.”

The terminology used by the parties to describe the clause in question is of some importance, but it
is not decisive. It is the party who is sued for the specified sum who has to prove it is a penalty,
whereas if the sum is actually made payable as a penalty it is the party who claims that it was
intended to be liquidated damages who must prove that it is not a penalty.

Where the courts find the sum to be a penalty, they will disregard the clause incorporating it and
will instead asses the aggrieved party’s actual loss. Where, instead, the courts consider the sum to
be a fair pre-estimate bearing a reasonable relation to the likely loss, the clause is effective and the
aggrieved party may recover the amount stipulated, regardless whether or not this corresponds
precisely to his actual loss

France

A penalty clause is a contractual obligation which is accessory to a principal obligation: if the

principal obligation is void the penalty clause is also void, but nullity of the penalty clause does not
affect the validity of the principal obligation (cf. Article 1227 of the Civil Code). It may be
stipulated either at the same time as the principal obligation or subsequently thereto. It is not
subject to any rules as to form, but must itself specify the nature and extent of the obligation it
guarantees. It is intended to constitute compensation for damage caused to the promisee by failure
to perform the principal obligation (Article 1229(1)).

For the penalty to be enforceable, in principle the promisee must have given the promisor notice to
perform mise en demeure - Article 1230), although in certain cases notice to perform can be waived
in advance, even by implication as, for example, where it is stipulated that the penalty shall become
due by the mere expiration of the time fixed. The failure to perform must be imputable to the
promisor under ordinary rules governing contractual liability. The promisor may be excused from
paying the penalty if he proves that the failure to perform was purely accidental or attributable to
force majeure. Parties may, nevertheless, provide that the penalty clause shall apply in all cases of
failure to perform, however caused, although if the promisor’s failure to perform is due to the fault
of the promisee in whose favour the penalty clause was stipulated, then the latter can never demand
payment.

A penalty clause must be set aside when its effects would be to enable the promisor to circumvent
existing prohibitions of clauses limiting liability, by limiting his liability to an amount less than that
of the actual damage.

The promisee may enforce performance of the principle obligation instead of suing the promisor in
default for the penalty (Article 1228); he may not call for concurrent performance of the principle
obligation and of the penalty, unless the penalty was stipulated for delay only (Article 1229 (2)).

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In principle, a penalty clause may not be modified, but in 1975 a second paragraph was added to
Article 1152 to the effect that a judge may (also ex officio) reduce or increase the penalty agreed
upon if it is manifestly excessive or ridiculously low - any stipulation to the contrary being deemed

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not to have been written. The manifestly excessive or ridiculously low character of the penalty is
determined at the time of judgment. The judge is not obliged to regulate the sum he awards on the
basis of the actual damage suffered, although he can not reduce it to a sum less than the damage
suffered where it is manifestly excessive, nor can he increase it to more than the damage suffered
where it is ridiculously low.

Where the obligation has been performed in part, the penalty agreed upon may be reduced by the
judge (also ex officio) in proportion to the value of the part performance to the person receiving it,
without prejudice to the application of Article 1152. Once again, any stipulation to the contrary is
deemed mot to have been written (Article 1231).

Switzerland

Although the Swiss Code of Obligations contains no definition of the penalty clause, Swiss legal
doctrine indicates that it is considered to be an agreement by which the promisor undertakes to do
some specific thing, usually to pay a sum of money, if he fails to carry out, performs in a manner
other than that agreed upon, or out of time, an obligation arising out of a contract or a unilateral
undertaking or one imposed by law (the principal obligation). It is essentially accessory in nature,
and its validity and enforceability thus depend upon that of the principal obligation to which it is
attached, regardless of whether the latter derives from a contract, a unilateral undertaking, or is one
imposed by law.

The payment of a penalty may be stipulated for total non-performance, performance not in
accordance with what was stipulated, or delay (cf. Article 160(1) and (2) of the Code of
Obligations); it may be a global payment or a special penalty for each individual failure to act, such
as for each day of delay. In every case the occurrence of the event contemplated in the agreement
must be established; in the case of an obligation to do something or transfer property it is for the
promisor to prove that he has properly performed the obligation if he is to avoid payment of the
penalty. However, in the case of an obligation to abstain from doing something, the promisee must,
if he wishes to obtain payment of the sum stipulated, prove that the promisor has failed to fulfil his
undertaking.

Unless the parties provide otherwise, failure to perform will normally be imputable to the promisor
in accordance with the general rules contained in Article 97 et seq. of the Code of Obligations
(Article 163(2). It is admitted that by agreement the penalty clause may be made to apply even
when failure to perform is not imputable to the promisor, e.g. in the case of force majeure.

As to the relationship which may exist between payment of the penalty and performance of the
principal obligation, Article 160 of the Code of Obligations expressly provides for three
possibilities. The first of these, the alternative penalty clause, is the only one which, under the
Code, shall apply in normal cases, i.e. where the parties have not made other arrangements (Article
160(1) and (2)). The relationship between payment of the penalty and performance of the
obligation is as follows:

(a) in the case of a penalty clause stipulated for non-performance or defective performance (and
subject to what will be said under (b)) below, the promisee may at his option call for either
payment of the penalty or performance of the principal obligation;

(b) in the case of a penalty stipulated for failure to observe the time or place agreed on for
performance, the promisee may enforce both payment of the penalty and due performance of the
principal obligation, unless he has expressly waived the right to claim both or has accepted late
performance or performance in a place other than that stipulated without objection.

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Cumulatively penalty clauses must be expressly stipulated by the parties (Article 160 (1)). Their
effect is to allow the promisee to obtain from the promisor both payment of the penalty and
performance of the principal obligation in every case.

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The exclusive penalty clause (Article 160 (3)) is a special case which allows the promisor, if he so
chooses, to pay the amount of the penalty instead of performing the principal obligation. In each
individual case it is for the promisor to prove that this is in fact the nature and scope of the clause
in question.

As regards the relationship between payment of the penalty and compensation for the damage
actually suffered by the promisee as a result of failure to perform or defective or late performance,
there are two rules on this subject: firstly, payment of the penalty is due even if in the actual case
the promisee has not suffered any damage (Article 61 (1)); and secondly, if the damage suffered by
the promisee exceeds the amount of the penalty he can only obtain compensation for the excess if
he proves negligence (or international fault) on the part of the promisor (Article 61 (2)).

In accordance with Article 163 (1), the parties are in principle free to agree on the amount of the
penalty clause, subject to two limitations:

(a) the clause must be valid in itself and in particular not contrary to morality; and

(b) even if the penalty clause is not in itself contrary to morality, a discretion is conferred on
the court by Article 163 (3) to reduce a penalty which it considers excessive. The courts
here take into account the special circumstances of each case, including the seriousness of
the promisor’s fault, his financial position, the relationship between the amount of the
penalty and the amount of the pecuniary damage which has been or might have been
caused to the promisee, the latter’s behaviour and other similar factors.

Italy

The penalty is an accessory clause to a contract (or principal obligation); if the contract is void the
penalty clause the penalty is also void, whilst nullity of the penalty clause does not affect the
validity of the contract (or principal obligation).

A penalty clause is defined as a clause whereby it is agreed that on failure to perform or late
performance one of the parties shall be bound to do a specific thing. This shall have the effect of
limiting the compensation to undertaking the thing promised unless the parties have agreed that
supplementary damages might be claimed (Article 1382, paragraph 1). The penalty shall be due
regardless of whether or not damage is proved (Article 1382, paragraph 2).

The failure must be imputable to the promisor, i.e. a result of his intentional fault or negligence: the
promisor is not liable to pay the penalty in cases of force majeure or where the failure is imputable
to the promisee.

A distinction is made between cases where the penalty is stipulated for failure to perform and those
for delay Articles 1382 and 1383). In the first case the promisee can not claim both performance of
the principal obligation and the penalty; the promisee must choose whether he wishes to sue for the
penalty or for specific performance of the principal obligation together with such damages as may
be due for the loss caused by late performance. In case of a penalty stipulated for late performance
the promisee can claim concurrently both the penalty and performance (Article 1383).

Courts are allowed, if the debtor so claims, to reduce the penalty on equitable grounds in two
distinct cases: (i) where there has been part performance of the principal obligation; and (ii) where
the amount of the penalty is manifestly excessive, regard being given in every case to the
promisee’s interest in the performance of the obligation (Article 1384). Courts consider this
provision mandatory for reasons of public policy. In practice, the “manifestly excessive” nature of
the penalty may be judged either on the basis of the facts and intentions of the parties at the time
the penalty clause was stipulated or having regard to subsequent events.

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Ethiopia

The following articles from the Civil Code are relevant to penalties.

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Art. 1678. - Elements of contract.
No valid contract shall exist unless:
(a) the parties are capable of contracting and give their consent sustainable at law;
(b) the object of the contract is sufficiently defined and is possible and lawful;
(c) the contract is made in the form prescribed by law, if any.

Art. 1679. - Consent necessary.

A contract shall depend on the consent of the parties who define the object of their
undertakings and agree to be bound thereby.

Art. 1680. - Agreement of the parties.

(1) A contract shall be completed where the parties have expressed their agreement thereto.
(2) Reserves or restrictions intended by one party shall not affect his agreement as
expressed where the other party was not informed of such reserves or restrictions.

Art. 1696. - Invalidation of contract.

A contract may be invalidated where a party gave his consent by mistake or under deceit or
duress.

Art. 1697. - Mistake must be decisive.

The party who invokes his mistake shall establish that he would not have entered into the
contract, had he known the truth.

Art. 1698. - Mistake must be fundamental.

A contract may be invalidated on the ground of mistake as defined in Art. 1697 where such
mistake relates to an element of the contract which the parties deem to be fundamental or
which is fundamental, having regard to good faith and to the circumstances in which the
contract was made.

Art. 1699. - Mistake as to the nature or object of the contract.

A contract may be invalidated on the ground of mistake where:
(a) the mistake relates to the nature of the contract; or
(b) the mistaken party has undertaken to make a performance substantially greater or to
receive a consideration substantially smaller than he intended.

Art. 1700. - Mistake as to the person.

A contract may be invalidated on the ground of mistake where such mistake relates to the
identity or qualifications of the other party and such identity or qualifications are a
fundamental element of the contract in the general opinion or having regard to the
circumstances of the

Art. 1701. - Non-fundamental mistakes.

(1) A contract may not be invalidated on the ground of mistake where such mistake only
relates to the motives which led to the making of the contract.
(2) Arithmetical mistakes in a contract shall not affect its validity and shall be corrected.

Art. 1702. - Good faith of mistaken party.

(1) The mistaken party may not invoke his mistake in a manner contrary to good faith.
(2) He shall be bound by the contract he intended to make where the other party agrees to
perform such contract.

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Art. 1703. - Reparation of damage.

Whosoever invokes his mistake to avoid the effect of a contract shall make good the
damage arising out of the invalidation of the contract unless the other party knew or should

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have known of the mistake.

Art. 1704. - Fraud.

(1) A contract may be invalidated on the ground of fraud where a party resorts to deceitful
practices so that the other party would not have entered into the contract, had he not
been deceived.
(2) A contracting party who has been deceived by a third party shall be bound by the
contract unless the other contracting party knew or should have known of the fraud on
the making of the contract and too advantage thereof.

Art. 1705. - False statements.

(1) A contract may be invalidated where a party in bad faith or by negligence made false
statements and a relationship giving rise to a special confidence and commanding
particular loyalty existed between the contracting parties.
(2) The provisions of sub-art. (1) shall apply where a party, by his silence, caused the other
party to believe a fact which was untrue.

Art. 1706. - Duress.

(1) A contract may be invalidated on the ground of duress where the acts of duress led a
party to believe that he, one of his ascendants or descendants, or his spouse, were
threatened with a serious and imminent danger to the life, person, honour or property.
(2) Duress must be such as to impress a reasonable person.
(3) The nature of duress shall be determined having regard to the age, sex and position of
the parties concerned.

Art. 1707. - Duress by third party.

(1) A contract may be invalidated on the ground of duress notwithstanding that duress was
exercised by a person other than the party who benefited by the contract.
(2) The party who invokes duress to avoid the effect of a contract shall make good the
damage arising out of the invalidation of the contract, where duress was exercised by a
third party and the other contracting party did not and should not have known thereof.

Art. 1708. Threat to exercise a right.

A threat to exercise a right shall be no ground for invalidating a contract unless such threat
was used with a view to obtaining an excessive advantage.

Art. 1709. - Reverential fear.

(1) Fear of an ascendant or a superior shall be no ground for invalidating a contract where
no duress was exercised.
(2) The provisions of sub-art. (1) shall not apply where the contract was made with the
person inspiring the fear and such person derived and excessive advantage from the
contract.

Art. 1710. - Unconscionable contract.

(1) A contract may not be invalidated on the sole ground that its terms are substantially
more favourable to one party than to the other party.
(2) Where justice requires, any such contract may be invalidated as unconscionable where
the consent of the injured party was obtained by taking advantage of his want,
simplicity of mind, senility or manifest business inexperience.

Art. 1771. - Effect of non-performance.

(1) Where a partly does not carry out his obligations under the contract, the other party
may, according to the circumstances of the case, require the enforcement of the contract
or the cancellation of the contract or in certain cases may himself cancel the contract.
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(2) He may in addition require that the damage caused to him by non-performance be
made good.

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Art. 1772. - Notice necessary.
A party may only invoke non-performance of the contract by the other party after having
placed the other party in default by requiring him by notice to carry out his obligations
under the contract.

Art. 1773. - Form and time of notice.

(1) Notice shall be by written demand or by any other act donating the creditor’s intention
to obtain performance of the contract.
(2) Notice may not be given unless the obligation is due.

Art. 1774. - Time for performance.

(1) The creditor may in the notice fix a period of time after the expiry of which he will not
accept performance of the contract.
(2) Such period shall be reasonable having regard to the nature and circumstances of the
case.

Art. 1775. - Notice when unnecessary.

Notice need not be given where:
(a) the obligation is to refrain from certain acts; or
(b) the debtor assumed to perform an obligation which the contract allows to be performed
only within a fixed period of time and such period has expired; or
(c) the debtor has declared in writing that he would not perform his obligations; or
(d) it is agreed in the contract that notice shall not be required and the debtor shall be in
default upon the expiry of the time fixed.

Art. 1776. - Specific performance.

Specific performance of a contract shall not be ordered unless it is of special interest to the
party requiring it and the contract can be enforced without affecting the personal liberty of
the debtor.

Art. 1808. - Who may require invalidation.

(1) A contract which is affected by a defect in the consent or by the incapacity of one party
may only be invalidated at the request of that party.
(2) A contract whose object is unlawful or immoral or a contract not made in the
prescribed form may be invalidated at the request of any contracting party or interest
third party.

Art. 1809. - Party may refuse performance.

A party who is entitled to require the invalidation of the contract may at any time refuse to
perform it.

Art. 1810. - Action for invalidation.

(1) No contract shall be invalidated unless an action to this effect is brought within two
years from the ground for invalidation having disappeared.
(2) Where a contract is unconscionable and the party injured was of age, the action shall be
brought within two years from the making of the contract.

Art. 1811. - Confirmation of contract.

(1) The party whose consent was vitiated may waive his right to require the invalidation of
the contract where the cause which vitiated his consent has disappeared.
(2) Where the contract was made in a special form, waiving as mentioned in sub-art. (1)
shall be made in the same form.
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Art. 1812. - Putting an end to action.

Where a party required the invalidation of an unconscionable contract, the other party may

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put an end to the action by offering to make good the injury.

Art. 1813. - Partial invalidation.

Where part only of the contract is vitiated, only that part shall be invalidated unless such
invalidation affects the essence of the contract.

Art. 1814. - Duty to opt.

(1) The party who is entitled to require the invalidation of the contract or to cancel the
contract shall, where he is so asked by the other party, without delay answer whether he
intends to confirm or to cancel the contract.
(2) Notwithstanding any proof to the contrary, the contract shall be deemed to be cancelled
where answer is not given in due time.

Art. 1815. - Effect of invalidation or cancellation.

(1) Where a contract is invalidated or cancelled, the parties shall as far as possible be
reinstated in the position which would have existed, had the contract not been made.
(2) Acts done in performance of the contract shall be of no effect.

Art. 1816. - Rights of third parties.

Acts done in performance of the contract shall not be invalidated where the interest of third
parties in good faith so requires.

Art. 1817. - Restoring previous position not possible.

(1) Acts done in performance of the contract shall not be invalidated where such
invalidation is not possible or would involve serious disadvantages or inconveniences.
(2) The parties shall as far as possible be reinstated in the position which would have
existed, had the contract not been made, by the payment of damages or any other
remedy which the court thinks fit.

Art. 1818. - Expenses.

Where a party who is to restore a thing following invalidation or cancellation of the
contract has altered such thing or incurred expenses in relation thereto, the provisions of
the Chapter of this Code relating to “unlawful Enrichment” (Art. 2168-2178) shall apply in
settling the rights or obligations arising out of such alterations or expenses.

Art. 1886. - Extension of liability.

The parties may extend their liability under the contract and provide that they will be liable
for non-performance notwithstanding that performance is prevented by force majeure.

Art. 1887. - Limitation of liability.

The parties may limit their liability under the contract and provide that they will not be
liable unless they commit a fault.

Art. 1888. - Acts of employees.

(1) The parties may provide that they will not be liable where non-performance is caused
by a fault of their employees or auxiliaries.
(2) Any such provisions shall be of no effect where it is made to the prejudice of a party
who is the employee of the other party.

Art. 1889. - Penalty.

The parties may fix the amount of damages which will be due, should a party fail to
discharge his obligations or to discharge them completely and in due time.

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Art. 1890. - Rights of creditor.

(1) Unless otherwise agreed, the creditor may require the performance of a contract which

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includes a penalty.
(2) He may not require both the enforcement of the contract and the penalty unless the
penalty was provided in respect of delay or the non-performance of a collateral
obligation.

Art. 1891. - Conditions of application.

The penalty shall be due whenever the creditor is entitled to claim damages by reason of
non-performance of the contract.

Art. 1892. - Actual damage.

(1) The penalty shall be due notwithstanding that no actual damage was caused to the
creditor.
(2) Damages may not be claimed above the amount of the penalty unless non-performance
is due to the debtor’s intention to cause damage or to his gross negligence or grave
fault.

Art. 1893. - Variation of penalty.

(1) A penalty shall be of no effect where the contract in which it is prescribed is
invalidated.
(2) A contract shall remain in force notwithstanding that the penalty is not valid.

Art. 1894. - Invalidation.

(1) A penalty shall be of no effect where the contract in which it is prescribed is
invalidated.
(2) A contract shall remain in force notwithstanding that the penalty is not valid.

Art. 1895. - Contractual sanctions.

Where a contract provides that a party may apply certain sanctions, should the other party
fail to carry out one of his duties, the court shall, notwithstanding any provision to the
contrary, verity whether the agreed sanctions may be applied.

Part 4. Recommendations

As can be gathered from the preceding parts of these Guidelines, the whole subject of penalties and
liquidated damages is of considerable complexity.

As regards this subject in Ethiopia, although on the majority of current major project the term
‘liquidated damages’ is used in the most frequently used contracts, it is really irrelevant as penalties
are enforceable in Ethiopia. This means that for a contractor on a contract where the governing law
is that of Ethiopia, he can not argue that the liquidated damages are a penalty and therefore not
enforceable as he could under common law systems.

It is important that employers, engineers and contractors are careful about the way and at what
level the liquidated damages are set for the following reasons.

For employers and/or engineers, it is important that every attempt is made to genuinely attempt to
pre-estimate the likely loss that could be suffered by the employer in the event of delayed
completion to a section or the whole of the works.

If the figure is set too low then the employer may well find that his losses are not adequately
covered. On the other hand, if the figure is set too high, then the bidder/tenderer is likely to include
in his bid/tender sum a financial factor to cover the potential risk. The employer in conjunction
with the engineer should therefore attempt to pre-estimate the likely loss as accurately as possible

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and on roads projects this figure would probably be limited to the additional supervision time by
the engineer and his site team together with an amount to cover the employer’s prolonged
overheads on the project. Therefore it should be possible upon this basis, to fairly accurately

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calculate the likely loss and insert this figure as preferably a sum but otherwise as a percentage per
day of delay up to a maximum of usually 10% of the original contract price.

From the bidder’s/tenderer’s point of view, bearing in mind that he can not at a later date argue that
the liquidated damages amount to a penalty and are therefore unenforceable, he should query the
amount before submitting his bid/tender if he considers that the sum stated is, in his opinion,
excessively high or even ridiculously low ( a highly unlikely scenario). Queries raised after the
bid/tender has been submitted and accepted, would have no effect as offer and acceptance has
already occurred.

Regarding the application of liquidated damages, on many contracts the writer has been involved in
over the past 25 years, the employer has often been loathe to deduct liquidated damages when the
contractual completion date has been passed, on the grounds that it would adversely affect the
contractor’s performance and ability to finally fulfil his principal obligation to complete. Whilst the
writer appreciates the reality of this viewpoint, it is strongly recommended that the engineer
notifies the employer immediately of his right to deduct liquidated damages and furthermore, the
employer immediately should do so forthwith. In the event that further extension(s) of time is/are
granted, then the liquidated damages would be credited in part or in full to the contractor by way of
interim or the final certificate(s). Although there is no specific provision for the payment of interest
within either FIDIC or the World Bank contracts for payment of interest on liquidated damages
deducted and then subsequently returned, there have been cases under common law where interest
has been allowed and under Ethiopian Civil law, the general consensus seems to be that interest
would also be allowable here in Ethiopia.

One major point that follows on from this, is that of the contractor providing the engineer with
sufficient and timeous information in order for him to evaluate any extension of time that may be
due to the contractor so as to avoid not only the possibly unnecessary deduction of liquidated
damages but also to avoid possible interest charges being payable by the employer. It is also
essential that the engineer performs his duties properly in this regard and makes accurate and
timeous recommendations to the employer for the reasons given above. Finally, where the specific
approval of the employer is required before the engineer can grant any extension of time, the
employer must not delay in giving such approval; again for the same reasons.

In construction contracts where the engineer has the right to grant extensions of time without the
specific approval of the employer ( a situation commonly found under UK contract forms such as
ICE, JCT and NEC) then the assessment of extensions of time due to the contractor rests with
engineer/architect. Assuming the engineer/architect has all the necessary information at hand, then
extensions of time can be granted if applicable timeously thereby avoiding the situation whereby
liquidated damages are deducted and subsequently repaid possibly with interest. The ICE form of
contract (5th and 6th editions) and the NEC form are quite specific regarding the fact that interest is
to be paid on liquidated damages which are repaid following re-assessment of extensions of time.
The JCT form and more importantly the FIDIC, World Bank and EDF forms make no reference to
interest payable on liquidated damages which are repaid following re-assessment of extensions of
time. Under Ethiopian law, interest may be payable but would fall under an action in the courts by
the contractor against the employer.

In many other countries the engineer’s powers are severely limited by the fact that specific
approval must be obtained from the employer before various actions can take place. The World
Bank Documents include these restrictions/limitations in the Conditions of Particular Application
as an option. These optional restrictions/limitations have been incorporated by ERA in numerous
contracts which are either currently in progress or ready to go out to Bid/Tender. The writer
recommends that these restrictions/limitations on the engineer’s powers are not included as they;
reduce the engineer’s ability to exercise his impartiality under the contract, tend to create delays in
decisions which result in the contractor being unable to properly plan the works (especially in
relation to extensions of time) or suffer unnecessary financial burdens, and create additional
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administrative work for the employer. On occasion, as has already happened on ERA contracts,
such delays in the administrative process can lead to matters progressing to international
arbitration. The writer’s opinion on this subject is shared by many consultants, contractors,

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authoritative bodies and individuals. If the employer is employing and paying a professional
engineer to supervise and administer the contract, why should the employer interfere with the
administrative process?. If the employer does not trust the engineer to act for the contract in a fair
and impartial manner, why employ and pay him in the first place?

If the contractual completion date has been reached and the engineer has recommended an
extension(s) of time and the employer has not given his specific approval to the extension(s), then
the engineer is placed in an almost impossible position. The contractor is also naturally placed in
the invidious position whereby he knows that the engineer is recommending an extension (s) of
time thereby allowing him to programme the works properly but, until the employer has given his
approval to the engineer he does not know whether he will be granted all, part or none of the
extension.

In the situation described herein, the Engineer has no option to recommend to the employer that
liquidated damages be deducted from the current completion date.

Should the employer act upon the engineer’s recommendation ( a wise course, see later ), then not
only will the contractor suffer financial hardship, but should the extension (s) of time be
subsequently approved and granted, the employer would have to pay back the liquidated damages
possibly with interest. The contractor may also have a potential claim against the employer for
disruption of his programmed sequence of works due to a reduction in planned cash flow or even
for acceleration.

If the employer decides not to follow the engineer’s recommendation to deduct liquidated damages
time may become at large. The phrase ‘time at large' is much loved by contractors. It has about it
the ring of plenty; the suggestion that the contractor has as much time as he wants to complete the
works. This is not what it means. Time becomes at large when the obligation to complete within
the specified time for completion of a contract is lost. The obligation then becomes to complete
within a reasonable time. The question of what is a reasonable time is subject to interpretation but
generally not allowing the contractor to act in an unreasonable or negligent manner, but it is most
certainly not ‘as and when the contractor sees fit’.

The circumstances of time becoming at large are usually where an act of prevention by the
employer creates delay and that delay is not covered by an extension of time provision; and to a
lesser extent:

(i) where the provisions for extension of time have not been properly administered or have
been misapplied;
( ii ) where there has been a waiver of the original time requirements;
( iii ) where there has been interference or obstruction by the employer in the certifying process.

The employer’s right to deduct liquidated damages for late completion is lost completely if time
becomes at large - the employer can still sue for general or unliquidated damages for late
completion - but regard will then be had to the contractor’s entitlement to a reasonable extension of
time.

One of the questions frequently asked, is if the employer does not deduct liquidated damages after
the current contractual completion date, can he subsequently retroactively deduct liquidated
damages? The answer to this question is highly complex and includes but is not limited to legal
principles such as waiver and estoppel.

On a basic level, should the employer decide not to deduct liquidated damages, he may find that at
a later stage when he changes his mind, there are insufficient monies available to do so i.e. the
amount remaining between that paid to the contractor and the contract price is less than that
representing the amount of damages the employer is seeking to recover. The employer’s only

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courses of action would then be to use the retention fund and/or performance security to ensure full
recovery or to sue the contractor for recovery. In the former case, this would be open to the
interpretation of the courts, and in the latter, a costly and time consuming task.

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Regarding the doctrine of waiver, this occurs when one party expressly or implicitly, indicates to
the other his intention to forgo certain rights under a contract and is effective in law when the other
party changes their position in reliance on the waiver.

As regards the doctrine of estoppel. Estoppel is a rule of evidence which acts as a defence in
preventing one party alleging facts necessary to a claim where he has previously by his conduct
represented the contrary.

Applied to liquidated damages it would seem to amount to this. If an employer assured a contractor
he did not intend to deduct liquidated damages for late completion and the contractor finished at his
own pace instead of accelerating to avoid damages, the employer could be estopped from suing for
liquidated damages and the contractor could rely on the doctrine of waiver to recover damages
deducted against the assurance so given. To stress once again, notwithstanding other factors such as
the possibility of the contractor being unable to complete the works due to the financial burden of
having liquidated damages deducted, the employer should follow the engineer’s recommendations.

One final point is that if the contractor has not submitted claims for an extension (s), even if they
are submitted later and approved and liquidated damages have been deducted, will the contractor
be entitled to interest on monies repaid? The short answer is that under most international forms of
contract, contractors are not obligated to submit claims - although in most cases they do - but
merely to provide to the engineer with sufficient details in order for him to be able make his
determination. The writer suggests that if it was proven that the contractor had been dilatory or
negligent in providing such details and/or particulars, thereby preventing the engineer from being
in a position to make a fair determination, the contractor would find it extremely difficult to make a
valid case for the payment of interest.

In summation, in a situation where the employer’s specific approval is necessary in order for the
engineer to grant an extension of time - a situation the writer totally disagrees with - the employer
must ensure that any recommendation for extension of time made by the engineer is acted upon
swiftly.

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Appendix 6-11 - ERA Measurement and Payment Clauses

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The following Measurement and Payment clauses have been extracted from the ERA Standard
Specification (see Appendix 3-6) for the purposes of demonstrating the nature of the measurement
system for works undertaken by Contractors.

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Series 1000: General Division 1200: General Requirements and Provisions.

1212 MEASUREMENT: GENERAL

The cost of all supervision and process control, including testing so carried out by the
Contractor, shall be deemed to be included in the rates rendered for the related items of work
except that the cost of certain tests and the provision of certain items of testing and sampling
equipment will be paid for separately as provided for in those Divisions of the Technical
Specifications where this applies.

(a) Units of measurements

All work shall be measured in accordance with the S.I. System of metric units.

(b) Bill of Quantities

The quantities set out in the Bill of Quantities are estimated quantities and are used for the
comparison of Tenders and awarding the Contract. It must be clearly understood that only
the actual quantities of work done or materials supplied will be measured for payment, and
that the quantities may be increased or decreased as provided in the General Conditions of
Contract.

(c) Measurement of completed work

(i) All distances along the center line of the roads as shown on the Drawings are
horizontal distances which will be used in calculating the quantities of earthworks, pavement
layers and surfacing and paving for payment purposes. All cross sections shall be taken in a
vertical plane.
(ii) All materials, which are specified to be measured in the vehicle, shall be hauled in
vehicles of such type and size that the actual contents may be readily and accurately
determined. Unless all vehicles are of uniform capacity, each vehicle shall bear a plainly
legible identification mark indicating its specific approved capacity.
(iii) Where the quantity of bituminous and similar materials is to be paid by volume, it
shall be measured at the specified temperature.
(iv) Structures shall be measured to the neat lines shown on the drawings including any
changes ordered in writing by the Engineer and shall include any reinforcing steel and minor
ducts up to 150 mm in diameter.

1213 PAYMENT

(a) Contract Rates

In computing the final contract amount, payments shall be based on actual quantities only of
authorized work done in accordance with the Specifications and Drawings. The tendered
rates shall apply, subject to the provisions of the General Conditions of Contract, irrespective
of whether the actual quantities are more or less than the billed quantities.
Where no rate or price has been entered against a pay item in the bill of quantities by a
tenderer, it shall be understood that he does not require any compensation for such work

(a) Rates to be inclusive

The Contractor shall accept the payment provided in the Contract and represented by the
prices tendered by him in the Bill of Quantities, as payment in full for executing and
completing the work as specified, for procuring and furnishing all materials, labour,
supervision, plant, tools and equipment, for wastage, transport, loading and offloading,
handling, maintenance, temporary work, testing, quality control including process control,
overheads, profit, risk and other obligations and for all other incidentals necessary for the
completion of the work and maintenance during the Period of Maintenance.
This Clause shall be applicable in full to all pay items except as these requirements may be
specifically amended in each case.

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Series 4000: Earthworks Division 4300: Borrow Materials

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4307 MEASUREMENT AND PAYMENT
Item 43.01 Excess overburden ...................................................................... cubic meter (m3)
The unit of measurement shall be the cubic meter of excess overburden measured in place
before stripping and such measurement shall be based on the depth of overburden measured in
trial pits excavated by the Contractor in a square pattern at intervals of 10 m over the whole
area concerned.
Where the borrow material consists of rock or sand which is used in the construction of stone
pitching, concrete work, crushed stone for sub-base and base, permeable subsurface drain
materials and in bituminous paving and surfacing, no excess overburden shall be measured or
paid for.
The tendered rate shall include full compensation for the digging of trial pits; stripping
clearing and grubbing, and removing the excess overburden prior to the excavation of borrow
material; for replacing the excess overburden in the borrow pit after completion of the
excavation of borrow material and for levelling-off the excess overburden in the borrow area.

Item 43.02 Excess over burden in borrow pits for obtaining crushed stone for pavement
layers
(a) Overburden in common (normal) or intermediate excavation ............cubic metre(m3)
(b) Overburden in rock (hard) excavation.................................................cubic metre (m3)
The unit of measurement shall be the cubic metre of excess overburden measured in place
before stripping. The quantity shall be based on the depth of the overburden as measured in
test pits. Distinction shall be made between common (normal) and intermediate material on
the one hand and rock (hard) material on the other, in accordance with the classification as
described in Sub- clause 4204 under Division 4200 for excavations.
The tendered rates shall include full compensation for stripping, removing and stockpiling
excess overburden prior to the borrow material being excavated, replacing the excess
overburden in the borrow pit after excavation of the borrow material has been completed and
levelling-off the excess overburden in the borrow area.
Where the stockpiled excess overburden has to be moved to beyond the limits originally
indicated by the engineer, it shall be measured once more for payment but only under item
43.01.
Where overburden material is used for filling or for other purposes, payment will not be made
for removing such overburden material, but will be made in accordance with the purpose for
which such material will be used.

Item 43.03 Finishing - off borrow areas

(a) Rock (Hard) material. ..................................................................................hectare (ha)
(b) Intermediate material ...................................................................................hectare (ha)
(c) Common (Normal)........................................................................material. hectare (ha)
The unit of measurement for finishing-off borrow areas shall be the hectare measured in
accordance with the finally excavated area of the borrow pit before it is finished off.
The tendered rates shall include full compensation for finishing-off the borrow pits as
specified, including any further earth moving necessary for finishing, but excluding the
establishment of grass. Borrow pits shall be classified in accordance with the classification of
the material removed therefrom and where more than one class of material is taken from a
borrow area, the area shall be apportioned prorata for classification purposes, in accordance
with the volumes of each type of material removed.

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Appendix 6-12 - Further Explanations

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FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA

ETHIOPIAN ROADS AUTHORITY
CONTRACT ADMINISTRATION DIVISION

FINANCIAL CONTROL
EXPLANATORY NOTES

ON

CURRENCIES OF TENDER, CONTRACT AND PAYMENT;

RATES OF EXCHANGE

AND

CONTRACT PRICE ADJUSTMENT

January 2007

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Table of Contents

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1 INTRODUCTION............................................................................................................. 6-162

2 CURRENCY(S) ................................................................................................................. 6-163

2.1 CURRENCY(S) OF BID VS. CONTRACT .................................................................. 6-164
2.2 CURRENCY(S) OF BID/CONTRACT VS. PAYMENT ............................................... 6-165

3 CURRENCY EXCHANGE RATES ............................................................................... 6-165

3.1 CONTRACT EXCHANGE RATE ................................................................................ 6-165
3.2 FUNDING EXCHANGE RATE................................................................................... 6-166
3.3 SOURCE OF EXCHANGE RATES............................................................................. 6-166

4 PROJECT FUNDING ...................................................................................................... 6-167

4.1 SOURCE OF FUNDS ................................................................................................. 6-167

5 CONTRACT PRICE ADJUSTMENT (CPA) ................................................................ 6-169

5.1 CALCULATION OF CPA ........................................................................................... 6-169
5.1.1 The Proven Cost Method .................................................................................... 6-170
5.1.2 The Adjustment formula(e) Method ................................................................... 6-170
5.2 CPA INDICES............................................................................................................. 6-172
5.2.1 Sources of Indices ............................................................................................... 6-173

6 DOUBLE COMPENSATION.......................................................................................... 6-174

Appendices

Appendix A - Extracts from WB SBD for Procurement of Works............................................. 6-176

Appendix B - FIDIC IV Changes in Cost and Legislation ......................................................... 6-180

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1 INTRODUCTION

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All contracts define how to address and apply the following to payments:

• current exchange rates

• currency(s) of payment
• contract price adjustment
• currency(s) of the contract
• contract exchange rates

These words and the concepts behind them, although simple, are often confused and the
interrelationships between them misunderstood. The purpose of this document is to clarify the
meanings of the words and concepts, explain the relationships between them and explain how they
are accommodated in monthly payments to Contractors.

In addition once the amount due to the Contractor has been established it is necessary to determine
the source of the money for the payment. In doing so it is necessary to consider:

• the source of the funds

• the currency of the funds
• the exchange rate used to convert the source funds to payments
• the proportions of the payments made from each source of funds

The diagram below shows the concepts addressed in this document.

Calculation of Payments Due

Current Currency of Contract Price Currency of Contract

Work Done
Exchange Rate Payment Adjustment Contract Exchange Rate

Payments to
Contractor

Funding Agency GoE

Sources of Payment Funds

Clauses 14, 15 and 30 of the Information to Bidders of World Bank's standard bidding document
for works are included as Appendix A - Extracts from WB SBD for Procurement of Works.

Clauses 70 to 72 of the conditions of contract and Clauses 70-73 of the conditions of particular
application of the same document are included in Appendix B - FIDIC IV Changes in Cost and
Legislation for the same reason.

The information contained in both Appendices has been included as typical examples of contract
document wording and definition of the above concepts.

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2 CURRENCY(S)
In environments such as Ethiopia and on projects such as ERA's, Contractors, undertaking works,

FINANCIAL CONTROL
usually have both local and foreign costs. Typically, a contractor's foreign costs are for foreign
labour, head office overheads, profit etc. and possibly bitumen, cement, plant etc. if these are not
locally available and have to be imported. Similarly, a contractor's local costs are for local labour
and possibly fuel, cement, timber, aggregate etc. if these are locally available.

For a contractor to make foreign payments it is necessary him to purchase the foreign currency with
local currency through the banking system. However, using the banking system introduces an
element of uncertainty for the Contractor i.e. he does not know what the exchange rates will be
when he needs to convert money and so can not be sure at the time of tender exactly what his true
cost will be and accordingly what his unit rate should be. If clients force contractors to use this
system for obtaining foreign currency, the contractors would add a cost for this uncertainty to the
unit rates in their tenders.

To avoid this, possibly, unnecessary additional cost clients usually take on the responsibility for
changes in exchange rates and make payments to contractors in both local and foreign currencies.
Bidders are, therefore, invited (in Clause 15 of the information to bidders. See Error! Reference
source not found.) to specify the proportions of local and foreign currencies which they wish to
receive.

Payments in the various currencies are accommodated in one of the following two ways:

a) Bidders submit their bids in local currency and specify what percentage of that sum they
wish to receive in foreign currency(s)
b) Bidders submit their bids in the currencies in which they wish to receive their payments.

Although these two ways may appear to be the same, or result in the same payments to the
Contractor, they are quite different. The sample bills of quantities below show the difference
between the two ways of bidding.

Method (a) - Local Currency Only

Item No Description Unit Quantity Rate (ETB) Amount (ETB)

13.01 Contractors General Obligations
a) Fixed obligations LS 1 150,000.00 150,000.00
b) Value-related obligations LS 1 375,000.00 375,000.00
c) Time-related obligations month 36 6,250.00 225,000.00
21.01 Clearing and Grubbing ha 30 10,000.00 300,000.00
42.01 Cut and Borrow to fill
(a) Material in compacted layer thickness of 200mm and less:
(ii) Compacted to 93% ModAASHTO m3 20,000 17.00 340,000.00
52.01 Base Layer Construction
(a) Gravel Base from cut or borrow, incl free haul up to 1.0km
(i) Gravel base compacted to 98% ModAASHTO m3 15,000 21.00 315,000.00
63C.01 Double Surface treatment
(c) 13.2mm and 6.7mm aggregate with 80/100 pen grade bitumen m2 100,000 29.00 2,900,000.00
63C.02 Variations in bitumen application rate
(b) 80/100 pen grade bitumen l 1,000 0.50 500.00
Total 4,605,500.00

In this case, the bidder specifies the currencies in which he would like to receive payment and the
proportions of each currency e.g. 70% in USD and 30% in ETB. Following acceptance of the bid
and the signing of the contract, the Employer makes every payment in those currencies on the
70/30 basis. In this case the currency of the bid, and subsequently the contract, is the ETB and the
currencies of payment are the ETB and USD.

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 Ethiopian Roads Authority

To convert 70 percent of the ETB into USD it is necessary to use a rate of exchange between the
ETB and USD. As the rate of exchange between currencies varies on a daily basis, it is necessary to
define how the rate of exchange is determined for each payment. Item 0 below contains further

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discussion on rates of exchange and their usage.

This method of bidding and pricing is the method generally favoured by ERA for its projects. In
terms of the WB SBD for Works this is Clause 15 Alternative A, which consequently requires the
use of ITB Clause 30 Option 1. (See Appendix A - Extracts from WB SBD for Procurement of
Works)

Method (b) - Local and Foreign Currency

Amount
Item No Description Unit Quantity Rate (ETB) Amount (ETB) Rate (USD)
(USD)
13.01 Contractors General Obligations
a) Fixed obligations LS 1 7,500.00 7,500.00 16,764.71 16,764.71
b) Value-related obligations LS 1 131,250.00 131,250.00 28,676.47 28,676.47
c) Time-related obligations month 36 1,875.00 67,500.00 514.71 18,529.41
21.01 Clearing and Grubbing ha 30 3,500.00 105,000.00 764.71 22,941.18
42.01 Cut and Borrow to fill
(a) Material in compacted layer thickness of 200mm and less:
(ii) Compacted to 93% ModAASHTO m3 20,000 6.80 136,000.00 1.20 24,000.00
52.01 Base Layer Construction
(a) Gravel Base from cut or borrow, incl free haul up to 1.0km
(i) Gravel base compacted to 98% ModAASHTO m3 15,000 8.40 126,000.00 1.48 22,235.29
63C.01 Double Surface treatment
(c) 13.2mm and 6.7mm aggregate with 80/100 pen grade bitumen m2 100,000 7.25 725,000.00 2.56 255,882.35
63C.02 Variations in bitumen application rate
(b) 80/100 pen grade bitumen l 1,000 0.00 0.00 0.06 58.82
Total ETB 1,298,250.00 USD 389,088.24

This example uses an exchange rate of 1USD to 8.5ETB. Using this exchange rate the "bottom
line" proportion of USD to Birr is 72 to 28. This is similar to the 70/30 requested in the Method (a)
example above. However, the USD/ETB proportions of the individual BOQ items vary between
60/40 and 95/5 and the final contract proportion will depend on the actual quantities of the
individual items. In this case the currencies of bid, and subsequently of contract, are the ETB and
USD and the currencies of payment are also the ETB and USD.

Although this method appears to be "more complicated" than Method (a) it avoids the need to
define and use exchange rates. The Contractor has priced the contract and its unit rates in two
parallel bills of quantities, one in ETB and one in USD.

This method of bidding and pricing is not generally favoured by ERA for its projects. In terms of
the WB SBD for Works this is Clause 15 Alternative B, which consequently requires the use of
ITB Clause 30 Option 2. (See Appendix A - Extracts from WB SBD for Procurement of Works)

2.1 CURRENCY(S) OF BID VS. CONTRACT

The currency(s) of Bid will in general be the same as the currency(s) of contract. The reason for
this is that a contract is established by the acceptance of a contractor's offer to undertake the works
for an amount paid in specified currencies and as that offer would have been made in a particular
currency(s) the conditions of that offer would become the conditions of the contract. The bid
currency(s) would accordingly become the contract currency(s).

The only time that the currency(s) of Bid would not be the same as the currency(s) of contract
would be if there was some agreement made between the Client and the Contractor during the
contract negotiation stage. Although this is unlikely, it could happen if there were, for example, an
international change in material supplier which warranted a change in the bid.

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2.2 CURRENCY(S) OF BID/CONTRACT VS. PAYMENT

The standard WB SBD for Works gives the Employer the option to define the currency(s) of bid in

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either one currency (WB Alternative A, Method (a) example above) or in more than one currency
(WB Alternative B, Method (b) example above). In both cases the currency(s) in which the bill of
quantities is presented will be the currency(s) of the Bid and subsequently of the Contract.

Having agreed upon the currency of the bid and contract the contract will be administered and
managed using only that currency(s) and the final contract amount will be defined in that
currency(s). As stated above, the currency of ERA's contracts is usually the Ethiopian Birr i.e. the
single local currency option of Alternative A.

The discussion above explains that payments to Contractors are made in proportion to their actual
foreign and local expenditures and that this may have little or no relationship to the currency of the
bid and contract.

It is conceivable that for some very-specialised project where items are manufactured externally
that the currency of the contract could be local and that all payments are made in foreign currency.

In summary the Currency(s) of Bid and Contract are not necessarily the same as the Currency(s) of
Payment, but in every contract it is necessary to define these clearly.

3 CURRENCY EXCHANGE RATES

The value of any particular country's currency is determined by the financial world's perception of
the strength of that country's economy, rate of inflation and political stability. This perception
changes daily and as it does so, the rate of exchange between the country's currency and those of
every other country in the world changes. When dealing in contracts worth millions of dollars,
exchange rate fluctuations of even a few percent can be significant and therefore need serious
consideration.

These fluctuations can be positive or negative resulting in increases or decreases in a contract's

ultimate cost. As stated in paragraph 2 of item 2 above; to avoid this, possibly, unnecessary
additional cost, it is normal39 for clients take on the responsibility for changes in exchange rates.

3.1 CONTRACT EXCHANGE RATE

By accepting the risk, the Client allows the contractor to calculate the true cost of the project and
know that they will receive exactly that amount in the currency in which they calculated it at the
time of tender. This is achieved by fixing the exchange rate to be used for all payments. The date of
fixing is usually the rate ruling 28 days before the closing of bids.

This is best demonstrated by means of a simple example, which will be used and expanded upon in
the remained of this document.

A contractor tenders to construct a project at a cost of ETB 1,000,000 and

specifies that he requires ETB 200,000 to be paid in ETB and ETB 800,000 to be
paid in USD at an exchange rate of 8ETB = 1 USD i.e. USD 100,000. The Client
is Ethiopian and is using local currency to fund the project.

In terms of this example the following can be/ have been defined:

39
FIDIC IV Clause 72.1 - Where the Contract provides for payment ... to be made ... in foreign currency ... ,
such payment shall not be subject to variations in the rate of exchange between ...
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 Ethiopian Roads Authority

• The currency of bid/contract is ETB

• The currencies of payment are ETB and USD

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• The contract exchange rate between the ETB and USD is 8ETB = 1USD

The Contractor can therefore be sure that no matter how the exchange rate fluctuates during the
contract period he will still receive the same amounts as he based his tender on.

3.2 FUNDING EXCHANGE RATE

Although a fixed rate "protects" the contractor it does not protect the Client. In the event of the rate
improving, in favour of the ETB, it would be cheaper for the Client to purchase the USD required
by the Contractor and the contract price would effectively reduce. The opposite is, however, also
true i.e. when the ETB weakens against the USD it becomes more expensive to purchase the USD
and the contract price effectively increases. Continuing the above example:

In the original example the Client was required to use ETB 800,000 to purchase
the USD 100,000 the Contractor wanted. If the rate improved to 7.5ETB = 1USD
the Client would only need to use ETB 750,000 to purchase USD 100 000 a
saving of ETB 50,000. However, if the ETB weakened to 8.5ETB = 1USD the
Client would need to use ETB 850,000 to purchase USD 100,000 and the
contract cost would effectively increase by ETB 50,000.

The only way in which the Client can protect itself from such fluctuations would be to buy forward
i.e. purchase the full USD 100 000 today for later disbursement to the Contractor. There are ways
of doing this, through the banking system, which are designed to ease the difficulties which
purchasing the whole foreign component would create for the clients cash flow.

In summary, as the Client initiates the development in the environment of his choice. It is only
reasonable that the Client should accept the financial risks associated with that development. It is,
therefore, important during the feasibility stage of any project that the Client makes a calculated
estimate of the likely effect of such exchange rate fluctuations and that the necessary financial
provisions are made. Failure to do so could well lead to insufficient funding for the completion of
the project.

Obviously any improvement in the local exchange rate will realise a saving for the Client by
reducing the project cost in foreign currency.

3.3 SOURCE OF EXCHANGE RATES

As stated above, exchange rates reflect the "personal" perception of financial institutions and,
accordingly, even exchange rates for the same currency(s) on the same day will differ from
institution to institution. In addition, these institutions offer different exchange rates for buying and
selling. The Bank's selling rate for any particular currency will always be slightly higher than their
buying rate.

If on 11 December 2006 one wishes to purchase 1USD at the Commercial Bank

of Ethiopia it would have cost 8.8814ETB whilst on the same day if one wished to
exchange 1USD for ETB at the same bank one would only have received 8.7073
ETB.

Although the tenderers will usually specify the exchange rate upon which they have based their
tender, Clients often wish to specify which banking institution should be used as the source of the
exchange rates. Because of the differences between the rates of different institutions and the
differences between the selling and buying rates it is very important, when defining bid currencies
and contract exchange rates, that the exact source and type of rate (buying or selling) be specified.

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4 PROJECT FUNDING
The above example under item 0, assumed a single local source of funding for the project. In terms

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of ERA's projects, funding is usually provided by the GoE and an external funding agency. In these
cases, the effect of exchange rate fluctuations becomes more complicated. In addition, conditions
imposed by the funding agency can further complicate matters. Continuing the example above:

The local funding is provided by the Client and the foreign funding is provided by
the Funding Agency.

Under these circumstances the problems of and complications associated with fluctuating exchange
rates fall away. We have the same scenario as with the Method (b) way of pricing i.e. we
effectively have two parallel contracts with separate sources of funding.

Unfortunately the above example is not typical of ERA contracts. The following extension of the
example more closely describes the normal funding regime for ERA projects:

30% of the project is funded by the Client and 70% by the Funding Agency40.

This means that the Client pays 30% of the ETB and USD and the Funding Agency pays 70% of
the ETB and USD. Under these circumstances the effect of and need to monitor the fluctuations in
the exchange rates becomes very important. The reason for this is that an improvement in the
strength of the ETB will reduce the project cost for the Client but increase it for the Funding
Agency and a weakening of the ETB will have the opposite effect.

4.1 SOURCE OF FUNDS

All of the GoE funds are held locally in ETB. All ETB payments are therefore easily made directly
from local bank accounts without the need for any currency exchange rates. However, when the
GoE is required to make payments in foreign currency(s) they are required to purchase that foreign
currency(s) through the Banking system at commercial or current exchange rates. The lower the
ETB falls in relation to the foreign currency(s) the more expensive the project becomes for ERA
and the higher the ETB rises in relation to the foreign currency(s) the cheaper the project become
for ERA.

In the case of foreign funding agencies it is more complicated and depends on how they make the
project funds available. The foreign funding agency could do any one of the following:

1. transfer all of the projects funds to GoE ETB accounts for disbursement (e.g. ASDI)
2. transfer all of the project funds to GoE Foreign Currency(s) accounts for disbursement (e.g.
IDA)
3. retain all of the project funds "at home" in foreign currency and disburse directly to
Contractors on the request of ERA (e.g. EU)
Each of these scenarios will be affected differently by exchange rate fluctuations, as explained
below:

Scenario 1 - All funds transferred to local ETB account

In this case the foreign funds would be no different to the GoE funds and discussion under the first
paragraph of this section remains unchanged. The opportunity to off-set local currency losses and
CPA with foreign currency gains, in the event of the ETB weakening, would be lost.

40
The ratio of funding can vary between the extremes of ETB 0 -100 and USD 0 -100
Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-167
 Ethiopian Roads Authority

Scenario 2 - All funds transferred to local Foreign Currency(s) accounts

In this case the foreign funds would respond in exactly the opposite way to the GoE funds, as
discussed under the first paragraph of this section. Because the foreign funding usually accounts for

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a greater percentage of the project costs than the local funding, the available funds are more
dramatically affected by exchange rate losses and gains.
Weakening of local currency usually results in an increase in the rate of CPA, which is then off set
by the resulting foreign currency exchange gains.

Scenario 3 - All funds retained in foreign currencies "at home".

In this case the funds would be retained in foreign currency and only converted when payments
were due. Foreign currencies tend to fluctuate a little less than local currency(s) and therefore the
risk of incurring foreign exchange losses is reduced. The risk of incurring gains or losses with local
currency payments sourced from the foreign funds remains the same as with scenarios 1 and 2
above.
In summary, the currencies of payment, proportions and sources of funding and applicable
exchange rates can have very different effects on project cost. The spreadsheet below shows the
variation in the project cost with changes in the payment currency proportions, funding proportions
and exchange rate fluctuations.

Source of Funding
Contract Price Currency of Payment RoE Equiv Project Cost
GoE 30% Funding Agency 70%
ETB ETB
ETB 20% USD 80% ETB/USD USD ETB ETB/USD ToT ETB USD/ETB USD ToT
1,000,000 200,000 800,000 8.0 100,000 60,000 240,000 300,000 17,500 70,000 87,500 1,000,000
9.5 100,000 60,000 285,000 345,000 14,737 70,000 84,737 1,150,000
9.0 100,000 60,000 270,000 330,000 15,556 70,000 85,556 1,100,000
8.5 100,000 60,000 255,000 315,000 16,471 70,000 86,471 1,050,000
7.5 100,000 60,000 225,000 285,000 18,667 70,000 88,667 950,000
7.0 100,000 60,000 210,000 270,000 20,000 70,000 90,000 900,000
6.5 100,000 60,000 195,000 255,000 21,538 70,000 91,538 850,000

RoE 19% GoE ETB Cost 15% FA USD Cost 3% 15%

Variation -19% Variation -15% Variation -5% -15%

ETB Project Cost

Variation

Source of Funding
Contract Price Currency of Payment RoE Equiv Project Cost
GoE 30% FA 70%
ETB ETB
ETB 80% USD 20% ETB/USD USD ETB ETB/USD ToT ETB USD/ETB USD ToT
1,000,000 800,000 200,000 8.0 25,000 240,000 60,000 300,000 70,000 17,500 87,500 1,000,000
9.5 25,000 240,000 71,250 311,250 58,947 17,500 76,447 1,037,500
9.0 25,000 240,000 67,500 307,500 62,222 17,500 79,722 1,025,000
8.5 25,000 240,000 63,750 303,750 65,882 17,500 83,382 1,012,500
7.5 25,000 240,000 56,250 296,250 74,667 17,500 92,167 987,500
7.0 25,000 240,000 52,500 292,500 80,000 17,500 97,500 975,000
6.5 25,000 240,000 48,750 288,750 86,154 17,500 103,654 962,500
RoE 19% GoE ETB Cost 4% FA USD Cost 13% 4%
Variation -19% Variation -4% Variation -18% -4%

ETB Project Cost

Variation

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5 CONTRACT PRICE ADJUSTMENT (CPA)

FINANCIAL CONTROL
Although the fixing of the exchange rate ensures that the Contractor will receive exactly the same
amounts (in the respective currencies) as tendered for, it will provide no protection against
increases in the market prices of labour and materials.

In the section 0 example, the Contractor requested ETB 200 000 and ETB 800 000 in USD at an
exchange rate of 8/1. These amounts were based on the price of labour and materials at the time of
tender. If, however, the cost of the materials and labour increased the Contractor would still only
receive the originally tendered ETB 200 000 and would accordingly have to fund this increase from
his own "pocket".

Once again, because the Client initiates the development and selects the location, it is reasonable
that the Client should accept the risks associated with the development. Any other decision would
mean that the Client would "get something for nothing". Therefore, if the Contractor were asked to
accept the risk of increases in labour and materials, he would increase his tendered price to provide
cover for that risk.

These labour and material price variations can be positive or negative, resulting in an increase or
decrease in a contract's ultimate cost. Rather than making the contractor responsible for price
increases and running the risk of paying for events, which may never occur, it is normal41 for
Clients to accept the labour and material price variation risks.

By accepting the risk, the Client allows the contractor to calculate the true cost of the project and
know that they will receive exactly that amount in the currencies in which they calculated it at the
time of tender, duly adjusted for changes in cost. The time of tender is usually assumed to be the
date 28 days before the submission of tenders and the base prices upon which the tender was based
those ruling on the same date.

It is normal that contracts of reasonably short duration (say < one year) are not subject to CPA and
those of reasonably long duration (say > eighteen months) are subject to CPA. The decision lies
with the Client and should be determined in consideration of the complexity of the project and the
stability of prices. The greater the uncertainty the more important it is to include CPA. IDA
recommends that all contracts with a contract period greater than eighteen months should be
subject to CPA.

In summary, Contractors are compensated for the difference in the prices of labour and materials
between the time when they submit their tenders and purchase the materials. By doing this the basis
of the contractor's tender remains unchanged.

5.1 CALCULATION OF CPA

CPA is generally calculated by using one of the following two methods:

• The Proven Cost Method

• The Adjustment formula(e) Method

41
FIDIC IV Clause 70.1 - There shall be added to or deducted from the Contract Price such sums in respect
of rise or fall in the cost of labour and/or materials or any other matters affecting the cost of execution of the
works ...
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5.1.1 The Proven Cost Method

When this method is used the contractor is required, at tender stage, to list those elements of his

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costs which he requires to be subject to CPA. In support of this he includes a list of the actual costs
and suppliers of the various elements upon which the tender was based. When the Contractor
purchases these materials he presents proof of the actual price paid and is compensated for the
difference between the "Basic Cost" and the "Actual" invoiced cost of those same items. It is
therefore important to ensure that all purchases are from the suppliers identified at the time of the
tender. Any change in suppliers is likely to result in an invalid comparison of prices and
accordingly overcompensation.

A typical month's CPA calculation using the Proven Cost Method might be as follows:

Basic Current Difference

Description Unit Qty CPA
Price Price (This IPC)

Cement pk 200 55.00 61.00 6.00 1,200.00

Diesel l 5000 4.50 5.50 1.00 5,000.00

Total CPA for this Month (Birr) 6,200.00

Although this example's CPA has only been calculated in one currency i.e. ETB, it would not be
unusual for the calculations to be presented in the currencies of payment. In this case, the
Contractor would present CPA schedules in each currency of payment

It is important, when using this method, that the Client verify the authenticity and reliability of the
suppliers and prices quoted as the base prices. Any change in supplier is likely to result in different
base prices, which will complicate the calculation of CPA.

Although this is the method generally used on EU funded projects, it is not the preferred method as
it has the potential for abuse by:

• Under quoting base prices

• Over invoicing current prices
• Changing suppliers

5.1.2 The Adjustment formula(e) Method

This method uses a mathematical model42 of the construction contract to calculate the CPA. The
Client/Contractor develops the model by identifying the items of greatest expenditure and then
combining these with statistically derived indices, which indicate the changes in the cost of those
items. Once again this is best explained via an example:

In a typical road construction project the items of greatest expenditure might

account for the percentages of local and foreign currency costs as indicated in
the table below:

42
Model n. - a simplified mathematical description of a system or process, used to assist calculation and
predictions (Oxford English Dictionary)
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 Ethiopian Roads Authority

Local Currency Foreign Currency

Expenditure
%age %age

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Fixed 10 10
Local Labour (LL) 20 0
Foreign Labour (FL) 0 15
Cement (C) 12 0
Bituminous Products (B) 0 25
Fuel (F) 33 0
Plant & Equipment (P) 0 40
Crushed Stone (CS) 25 0
Steel (St) 0 10
Total 100 100

Although there will be expenditure on a number of additional items the percentages of these in
relation to the overall contract amount will be very small and any variations in the cost of these
items is unlikely to significantly effect the final contract amount. It is, therefore, not worthwhile
unnecessarily complicating the CPA formula(e) with insignificant items or items to which the
outcome is not sensitive. Examples of these other items are road marking paint, road signs, pre-cast
culverts, road barriers etc.

The first item in the expenditure schedule above is termed "Fixed", which is obviously not a
materials or materials associated expenditure. It is, however, normal to include an item such as this
to cover a small portion of the expenditure for which the Client does not assume the risk of price
variations. The reason for this is that the Client believes there is a certain percentage of the
expenditure over which the Contractor must exercise control. Examples of this might be the type of
vehicles, which the Contractor chooses to purchase for his staff, the insurer with whom he chooses
to place the works insurance, the bankers who issue the guarantees etc.

This fixed element of the expenditure will not be subject to increases. Further explanation of this is
given below.

The first step in the formulation of the mathematical model can now be taken as it is now possible
to state that the project's expenditure can be modelled as follows:

Expenditure = ƒETB(0.10 + 0.20LL + 0.12C + 0.33F + 0.25CS) + ƒUSD(0.10 + 0.15FL + 0.25B + 0.40P + 0.10St)

The formula as it is above models the expenditure of the project in terms of some unknown
mathematical functions. What is required is a formula, which will allow one to calculate a factor by
which the monies due to the Contractor may be adjusted to compensate for price increases. This is
done by introducing statistically determined indices43 for each of the expenditures and adjusting
those in proportion to the changes in the indices.

43
Index n. (pl. indexes or indices) measure of prices or wages compared with a previous month, year, etc.
(retail price index).
index-linked adj. related to the value of a price index.
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5.2 CPA INDICES
Indices are a measure of the prices of materials or groups of materials and their current values are
compared with their values at some time in the past. An index usually represents a "basket" of
similar materials or products e.g.

A fuel index may be made up from the prices of petrol, diesel, paraffin and lubricants
combined in proportion to the quantity of each used in that country or region. Similarly a
Steel index may comprise Rolled Steel Sections, Steel Plate, Cold Rolled Sections and
Reinforcing Steel similarly combined to produce a representative index.

Each of the expenditure components of the above model can be adjusted by the ratio of today's
value of the index divided by the base value of the index. As with the rates of exchange and base
prices the date and value of the base index is usually fixed on the date and value 28 days before the
submission of tenders e.g. the local labour component of the above expenditure model would be
adjusted as follows ... +0.20LLtoday/LLbase date.

Where:

LL is the local labour index and LLtoday and LLbase date are the current and base values of the
index respectively. The "today" or current index is usually designated by a subscript "n"
i.e. LLn. and the base index by a subscript "o" i.e. LLo.

By applying the indices to the ETB and USD elements of the above model, two formulae can be
generated and used to determine a factor by which the monies due to the Contractor may be
adjusted. These forms of the formulae are typical for FIDIC and ERA projects.

PnETB = 0.1 + 0.2 LLn/LLo + 0.12 Cn/Co + 0.33 Fn/Fo + 0.25 CSn/CSo

and

PnUSD = 0.1 + 0.15 FLn/FLo + 0.25 Bn/Bo + 0.4 Pn/Po + 0.1 Stn/Sto

Where:

PnETB and PnUSD are the adjustment factors to be applied to the amounts for payment of the
work carried out in month "n", in ETB and USD respectively.

The general form of these formulae is the following44:

44
See FIDIC IV Clause 70 and/or the WB, MDB and ERA standard bidding documents
Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-172
 Ethiopian Roads Authority

Pn = a + b Ln/Lo + c Cn/Co + d Fn/Fo + etc.

FINANCIAL CONTROL
Where:

Pn is a price adjustment factor to be applied to the amount for the payment of the work
carried out in the subject month

a is a constant, representing the nonadjustable portion in contractual payments i.e. it has no

representative or linked indices;

b, c, d, etc., are weightings or coefficients representing the estimated proportion of each

cost element (labour, materials, equipment usage, etc.) in the Works or sections thereof, net
of Provisional Sums.

Ln, Cn, Fn, etc., are the current cost indices or reference prices of the cost elements for
month “n”, applicable to each cost element; and

Lo, Co, Fo, etc., are the base cost indices or reference prices corresponding to the above
cost elements at the base date.

Prices and accordingly indices can increase and decrease and Pn can, therefore, be either greater
than or less than one. In summary:

Amount Due this Month = Value of Work Done this Month x Pn

and

The actual CPA due this month = Value of Work Done this month x (Pn-1)

5.2.1 Sources of Indices

Indices are usually produced by governmental departments of statistics to represent the costs of
those materials or groups of materials within the areas of influence of those departments. Indices
are therefore directly linked to the economy and accordingly the rate of inflation, political stability
and exchange rates, of that particular country or area of influence. Because indices are area specific
they can not be used as being representative of other areas i.e. a fuel index from Zimbabwe would,
today, reflect the hyper inflation currently being experienced in that country and would give no
indication of what was happening with the cost of fuel in Ethiopia.

If one were to use arbitrary indices, one would effectively "import" the inflation from that area into
the project and over or under compensate the Contractor for CPA. It is therefore essential that the
sources of indices coincide with the currencies of payment i.e. in the above example the Contractor
requested payment in ETB and USD. The source of the indices must therefore be Ethiopia and the
United States of America.

All well developed countries produce such indices, which are up to date and readily available,
usually via the internet. However, were these are not produced it becomes necessary to use proxy
indices, which more often than not, are actual material or product prices from reliable
manufacturers or producers e.g. a cement factory, government published minimum wage or fuel
price.

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 Ethiopian Roads Authority

Where even proxy indices are unavailable, it is possible to use indices from a source other than the
country of the currency of payment. However, in this case it is necessary to apply a correction
factor Zo/Z to the respective component factor in the formula.

FINANCIAL CONTROL
Where:

Zo is the number of units of the currency of the country of the index, equivalent to one unit
of the currency of payment on the date of the base index, and

Z is the corresponding number of such currency units on the date of the current index.

The following example may assist with a better understanding of this paragraph.

Imagine in the PnETB formula above that there was no cement index or even
producer in Ethiopia and the contractor chose to purchase his cement from Japan
in Yen and therefore use a Japanese cement index.

To make this acceptable it would be necessary to "correct" the Japanese index to

suit the contract and its payments in ETB and USD.

To do this one would require the rate of exchange between the Yen and ETB on
the base date (say) 1 Yen = ETB 0.0757 and today (say) 1 Yen = ETB 0.0800.

Tthe index would be corrected as follows

(CETBn/CETBo) = (CJAPn/CJAPo) x 0.0757/0.0800

Where:

CETB = The "corrected" Japanese index suitable for the ETB Pn formula

CJAP = The Japanese index

6 DOUBLE COMPENSATION
The fixing of the contract exchange rate and the compensation of the Contractor for price increases
via CPA, compliment each other and ensure that the Contractor is properly compensated for the
work undertaken.

However, great care must be taken if any changes are made to this model e.g. not fixing a contract
exchange rate or changing the contract currency to a foreign currency, as such changes combined
with the payment of CPA can result in the Contractor being either under or over paid.

The table below contains a number of different scenarios which demonstrate how the combination
of Contract Currency, Currencies of Payment and Exchange rates can result in very different
payments and that if this is combined with CPA the effects can be either increase or decreased. All
of the examples assume the same contract amount (ETB 1000 000) and same payment currency
ratio 20/80 ETB/USD).

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 Ethiopian Roads Authority

Currency
Contract Currencies of Amounts Exchange Amounts Currency
of
Value Payment Due Rate Receievd Received
Contract

FINANCIAL CONTROL
Correct
ETB 200,000.00 200,000.00 ETB
1,000,000.00 8/1
ETB/USD 800,000.00 100,000.00 USD

Under Paid
ETB 200,000.00 200,000.00 ETB
ETB 1,000,000.00 20/1
ETB/USD 800,000.00 40,000.00 USD

Over Paid
ETB 200,000.00 200,000.00 ETB
1,000,000.00 5/1
ETB/USD 800,000.00 160,000.00 USD

Correct
USD/ETB 25,000.00 200,000.00 ETB
125,000.00 8/1
USD 100,000.00 100,000.00 USD

Over Paid
USD/ETB 25,000.00 500,000.00 ETB
USD 125,000.00 20/1
USD 100,000.00 100,000.00 USD

Under Paid
USD/ETB 25,000.00 125,000.00 ETB
125,000.00 5/1
USD 100,000.00 100,000.00 USD

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Appendix A - Extracts from WB SBD for Procurement of Works

FINANCIAL CONTROL

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 Ethiopian Roads Authority

Extract from the Instructions to Bidders from the World Bank's standard bidding documents for
Procurement of Works (May 2002 revised March 2003)

FINANCIAL CONTROL
14. Bid Prices 14.1 Unless stated otherwise in the bidding documents, the Contract shall
be for the whole Works as described in Sub-Clause 1.1, based on the
unit rates and prices in the Bill of Quantities submitted by the bidder.

14.2 The bidder shall fill in rates and prices for all items of the Works
described in the Bill of Quantities. Items against which no rate or
price is entered by the bidder will not be paid for by the Employer
when executed and shall be deemed covered by the rates for other
items and prices in the Bill of Quantities.

14.3 All duties, taxes, and other levies payable by the Contractor under the
Contract, or for any other cause, as of the date 28 days prior to the
deadline for submission of bids, shall be included in the rates and
prices and the total Bid Price submitted by the bidder.

14.4 Unless otherwise provided in the Bidding Data and Conditions of

Particular Application, the rates and prices quoted by the bidder are
subject to adjustment during the performance of the Contract in
accordance with the provisions of Clause 70 of the Conditions of
Contract. The bidder shall furnish the indices and weightings for the
price adjustment formulae in the Appendix to Bid, and shall submit
with its bid such other supporting information as required under
Clause 70 of the Conditions of Contract. The Employer may require
the bidder to justify its proposed weightings.

15. Currencies of 15.1 The currency(s) of the bid shall follow Alternative A or B, as
Bid and Payment specified in the Bidding Data

Alternative A: 15.2 The unit rates and the prices shall be quoted by the bidder entirely in
Bidders quote the currency of the Employer’s country specified in the Bidding Data
entirely in local and Conditions of Particular Application. A bidder expecting to incur
currency expenditures in other currencies for inputs to the Works supplied
from outside the Employer’s country (referred to as “the foreign
currency requirements”) shall indicate in the Appendix to Bid the
percentage(s) of the Bid Price (excluding Provisional Sums) needed
by him for the payment of such foreign currency requirements,
limited to no more than three foreign currencies of any member
country of the Bank

15.3 The rates of exchange to be used by the bidder in arriving at the local
currency equivalent and the percentage(s) mentioned in Sub-Clause
15.2 above shall be specified by the bidder in the Appendix to Bid,
and shall apply for all payments under the Contract so that no
exchange risk will be borne by the successful bidder

15.4 Bidders shall indicate their expected foreign currency requirements in

the Appendix to Bid

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FINANCIAL CONTROL
15.5 Bidders may be required by the Employer to clarify their local and
foreign currency requirements, and to substantiate that the amounts
included in the unit rates and prices and shown in the Appendix to Bid
are reasonable and responsive to Sub-Clause 15.2, in which case a
detailed breakdown of its foreign currency requirements shall be
provided by the bidder.

15.6 During the progress of the Works, the foreign currency portions of the
outstanding balance of the Contract Price may be adjusted by
agreement between the Employer and the Contractor in order to
reflect any changes in foreign currency requirements for the Contract,
in accordance with Sub-Clause 72.4 of the Conditions of Particular
Application. Any such adjustment shall be effected by comparing the
percentages quoted in the bid with the amounts already used in the
Works and the Contractor’s future needs for imported items

Alternative B: 15.2 The unit rates and prices shall be quoted by the bidder separately in
Bidders quote in the following currencies:
local and foreign
currencies (a) for those inputs to the Works that the bidder expects to supply from
within the Employer’s country, in the currency of Employer’s country
specified in the Bidding Data and Conditions of Particular
Application; and

(b) for those inputs to the Works that the bidder expects to supply from
outside the Employer’s country (referred to as “the foreign currency
requirements”) in up to any three currencies of any member country
of the Bank.

15.3 Bidders shall indicate their expected foreign currency requirements in

the Appendix to Bid.

15.4 Bidders may be required by the Employer to clarify their local and
foreign currency requirements, and to substantiate that the amounts
included in the unit rates and prices and shown in the Appendix to Bid
are reasonable and responsive to Sub-Clause 15.2, in which case a
detailed breakdown of its foreign currency requirements shall be
provided by the bidder.

15.5 During the progress of the Works, the foreign currency portions of the
outstanding balance of the Contract Price may be adjusted by
agreement between the Employer and the Contractor in order to
reflect any changes in foreign currency requirements for the Contract,
in accordance with Sub-Clause 72.4 of the Conditions of Particular
Application. Any such adjustment shall be effected by comparing the
amounts quoted in the bid with the amounts already used in the
Works and the Contractor’s future needs for imported items.

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30. Conversion to

FINANCIAL CONTROL
Single Currency
for Comparison
of Bids

Option 1: To be 30.1 For comparison of bids, the Bid Price, corrected pursuant to Clause
used with Clause 29, shall first be broken down into the respective amounts payable in
15, Alternative A various currencies by using the exchange rates specified by the bidder
in accordance with Sub-Clause 15.3.

30.2 In the second step, the Employer will convert the amounts in various
currencies in which the Bid Price is payable (excluding Provisional
Sums but including Daywork where priced competitively) to either:

(a) the currency of the Employer’s country at the selling rates

established for similar transactions by the authority specified in
the Bidding Data on the date stipulated in the Bidding Data;

or

(b) a currency widely used in international trade, such as the U.S.

dollar, stipulated in the Bidding Data, at the selling rate of
exchange published in the international press as stipulated in
the Bidding Data on the date stipulated in the Bidding Data, for
the amounts payable in foreign currency; and, at the selling
exchange rate established for similar transactions by the same
authority specified in Paragraph 30.2 (a) above on the date
specified in the Bidding Data for the amount payable in the
currency of the Employer’s country.

Option 2: To be used
with Clause 15, 30.1 The Employer will convert the amounts in various currencies in
Alternative B which the Bid Price, corrected pursuant to Clause 29, is payable
(excluding Provisional Sums but including Daywork where priced
competitively) to either:
(a) the currency of the Employer’s country at the selling rates
established for similar transactions by the authority specified in
the Bidding Data on the date stipulated in the Bidding Data;

or

(b) a currency widely used in international trade, such as the U.S.

dollar, stipulated in the Bidding Data, at the selling rate of
exchange published in the international press as stipulated in the
Bidding Data on the date stipulated in the Bidding Data, for the
amounts payable in foreign currency; and, at the selling exchange
rate established for similar transactions by the same authority
specified in Paragraph 30.1 (a) above on the date specified in the
Bidding Data for the amount payable in the currency of the
Employer’s country.

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 Ethiopian Roads Authority

Appendix B - FIDIC IV Changes in Cost and Legislation

FINANCIAL CONTROL

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 Ethiopian Roads Authority

Extract from FIDIC IV conditions of contract, as used by World Bank in their standard bidding
documents for Procurement of Works (May 2002 revised March 2003)

FINANCIAL CONTROL
Changes in Cost and Legislation

Increase or 70.1 There shall be added to or deducted from the Contract Price such sums in
Decrease of Cost respect of rise or fall in the cost of labour and/or materials or any other matters
affecting the cost of the execution of the Works as may be determined in
accordance with Part II of these Conditions.

Subsequent 70.2 If, after the date 28 days prior to the latest date for submission of tenders for the
Legislation Contract there occur in the country in which the Works are being or are to be
executed changes to any National or State Statute, Ordinance, Decree or other
Law or any regulation or bye-law of any local or other duly constituted
authority, or the introduction of any such State Statute, Ordinance, Decree,
Law, regulation or bye-law which causes additional or reduced cost to the
Contractor, other than under Sub-Clause 70.1, in the execution of the Contract,
such additional or reduced cost shall, after due consultation with the Employer
and the Contractor, be determined by the Engineer and shall be added to or
deducted from the Contract Price-and the Engineer shall notify the Contractor
accordingly, with a copy to the Employer.

Currency and Rates of Exchange

Currency 71.1 If, after the date 28 days prior to the latest date for submission of tenders for the
Restrictions Contract, the Government or authorised agency of the Government of the
country in which the Works are being or are to be executed imposes currency
restrictions and/or transfer of currency restrictions in relation to the currency or
currencies in which the Contract Price is to be paid, the Employer shall
reimburse any loss or damage to the Contractor arising therefrom, without
prejudice to the right of the Contractor to exercise any other rights or remedies
to which he is entitled in such event.

Rates of 72.1 Where the Contract provides for payment in whole or in part to be made to the
Exchange Contractor in foreign currency or currencies, such payment shall not be subject
to variations in the rate or rates of exchange between such specified foreign
currency or currencies and the currency of the country in which the Works are
to be executed.

Currency 72.2 Where the Employer has required the Tender to be expressed in a single
Proportions currency but with payment to be made in more than one currency and the
Contractor has stated the proportions or amounts of other currency or currencies
in which he requires payment to be made, the rate or rates of exchange
applicable for calculating the payment of such proportions or amounts shall,
unless otherwise stated in Part II of these Conditions, be those prevailing, as
determined by the Central Bank of the country in which the Works are to be
executed, on the date 28 days prior to the latest date for the submission of
tenders for the Contract, as has been notified to the Contractor by the Employer
prior to the submission of tenders or as provided for in the Tender

Currencies of 72.3 Where the Contract provides for payment in more than one currency, the
Payment for proportions or amounts to be paid in foreign currencies in respect of Provisional
Provisional Sums Sums shall be determined in accordance with the principles set forth in Sub-
Clauses 72.1 and 72.2 as and when these sums are utilised in whole or in part in
accordance with the provisions of Clauses 58 and 59.

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 Ethiopian Roads Authority

Extract from the World Bank conditions of particular application in their standard bidding
documents for Procurement of Works (May 2002 revised March 2003)

FINANCIAL CONTROL
Changes in Cost and Legislation
Note: In Works contracts financed in whole or in part by
Clause 70 (WB-R) the Bank, it is mandatory to include price
adjustment provisions if the contracts extend
Changes in Cost (*) beyond 18 months (or even shorter periods in
and Legislation countries with high inflation rates). The method of
price adjustment prescribed (i.e., the use of a
formula) is for cases where official or proxy indices
for the fluctuation of the prices of constructional
inputs are available. Use of the “documentary
evidence” method of price adjustment is
discouraged and should be applied only in the rare
cases where there are no official indices available
and it is not possible to determine proxy indices.
Use of the “documentary evidence” method will
require different clauses, and care and diligence in
the checking of base price documents and actual
invoices submitted by the Contractor. If this
document is used for a fixed-price contract, only
Sub-Clause 70.8 should be retained (and
renumbered) with the omission of the last
sentence therein.

Delete Clause 70 in its entirety, and substitute:

The amounts payable to the Contractor, in various

currencies pursuant to Sub-Clause 60.1, shall be adjusted
Sub-Clause 70.1 (WB-R) in respect of the rise or fall in the cost of labor,
Contractor’s Equipment, Plant, materials, and other inputs
Price Adjustment
to the Works, by applying to such amounts the formulae
prescribed in this clause.
To the extent that full compensation for any rise or fall in costs
Sub-Clause 70.2 (WB-R)
to the Contractor is not covered by the provisions of this or other
Other Changes in clauses in the Contract, the unit rates and prices included in the
Cost Contract shall be deemed to include amounts to cover the
contingency of such other rise or fall of costs.

The adjustment to the Interim Payment Certificates in respect of

Sub-Clause 70.3 (WB-R)
changes in cost and legislation shall be determined from separate
Adjustment formulae for each of the currencies of payment45 and each of the
Formulae types of construction work to be performed and Plant to be
supplied.46 The formulae will be of the following general type:

45
In contracts involving various currencies, formulae, or families of formulae that derive price
adjustment factors for each currency are essential.
46
For complex Works involving several types of construction work with different inputs, a family of
formulae will be necessary. The various items of Daywork may also require different formulae, depending
on the nature and source of the inputs.
Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-182
 Ethiopian Roads Authority

Ln Mn En
pn = A + b +c +d + etc.
Lo Mo Eo

FINANCIAL CONTROL
Where:

pn is a price adjustment factor to be applied to the amount in

each specific currency for the payment of the work carried out in
the subject month, determined in accordance with Paragraph
60.1 (d), and with Paragraphs 60.1 (e) and (f), where such
variations and daywork are not otherwise subject to adjustment;

A is a constant, specified in the Appendix to Bid, representing

the nonadjustable portion in contractual payments;47

b, c, d, etc., are weightings or coefficients representing the

estimated proportion of each cost element (labor, materials,
equipment usage, etc.) in the Works or sections thereof, net of
Provisional Sums, as specified in the Appendix to Bid; the sum
of A, b, c, d, etc., shall be one;

Ln, Mn, En, etc., are the current cost indices or reference prices
of the cost elements in the specific currency of origin for month
“n,” determined pursuant to Sub-Clause 70.5, applicable to each
cost element; and

Lo, Mo, Eo, etc., are the base cost indices or reference prices
corresponding to the above cost elements at the date specified in
Sub-Clause 70.5.

If a price adjustment factor is applied to payments made in a

currency other than the currency of the source of the index for a
particular indexed input, a correction factor Zo/Zn will be
applied to the respective component factor of pn for the formula
of the relevant currency. Zo is the number of units of currency
of the country of the index, equivalent to one unit of the currency
of payment on the date of the base index, and Zn is the
corresponding number of such currency units on the date of the
current index.48

Sub-Clause 70.4 (WB-R) The sources of indices shall be those listed in the Appendix to
Bid, as approved by the Engineer. Indices shall be appropriate
Sources of for their purpose and shall relate to the Contractor’s proposed
Indices and source of supply of inputs on the basis of which his Contract
Weightings Price and expected foreign currency requirements shall have
been computed. As the proposed basis for price adjustment, the

47
Insert a figure for factor A only where there is a part of the Contractors’ expenditures that will not
be subject to fluctuation in cost (for example, stamp duties and other expenses incurred in formalizing the
Contract), or to compensate for the unreliability of some indices. A should normally not exceed 0.10.
48
The correct procedure for price adjustment is to use an index relating to the country of supply for a
particular input and to make payment in the currency of that country. However, if price adjustment payments
are made in a currency other than the currency of the source of the indexed input, distortions may occur due
to differential rates of price variation and periodic exchange rate changes. Hence, the need for a correction
factor.
Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-183
 Ethiopian Roads Authority

Contractor shall have submitted with his bid the tabulation of

Weightings and Source of Indices in the Appendix to Bid, which
shall be subject to approval by the Engineer.

FINANCIAL CONTROL
Sub-Clause 70.5 (WB-R) The base cost indices or prices shall be those prevailing on the
day 28 days prior to the latest date for submission of bids.
Base, Current, Current indices or prices shall be those prevailing on the day 28
and Provisional days prior to the last day of the period to which a particular
Indices Interim Payment Certificate is related. If at any time the current
indices are not available, provisional indices as determined by
the Engineer will be used, subject to subsequent correction of the
amounts paid to the Contractor when the current indices become
available.
If the Contractor fails to complete the Works within the time for
Sub-Clause 70.6 (WB-R)
completion prescribed under Clause 43, adjustment of prices
Adjustment after thereafter until the date of completion of the Works shall be
Completion made using either the indices or prices relating to the prescribed
time for completion, or the current indices or prices, whichever
is more favourable to the Employer, provided that if an extension
of time is granted pursuant to Clause 44, the above provision
shall apply only to adjustments made after the expiry of such
extension of time.

The weightings for each of the factors of cost given in the

Sub-Clause 70.7 (WB-R)
Appendix to Bid shall be adjusted if, in the opinion of the
Weightings Engineer, they have been rendered unreasonable, unbalanced, or
inapplicable as a result of varied or additional work already
executed or instructed under Clause 51 or for any other reason.

If, after the date 28 days prior to the latest date for submission of
Sub-Clause 70.8 (F-M)
bids for the Contract, there occur in the country in which the
Subsequent (*) Works are being or are to be executed changes to any National or
Legislation State Statute, Ordinance, Decree, or other Law or any regulation
or by-law of any local or other duly constituted authority, or the
introduction of any such State Statute, Ordinance, Decree, Law,
regulation, or by-law that causes additional or reduced cost to the
Contractor, other than under the preceding sub-clauses of this
clause, in the execution of the Contract, such additional or
reduced cost shall, after due consultation with the Employer and
the Contractor, be determined by the Engineer and shall be added
to or deducted from the Contract Price and the Engineer shall
notify the Contractor accordingly, with a copy to the Employer.
Notwithstanding the foregoing, such additional or reduced cost
shall not be separately paid or credited if the same shall already
have taken into account in the indexing of any inputs to the Price
Adjustment Formulae in accordance with the provisions of Sub-
Clauses 70.1 to 70.7.

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Currency and Rates of Exchange

FINANCIAL CONTROL
Delete the words from “prevailing, as determined by the Central
Sub-Clause 72.2 (WB-M)
Bank...” to the end of the sub-clause and substitute with “stated by
Currency the Contractor in the Appendix to Bid, included with its original
Proportions bid.”
Alternative A:
To be used with
Add to end of paragraph “All payments shall be made in the
Clause 60,
currency or currencies specified in the Appendix to Bid pursuant
Alternative A
to GCC 72.2. ”

Sub-Clause 72.2 (WB-M) Delete entirely and replace with “All payments shall be
made in the currency or currencies specified in the
Currency Appendix to Bid.
Proportions
Alternative B:
To be used with
Clause 60,
Alternative B.
The proportions of foreign and local currency payments of the
Sub-Clause 72.4 (WB-M)
balance of the Contract Price shall be amended by agreement
Substantial between the Employer and the Contractor to reflect any
Changes in substantial changes in the expected foreign and local currency
Currency requirements of the Contractor during the execution of the
Requirements Works, provided that
(a) the Contractor shall inform the Employer and the
Engineer whenever any such substantial change may
occur; or
(b) the Engineer may recommend a review of such expected
requirements if in his judgment there is evidence of a
change in the country of origin of materials, Plant, or
services to be provided under the Contract that should
result in any substantial change of such expected
requirements.
Sub-Clause 73.1 (WB-M) The prices bid by the Contractor shall include all taxes, duties,
Foreign Taxation (*) and other charges imposed outside the Employer’s country on
the production, manufacture, sale, and transport of the
Contractor’s Equipment, Plant, materials, and supplies to be
used on or furnished under the Contract, and on the services
performed under the Contract.
Sub-Clause 73.2 (WB-M) The prices bid by the Contractor shall include all customs duties,
Local Taxation (*) import duties, business taxes, and income and other taxes that
may be levied in accordance with the laws and regulations in
being on the date 28 days prior to the latest date for submission
of bids in the Employer’s country on the Contractor’s
Equipment, Plant, materials, and supplies (permanent,
temporary, and consumable) acquired for the purpose of the
Contract and on the services performed under the Contract.
Nothing in the Contract shall relieve the Contractor from his
responsibility to pay any tax that may be levied in the
Employer’s country on profits made by him in respect of the
Contract.

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The Contractor’s staff and labour will be liable to pay personal

Sub-Clause 73.3 (WB-R)
income taxes in the Employer’s country in respect of such of
their salaries and wages as are chargeable under the laws and

FINANCIAL CONTROL
Income Taxes on (*)
Staff regulations for the time being in force, and the Contractor shall
perform such duties in regard to such deductions thereof as may
be imposed on him by such laws and regulations.

Notwithstanding the provisions of Sub-Clause 73.2, Contractor’s

Sub-Clause 73.4 (WB-R)
Equipment, including essential spare parts therefor, imported by
Duties on (*) the Contractor for the sole purpose of executing the Contract
Contractor’s shall be temporarily exempt from the payment of import duties
Equipment49 and taxes upon initial importation, provided the Contractor shall
post with the customs authorities at the port of entry an
approved export bond or bank guarantee, valid until the time of
completion of the Contract plus six months, in an amount equal
to the full import duties and taxes that would be payable on the
assessed imported value of such Contractor’s Equipment and
spare parts, and callable in the event that the Contractor’s
Equipment is not exported from the Employer’s country on
completion of the Contract. A copy of the bond or bank
guarantee endorsed by the customs authorities shall be provided
by the Contractor to the Employer upon the importation of
individual items of Contractor’s Equipment and spare parts.
Upon export of individual items of Contractor’s Equipment or
spare parts, or upon completion of the Contract, the Contractor
shall prepare, for approval by the customs authorities, an
assessment of the residual value of the Contractor’s Equipment
and spare parts to be exported, based on the depreciation scale(s)
and other criteria used by the customs authorities for such
purposes under the provisions of the applicable law. Import
duties and taxes shall be due and payable to the customs
authorities by the Contractor on (a) the difference between the
initial imported value and the residual value of the Contractor’s
Equipment and spare parts to be exported; and (b) on the initial
imported value of that Contractor’s Equipment and spare parts
remaining in the Employer’s country after completion of the
Contract. Upon payment of such dues within 28 days of being
invoiced, the bond or bank guarantee shall be reduced or
released accordingly; otherwise the security shall be called in the
full amount remaining.

49
Sub-Clause 73.4 should apply where import duties and taxes are to be levied on the value of the
Contractor’s Equipment that depreciates during construction. Its use is recommended in situations where
domestic contractors who have paid full duties for the Contractor’s Equipment they use are to compete with
foreign contractors. If the Employer wishes to exempt the Contractor from import duties, the sub-clause can
be modified by deleting in the first sentence the words “temporarily” and “initial” and concluding the sub-
clause on the word “importation” of the same sentence.
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 Ethiopian Roads Authority

FINANCIAL CONTROL
INDEX
Accounting Financial
Monthly vs. Cumulative...................... 6-16 Advance Payment ............................... 6-23
Monthy vs Cumulative........................ 6-16 Budget Limitations.............................. 6-13
Addenda Cost Control ........................................ 6-13
vs. Variations ...................................... 6-31 CPA..................................................... 6-20
Advance Payment ................................... 6-23 Currencies of Contract ........................ 6-14
Repayment of ...................................... 6-24 Currencies of Payment ........................ 6-15
Repayment, Currencies of................... 6-25 Exchange Rate .................................... 6-15
Repayment, Method of........................ 6-24 Final Estimate ..................................... 6-30
Bill of Quantities ...................................... 6-18 Final Statement ................................... 6-30
Duties and Taxes ................................. 6-27 Interest on Late Payments ................... 6-26
Bond .......................................................... 6-4 Materials on Site ................................. 6-23
Conditional............................................ 6-4 Monitoring .......................................... 6-15
On Demand ........................................... 6-4 Monthly vs. Cumulative Control ........ 6-16
Surety .................................................... 6-4 Montioring, PE responsibility ............. 6-15
Unconditional........................................ 6-4 MOS.................................................... 6-23
Claims ..................................................... 6-26
Statement at Completion..................... 6-30
CPA on................................................ 6-26
Variations............................................ 6-14
Final Statement ................................... 6-30 Guarantee ................................................. 6-4
Completion
Advance Payment ................................. 6-4
Bonus for............................................. 6-26
Bid......................................................... 6-4
Early/Late............................................ 6-26
Conditional............................................ 6-4
Late ..................................................... 6-26
On Demand ........................................... 6-4
Liquidated Damages ........................... 6-26
Performance .......................................... 6-4
Statement at......................................... 6-30
Retention ............................................... 6-4
Contingency ............................................ 6-18
Contract Tender ................................................... 6-4
Currencies of ....................................... 6-14 Unconditional........................................ 6-4
Guideline
Exchange Rate..................................... 6-15
Contract Price Adjustment ...................... 6-20 Consultant's Invoice ............................ 6-27
Basic Cost ........................................... 6-20 Consultant's Invoice Format ....6-27, 6-114
Claims ................................................. 6-26 Financial Monitoring6-14, 6-15, 6-30, 6-
Cuurencies of ...................................... 6-21 76
Formula ............................................... 6-20 IPC Format............ 6-13, 6-17, 6-21, 6-102
Formula Method.................................. 6-20 Liquidated Damages and Penalties6-28, 6-
Proven Cost Method............................ 6-20 135
Proxy Indices....................................... 6-21 Securities......................................6-3, 6-32
Cost Control Interim Payment Certificate
Final Estimate ..................................... 6-30 Advance Payment ............................... 6-23
Final Statement ................................... 6-30 Claims ................................................. 6-26
Monitoring y PE.................................. 6-30 Consultant's ......................................... 6-27
Currencies Contractor's ......................................... 6-13
Contract ,of.......................................... 6-14 Duties and Taxes................................. 6-27
Payment, of ......................................... 6-15 Errors, correction of ............................ 6-17
Dayworks................................................. 6-19 Final Estimate ..................................... 6-30
Defects Liability Certificate Final Statement ................................... 6-30
Final Statement ................................... 6-30 Format ................................................. 6-17
FIDIC IV...................................... See App 3-5 Interest on Late Payments ................... 6-26
Final Contract Price................................. 6-18 Liquidated Damages ........................... 6-27
Final Statement ....................................... 6-30 Measurement of Works....................... 6-29
Defects Liability Certificate................ 6-30 Retention ............................................. 6-22
Draft .................................................... 6-31 Variations vs. Addenda ....................... 6-31
Invoice
Consultant's ......................................... 6-27

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 Ethiopian Roads Authority

Late Payments Advance Payment ..........................6-4, 6-6

Interest on............................................ 6-26 Bid..................................................6-4, 6-5
Liquidated Damages ......................6-26, 6-27 Bond...................................................... 6-3
Calculation of...................................... 6-28 Definition .............................................. 6-3
Deduction, by whom ........................... 6-29 Forms of ................. 6-4, 6-5, 6-6, 6-7, 6-53
Payment,by whom............................... 6-29 Guarantee .............................................. 6-3
Period of.............................................. 6-28 Insurance ............................................... 6-3
Planning and Procurement .................. 6-28 Issuers of ............................................... 6-5
Taking Over Certificate....................... 6-28 Performance ...................................6-4, 6-6
Materials on Site...................................... 6-23 Retention ........................................6-4, 6-7
Payment, percentage of ....................... 6-23 Surety Bond .......................................... 6-4
Measurement Tender ............................................6-4, 6-5
Final Estimate ..................................... 6-30 Statement at Completion......................... 6-30
Methods of .......................................... 6-29 Taking Over Certificate
Payment Clauses ......................6-29, 6-155 Liquidated Damages ........................... 6-28
Records of ........................................... 6-29 Variations ....................................... 6-14, 6-18
Re-measureable contracts.................... 6-30 Additional Works................................ 6-14
Specification........................................ 6-29 Approval of ......................................... 6-14
MOS ........................................................ 6-23 New Works ......................................... 6-14
Penalties.................................................. 6-27 Variation Order ................................... 6-14
Project vs. Addenda......................................... 6-31
Cost Control ........................................ 6-13 Work Done .............................................. 6-18
Retention ................................................. 6-22 Works
Measurement of .................................. 6-29
Securities................................................... 6-3

Contract Administration Manual Draft April 2007 Volume 1 Section 6 6-188