Modification to the FIDIC EPC/Turnkey

Contract to allow for geotechnical risk

sharing

Sean Renecke, Project Manager, GIBB, South Africa

Presentation Overview

Background and Information on the Kabompo Gorge Hydropower Project

Reasons for selection of the Contract form

The Risk Sharing Mechanism selected

Results from the Risk Sharing Mechanism

Observations

Conclusion

Presentation Overview

Background to the Project

In 2008, the Copperbelt Energy Corporation Plc

(CEC), conducted a feasibility study for the Project

Amanzi Consultants JV, contracted to compile the

Feasibility study, GIBB – the lead consultant

Expression of interest

EOI called for in October 2010

17 submissions were received

5 were invited to tender

Amanzi JV - Contracted to complete the Technical

Adjudication of the bids by 6 June 2012 and

currently assisting with negotiations

Description of the Project and the current

status

• Situated in the North-Western Province of the Republic of Zambia

• Kabompo River flows entirely within Zambia

Location

• 40MW Hydro Project, comprising a 50 m high dam, significant underground works and E&M Equipment

Description

• The scheme is being developed under a concession agreement

Contractual

• Preferred EPC Contractor identified –negotiations in progress

Status

Reasons for selecting the FIDIC Contract

as the preferred form of Contract

Two options were considered

CEC has experience with the FIDIC contracts and it has been used extensively in the region

The FIDIC and NEC3 suites of contracts were both considered

CEC does not have its own standard form of Contract

FIDIC Conditions

of Contract for

Construction

(Red Book)

1 2

The FIDIC Conditions

of Contract for EPC /

Turnkey Projects

(Silver Book)

Selection of the FIDIC EPC

/Turnkey Form of Contract

High degree of certainty of the Contract price

Silver book requires less input from the Employer than the Red Book

Significant interest in the Project from potential Contractors

Silver Book allows for supervision by the Employer’s Personnel so that the quality of the work can be monitored

Geological and

Hydrology risk

Lender

Employer Contractor

The Risk Sharing Mechanism selected

The risk of highly inflated prices or of not receiving any responses to a tender enquiry was recognized

The Red Book and other similar contracts do make provision for varied ground conditions by defining a range of excavation and rock support classes

The bidder is required to price both the time related charges and quantity proportional costs for each class

A variation of this mechanism, based on an accepted geological classification system, could be used and incorporated into the Silver book

Application of the Risk Sharing Mechanism The base case would provided an indication as to cost and time variation for the various rock quality grades and excavation depths

The actual geological conditions will be assessed, with the classification to be agreed between the Contractor and Employer

If actual geology meets the base case , there is no variation in time and cost

When there is a difference between the base case and the actual conditions, this difference is used to determine the percentage change in contract price and duration

This allows for both a positive or negative adjustment in the contract price and duration

The Contract also allows for the maximum Re-measurable price adjustment percentage to be agreed on upfront

Tunnel Base Case

Defined the various rock quality grades assumed for various sections of the tunnel

The rock quality grades were rated from A to E, where A is good and E is extremely poor, based on the Rock Tunnel Quality Index (Q)

The estimated percentage of excavation within each rock quality grade was then

determined

The Contractors had to allocate both time related and non-time related costs to the

various rock quality grades specified in the base case

Dam Excavation Base Case

It was based on foundation excavation levels recommended in the feasibility report, for a

specific Dam type and alignment

Based on an evaluation of borehole core logs obtained during geotechnical

investigations - feasibility study

The Alternative Re-measurable price was based on the Excavation base case and

could be adjusted

The Contractors could not increase the re-measurable price where actual conditions at the Site are caused by the activities of the

Contractor

This Table shows the foundation excavation

variances

Variance in Actual Depth of Dam

Foundation Excavation compared to

Excavation Base Case

(Metre)

+ 2

+ 1

- 1

- 2

- 3 to - 5

- 5 to - 10

- 10 to - 15

> - 15

Cost Variation for the Tunnel Base case,

based on the information supplied

Slightly better thanbase case

Base case Slightly worse thanbase case

Significantly worsethan base case

Very poor toextremely poor

throughout

Extremely poorthroughout

Co

st V

aria

nce

(U

S D

olla

rs)

Ground Conditions Encountered Throughout the Scheme

Contractor B

Contractor A

moderate

There is a chance that this may be

the case

high

More than an even chance of

occurring

moderate

There is a chance that this may be

the case

low

Small likelihood but this could

happen

very low

Not expected to happen

extremely

low

Virtually impossible

Likelihood of

Occurrence

moderate

There is a chance that this may be

the case

high

More than an even chance of

occurring

moderate

There is a chance that this may be

the case

low

Small likelihood but this could

happen

very low

Not expected to happen

extremely

low

Virtually impossible

Likelihood of

Occurrence

Results of the Dam Excavation Base

Case based on information supplied by

the Contractors

Observations from Risk Sharing • Risk sharing proposed a good balance between the

EPC/Turnkey contract and a suitable risk sharing mechanism

• Obtaining two prices the Employer could quantify the risk premium

Positives

• Contractors application of the risk sharing mechanism

Interpretation by

Contractors

• The difference between the All Risk Price and the Re-measurable Price obtained was marginal

• The bids were also close to the feasibility study cost estimate

Risk Sharing not considered

• No high premium placed on the All Risk Price

• Contractors preferred to carry the geotechnical risk

Contractors appetite for

Risk

Observations from Risk Sharing Positives

Risk sharing proposed a good balance between the

EPC/Turnkey contract and a suitable risk sharing mechanism

Obtaining two prices the Employer could quantify the risk

premium

Interpretation by Contractors

Contractors application of the risk sharing mechanism

Risk Sharing not considered

The difference between the All Risk Price and the Re-

measurable Price obtained was marginal

The bids were also close to the feasibility study cost estimate

Contractors appetite for Risk

No high premium placed on the All Risk Price

Contractors preferred to carry the geotechnical risk

Conclusion

Its was acknowledged that some type of risk sharing mechanism may be required for successful development of this Hydropower scheme under the EPC/ Turnkey contract

Two prices allowed the Employer to analyse and select the least risk options and also understand Contractors perception of risk

Inclusion of a risk sharing mechanism must be clearly and thoroughly defined and explained in Tender Documents, for all Parties involved

Thank You for

Listening

Typical FIDIC form of contract selection

process

The FIDIC Silver

book

Silver Book

Advantages

All risk is carried by the Contractor

Disadvantages

The Contractor will price for the risk taken

Contract Price higher than under other forms of contract

Where there is a substantial amount of underground works,

few or no bids will be submitted

bids submitted will be qualified

Employer has little control over the quality of construction

more risk of latent defects and high maintenance costs

The FIDIC Red book

Red Book

Advantages

The Construction price should be significantly lower

Contractor does not need to price the risk of unforeseeable conditions

Engineering costs are lower as only one design is prepared, rather than

the review of multiple designs

Disadvantages The Employer takes substantial

risk, particularly the risk of unforeseeable physical conditions

and design risk

The Risk

Sharing

Mechanism

selected