Project Contract Structure
Last updated: 2022-03-07
Which project contract structure shall we use for our project? This is
one of the most fundamental decisions we have to take in project
definition phase. In order to provide you some orientation, we describe
the basic contract structures available, and their most important
advantages and disadvantages.
When do we need a contract? Organization A (or party A) wants to
undertake a project and it is clear that within A there are not all
necessary resources available. Then, A needs support or contributions
from one or more other organizations B, C, etc. (parties B, C, etc.), to
be able to carry out that project. Usually, these different parties are
different legal entities, that is different companies. Then, we need contracts between the different involved parties to determine and define the rights and obligations of each party.
On this page, we give short explanations of contract structures we often see:
- Bi-lateral contracts
- String contracts
- Parallel contracts
- Tri-lateral contracts
- Project consortium contracts
(1) Bi-lateral Contracts
A bi-lateral contract is the simplest project contract structure. There is one party A asking for support by another party B.
Bi-lateral Contract Structure
The scope of support party B has to deliver can be just about
everything, from a part of a machine to a small sub-project or even the
whole project, depending on the sets of skills and capabilities of
parties A and B. All terms and conditions of a bi-lateral contract are
under control of the two parties.
(2) String Contracts
A string contract represents a string of bi-lateral contracts between three or more parties.
String Contract Structure
A contracts B, B sub-contracts C, maybe C sub-sub-contracts … In a
string contract structure, the terms and conditions between two parties
of the string (e.g. between B and C) are not necessarily under the
control of any of the other string parties (e.g. A).
(3) Parallel Contracts
If party A wants to be in full control of all contracts it chooses a parallel contract structure.
Parallel Contract Structure
A necessary precondition for successful contract management is: Party A
needs to have all resources and skill sets of the required project
management and coordination, including contract management.
(4) Tri-lateral Contracts
For large and complex projects it might be appropriate to setup a tri-lateral project contract structure
in which party A "delegates" certain tasks and / or decisions to a
third party C, while party B remains the main supplier of the project
results. Party C takes over partial responsibilities, e.g. in project
coordination, verification of design and engineering results, or design
Tri-lateral Contract Structure
Most of these trilateral or triangular contracts are based on templates provided by the International Federation of Consulting Engineers, FIDIC (which actually stands for the French name of that organization, Fédération Internationale Des Ingénieurs-Conseils). In FIDIC based contracts, we call party A the Employer, party B the Contractor, and party C the Consulting Engineer.
There are different types of templates, including
- FIDIC Conditions of Contract for Construction (New Red Book)
- FIDIC Conditions of Contract for Plant and Design/Build (New Yellow Book)
- FIDIC Conditions of Contract for EPC Turnkey Projects (Silver Book)
- FIDIC Short Form of Contract (Green Book)
You find a wealth of information about FIDIC on their site www.fidic.org, especially in their bookstore.
biggest advantages of the triangular contract structure are their
relevance for larger projects and the possibility of delegating certain
project management and other responsibilities to a third party. However,
a disadvantage is the behavior of some engineers or consultants who are
scared, not able or not willing to make clear decisions - e.g. in
case of design approvals - and thus, delay the work progress in their
(5) Project Consortium Contracts
For very complex projects which need the contribution of different
large companies these companies can setup a consortium. In this project
contract structure, there is one contract that binds the consortium
partners, e.g. companies B, C, D and E, together into the consortium,
and another contract between the project owner, party A, and the
If there is one consortium partner, company B, who
fully represents the whole consortium, we call it a closed consortium.
In such a case companies C, D and E cannot directly deal with the
project owner, party A, except through the consortium leader, company B.
In some very large and complex projects, all the consortium partner
companies want to reserve the right for dealing with the project owner,
party A, directly to a certain extent: e.g. design approvals, site
access rights, invoicing, etc. Usually, this weakens the position of the
The project contract structure should always reflect the working
relationships of all involved parties, as closely as possible. It should
also reflect the chain of value creation of the project, as detailed as
necessary. In order to make contract management, change management and claim management as well as project claim analysis easier, the contract structure should be as simple as possible.
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