Author: Greville Edwards

A Contract within a Contract,
– hidden in plain sight 

by John Farage O’Brien | 11 Nov 2025

Some years ago, I had a contractor client that fell into dispute on a PW-CF1 Public Works Contract over a significant change order in the region of €450k involving heavy excavators, rock-breakers and 40t dump-trucks. The contractor owned his own plant outright, which was the lion’s share of the value of the change order and in Part 2D of the Tender & Schedule, the contractor tendered (negative) -50% as his tendered % deduction to the cost of plant giving him the comparative tender advantage over his rivals, winning him the contract. 

The Employers Representative (“ER”) had determined evaluation under 10.6.4 and had conclusively directed that the plant element of the change order was valued at 50% of the cost which amounted to the square root of nothing! Given the windfall to the Employer, the ER was shrugging his shoulders saying “the contract is the contract.” I directly asked the contractor’s estimator why he had put a deduction 50% against the cost of plant, and he quietly replied: “I thought they only asked me to tender for an estimated overrun of €40,000 worth of plant.” 

On further enquiry, the young estimator referred me to Appendix 5 of the Instructions to Tenderers (“ITT”). Like a bolt of lightning, on review of Appendix 5 of the ITT, it became clear what these Schedule 2D tendered rates were, and what they were intended to do! 

For a number of years since, by pointing out the undeniable logic of what that young estimator identified to me, I have successfully pursued and recovered claims for contractors, unfettered by the Schedule 2D rates, against ER’s who have not understood the intended purpose and limitations of those rates. 

I decided to publish this paper after being quite shocked as an Irish taxpayer at a recent seminar attended by a ballroom full of public employers, at which the speakers were setting out their firm views on what should or should not be considered as abnormally low tenders, when contractors tender a Schedule 2D “zero” rate. Because of their lack of understanding, and unfortunately also the lack of any authority on the point, I thought it might be helpful to set out my views here.

First, it is important to understand how Schedule 2D rates are generated and what they are for. The story begins with Appendix 5 of the ITT. 

ITT, Appendix 5: 

A typical Appendix 5 of the ITT is set out below. In essence, it informs the Contactor that, in addition to the Tendered Contract Sum, the price it includes in its tender will be assessed on certain assumptions in relation to overruns on labour, plant, materials and time, which it also must price.  

In the example above, the assumptions for the project, estimatedby the Employer’s Design Team, are an overrun on the costs of labour of €280,000, the same for materials, €140,000 for plant and 40 Site Working days of time of expected delay costs. 

The Contractor prepares its price for the overruns on those assumptions, which is then added to the “Tendered Contract Sum”. This forms the “Total Comparative Cost of Tender”, which figure the Employer compares with the other tenderers.

What’s critical are the assumptions upon which the Contractor basis its tendered rates and the specific reference to Schedule, part 2D of the Contract, where it’s clear that the Contractor’s tendered rates are used to evaluate overruns up to those estimated limits.

In contractual law terms, the ITT, and the assumptions included in it, are the “invitation to treat” upon which the Contractor is being asked to make its “offer”. 

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Tender & Schedule Part 2D
Contract conditions Clause 10.6.4 and 10.7.1

The Tender & Schedule that the Contractor completes is, for the purposes of contract law, the “offer” made to the public authority, which it may accept by way of the Letter of Acceptance. 

The Contractor inserts its “Tendered Contract Sum” in the first page of the Tender and Schedule. It then inserts its tendered rates for the estimated overruns for labour, plant, materials and time (as communicated to it in Appendix 5 of the ITT) in Part 2 D of the Schedule. 

In the PWC MF1.4 Letter of Acceptance, the Tendered Contract Sum becomes the “Contract Sum” when accepted by the Employer, and the Schedule 2D tendered rates become accepted when “appended” to the Letter of Acceptance. 

In this way, there is a direct link between Appendix 5 of the ITT and Part 2D of the Schedule. In legal parlance, the assumptions in Appendix 5 of the ITT are carried through to the contract by reference and/or implication because: 

• the ITT specifically references Part 2D

• the assumptions represented in the ITT inform how the tendered percentages and rates are derived

• the ITT sets the evaluation basis upon which the rates were competitively tendered, and,

• the ITT provides the only objective reference point for understanding the percentages’ and rates intended application 

The relevant Contract Conditions (clauses 10.6.4 and 10.7.1) also assist in identifying a direct link between Appendix 5 of the ITT and the contract because both clauses make specific, and very intentional multiple references to the Contractor’s “tendered” rates. 

This language expressly incorporates what has been “tendered”, which, logically, must include the assumptions that the Contractor has tendered upon as identified by Appendix 5 of the ITT.  

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So, what’s the misunderstanding? 

The issue is that certain Employers and Employer’s Representatives fail to take the above into account and decide (either wilfully or out of ignorance) that the rates included in Schedule 2D apply beyond the assumptions the Contractor has been asked to price by Appendix 5 of the ITT i.e. that the rates included in Schedule 2D apply ad infinitum. They also argue that Appendix 5 of the ITT is for “tender comparison purposes” only, so is really of no relevance to the Contractor nor indeed do they form part of the Contract. 

Taking the last point first, which is the one usually made. If Appendix 5 of the ITT was of no relevance to the Contractor, then why is it part of the ITT? Why does it identify assumed overruns? Why are these being communicated to the Contractor? And, why is the Contractor being told that its price (and the rates its includes in Schedule 2D) will be assessed on that basis? Appendix 5 is there for a reason – it includes critical information on a contract within a contract where the Contractor is invited to competitively tender rates for a quantified overrun (an overrun for which he otherwise would’ve been entitled to damages) and this is part of the “invitation to treat” that the Contractor prepares its “offer” in response to. 

Regarding the Schedule 2D rates applying ad infinitum, this could never be the intention of the parties: 

• It would allow the Employer turn the contract into a “time and materials” contract if very large variations (beyond the assumptions for overruns in ITT Appendix 5) were directed pursuant to clause 10.6.4.

• It would result in the Employer being unjustly enriched: the Employer could wilfully breach the contract causing delay and contractor would not be able to recover its actual losses – this runs contrary to the legal doctrine that a party cannot benefit from its own breach of contract. 

• In relation to the cost of labour, it could result in payments to the Contractor for labour being below the relevant SEO rates but at the same time require the Contractor to pay those rates to its operatives – in essence, the public authority would be breaching employment legislation on an on-going basis – this could not be the intention of any public contract. 

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What happens when the assumptions expire? 

This is where the “rubber meets the tarmac” and where the Contract terms do not readily assist. To give context we must look at the philosophical approach that was taken to the PWC, which was to take out all uncertainty in public tendering. This is most evident in prohibiting provisional sums in preparation of bills of quantities, but it is equally evident with this issue. 

It comes back to the Employer’s Design Teams’ “professional judgment” as to the assumptions included in Appendix 5 of the ITT. It is clearly open to the Design Team to include whatever assumptions it wants in that document – including an ad finitum assumption! It clearly cannot do this and must use its professional judgment to assess what the overruns on the project might be, (because if these overruns are genuinely too large, than the Sponsoring Agent is de facto not ready to go to tender). However, the Design Team gets it wrong all the time, and what are we left with then?

Luckily, we are left with the law. As per contract law “101”, if the Employer has breached the contract (e.g. delayed beyond the assumption included and priced for in the Contract) and there is no contractual mechanism to cater for that occurrence (the assumption limits have expired) the contractor will be due the damages that naturally flow from the Employer’s breach. This would include all damages that the contractor would suffer (subject to remoteness) including its costs, losses and damages, whatever they may be (including prolongation cost, overhead and profit).     

The above analysis restores logical, practical and legal sense to matters, and it amazes me how Employer’s / ERs look to ignore this, in order to hold Contractor’s to ransom and unjustly enrich themselves by incorrectly and inappropriately applying Schedule 2D rates beyond what they should. 

If a public procurement body were to exclude a tender that had a €Zero Schedule 2D daily delay rate, on the grounds that it considered it to be abnormally low (as suggested by the presenters to the ballroom of public employers), then in my view that might indeed be cause for a challenge. 

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When there is a dispute on the applicability of the rates…

When the Employer sticks to the position that the Schedule 2D rates apply ad finitum, we again revert to contract law “101”. 

If the matter was litigated, courts would invariably look to the ITT as part of the “factual matrix” to interpret ambiguous or unclear terms in line with the juris prudence for interpretation of contracts – they would do so because Appendix 5 of the ITT underpins the rates that the Contractor inserts in its tender and gives construction to the applicability of those tendered rates and the relevant contract terms. 

In addition, the tendered rates and sub-clauses 10.6.4,10.7.1 and 10.7.4 would also be interpreted as exclusion clauses (that is what they are: designed to deny the contractor what would otherwise be a common law rights for breach of contract), which means they would be narrowly interpreted against those who were trying to enforce them.  

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What to do?

In my experience, when faced with the above, sensible public authorities will recognise their risk and with the help of equally sensible independent third-party mediators or conciliators, will generally settle with Contractors on a basis more aligned with their proper rights and entitlements. 

What we really need though, as I set out in my previous article “The Perfect Storm” is the re-introduction of the case stated procedure as per the 1954 Arbitration Act, so that certainty on the above and similar issues can be provided by way of case precedent. Otherwise, many will continue to operate in the dark and will not receive their proper rights and entitlements under contract – the last thing this does is serve any type of justice. It must be changed if we are to evolve sensibly as an industry.  

John FFF O’Brien | 11 November 2025 

FSCSI FRICS FCIArb MCInstCES

A paper presented to the Dispute Resolution Board Federation webinar 4th March 2021
By NG Bunni

Dispute Adjudication Boards were developed by FIDIC following the successful American experience of Dispute Review Boards and first appeared in the 1995 Orange Book for Design- Build and Turnkey projects. The Board’s function of “Review” was changed to “Adjudication” in order to simulate the Engineer’s Determination or Decision under the earlier editions of the FIDIC Forms.

Following the successful use of Dispute Adjudication Boards, which I will now refer to as “DABs”, in the Orange Book, the function of a DAB was incorporated into the 1999 Red, Yellow and Silver Forms of Contract. However, in the Red Book, a Standing DAB was provided for, which related to a DAB being appointed for the duration of the entire project, whereas, in the Yellow and Silver Books, an adhoc DAB was provided for, which related to a DAB being appointed only after a dispute had arisen. The idea of an adhoc DAB was proven to be a mistake and was subsequently abandoned in the 2017 editions of the FIDIC Forms.

In Ireland, the first Contract using the 1999 FIDIC Yellow Book and, thus a DAB, was the Dublin Light Rail Project, for short it is referred to as the “Luas”. Although this Contract used the Yellow Book, which provided for an adhoc DAB, the Employer’s lawyers had identified the mistake of using an adhoc DAB and instead, a Standing DAB was incorporated in this Project. The Project was designed as a fast public transport system for parts of the south of Dublin City and construction on the Project commenced at the end of 2001, with the Works being completed in September 2004. It had nine main Contractors and the Employer was known as the Railway Procurement Agency, the “RPA”. I was appointed as a sole Standing DAB for the duration of the Project. By the time it was completed, most of the problems faced were solved around the discussion table and only two disputes were referred to a full adjudication process. Arbitration was therefore not required to resolve any of the disputes that arose. This Project was taken to a second stage in February 2007, where the Rail Network was extended to part of the City Centre. The Employer continued to be the RPA and this second stage had only five main Contractors. Again, the same Form of the FIDIC Contract was used and I was, once again, appointed as a sole Standing DAB. The second stage of this Project was completed in March 2011.

The combined cost of the two stages of this Project was over €700 million and, once again, all of the problems that arose were resolved through discussions and no arbitration was needed or instigated.

During 2006/2007, the Irish Government had formed a Committee to adopt the use of the FIDIC Contracts in Ireland for construction projects. This was partly as a result of the success of avoiding arbitration in the Luas Project. We were just nearing the end of our work when the Irish Construction Industry was dealt a significant blow. The Committee was disbanded and we were informed that the relevant authorities had decided to use a new form of contract, which was later named as the Public Works Contract.

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On an article by Mr. John Farage O’Brien published in Construction News, February 2021.

I was very fortunate that this article was published whilst preparing my presentation for this webinar. Mr. O’Brien is a prominent construction consultant in Ireland and, in his article, he lucidly explains the adverse effects of the PWCs on the Irish Construction Contracts scene, which, combined with two other events, he said created “the perfect storm”.

The first version of the PWC was introduced in 2007 to replace the GDLA and the IEI Forms of Contract when, as Mr. O’Brien articulates, driven by a cost-saving effort, a ‘politician’s brief’ was developed. However, Mr. O’Brien explains that what many politicians at the time did not understand was that construction contracts are all about risk allocation and that the risk ought to remain with the party who is best placed to manage it in order to achieve commercial value. Failure to allocate a risk correctly can result in huge expense. Unfortunately, this absence of understanding of the nuances of risk allocation went unchecked and the PWC was introduced for all public works projects.

Mr. O’Brien continued his explanation that the objective of the PWC was to ensure fixed lump sum contracts, which would provide cost certainty. Although the price of the tenders under this “new” form of contract were expected to be slightly higher than those tendered under the previous government contract forms, the objective of the PWC was that there would be no other costs attached to any project.

Mr. O’Brien further explained that whilst the PWC’s fixed lump sum contract prices seemed great in theory, the politicians who initiated the drafting process did not fully grasp the mechanics of the Irish construction industry and that there were some very real problems with the PWCs. The first problem, as Mr. O’Brien correctly pointed out, was that these forms of contract were untried and untested, as nowhere in the World used forms such as these. Whereas the GDLA and IEI Forms of Contract were based upon their UK counterparts, meaning that parties to projects under these Forms of Contract could see that such contract worked in the UK, the entirely new PWC had no precedent from which parties could derive any interpretive certainty and this problem remains today. I would point out that this problem has been exasperated by the fact that the PWC has been amended no less than fourteen times since its inception.

The second event that Mr. O’Brien refers to is the global financial crisis of 2008. This stunted any meaningful assessment of the PWC so it was impossible to establish whether or not it actually worked.

The third event that Mr. O’Brien refers to as part of his description of the “storm” is the effect of the introduction of the 2010 Arbitration Act, which, he says, made the situation even worse, due to the fact that the case-stated procedure in 1954 Arbitration Act that applied then was abolished and therefore no one could obtain judicial interpretation of the individual clauses in the PWC. Mr. O’Brien insinuates that this may be due to the drafters of this Act not giving full consideration to the use of the PWCs, where there was no authority to assist in the interpretation of the clauses therein. The 2010 Act effectively erased any chance that the construction industry had of creating a case precedent for the PWC.

The final point that I would like to take from Mr. O’Brien’s article is his reference to the revisions to the PWCs, of which there were many and some of which had extremely problematic effects. He gave the example of the amendment in version 1.4 on 28th July 2011. An amendment therein stipulated that each party would pay their own costs in arbitration,regardless of which party effectively “wins”. This was enabled by Section 21 of the 2010

Arbitration Act, with the removal of the prohibition on contract terms which makes parties liable for their own costs in any event. This amendment is considered to be hugely inappropriate and inequitable to be included in a form of contract drafted by the Government, particularly as it directly contrasts the Irish Superior Court rules where costs follow the event.

Getting back to the main theme of my presentation, the dispute resolution mechanism under the PWC when it was first introduced was conciliation, followed by arbitration. With the introduction of the Construction Contracts Act, 2013, which came into force in July 2016, Statutory Adjudication became another step that had to be included in the PWC. Despite there being over fourteen changes made to the PWCs, no dispute avoidance mechanism was included alongside the dispute resolution mechanism. As such, dispute avoidance, which is part of the DAB procedure, was no longer in use in Ireland since the introduction of the PWCs in 2007.

It was in 2015 that a third stage of the Luas Project, the Luas Cross City Project that was extending the Luas to the northern part of the City, commenced and had to use the PWC. The main Contractor in this stage of the Project was one of the five main Contractors in the second stage of the Luas Project and, although the Employer had changed its title, it was effectively the same Employer as in the first and second stages of the Project. Having been aware of the advantages of dispute avoidance that were implemented through the DAB procedure in both stages of this Project, they wished to have a similar procedure in their contract superimposed by the PWC. Having been the sole Standing DAB on the first and second stages of the Project, I was invited to participate in a discussion of how this might be done. This resulted in the creation of the position of the “Standing Conciliator”, and a set of rules had to be drafted for use in this position. The Project was substantially completed in November 2017 and, although it was a very complex Project with many difficulties, as it involved many civil engineering works in the middle of a busy city centre, all of the problems were resolved using the mechanism of the Standing Conciliator and without any reference to arbitration.

Due to the success of the idea of the Standing Conciliator, the drafters of PWC picked up this idea and attempted to implement the principle of the Standing Conciliator in a “Project Board”, but, unfortunately, they failed to implement the essential parts of the rules that were developed for the Standing Conciliator under the third stage of the Luas Project. The main problem was that the dispute avoidance mechanism must begin from the very start of the events that lead to a dispute.

SHOW SLIDE “MANIFESTATION OF A DISPUTE” AND EXPLAIN.

In implementing the idea of the Standing Conciliator and the Project Board, the drafters of the PWC issued Guidance Notes to accompany the PWC. The present Guidance Note 3.1.1, Dispute Resolution, which, although expressing the correct sentiments of dispute avoidance, failed to show a proper procedure for achieving successful avoidance.

SHOW GUIDANCE NOTES AND EXPLAIN WHERE THEY GO WRONG.

I would like now to go to Clause 13 of the PWC and explain the problem with respect to the manifestation of a dispute in that Clause. In Sub-Clauses 13.1.1 and 13.1.2, it is stated that the dispute management procedure for resolution of disputes could only arise from Sub-Clauses 10.5.4 and 10.5.5 of the Contract. Therefore, dispute avoidance could only be used after the Employer’s Representative had given a determination and a dispute is in the making. Dispute avoidance is therefore too late. There are many other problems with Clause 13, but, unfortunately, I do not have the time to deal with those now.

What about the future? What needs to be done now is to either properly adopt the mechanism of the Standing Conciliator; or else properly incorporate that mechanism into Contractual Adjudication. Of course, there is no problem in having Contractual Adjudication alongside Statutory Adjudication, but I will leave those ideas with Gerard Monaghan.

On a final note, I believe that, at present, a firm of consultants, Indecon, has been appointed by the Office of Government Procurement to investigate the operation of the roles of the Standing Conciliator and the Project Board, with the view to updating national policy in dispute avoidance and I wish them luck with their work.

I now hand you back over to Gerard.