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Suitable Contract Formulation and Administration Essential for Smooth Hydro Power Execution, Shri R V Shahi, Former Secretary, Ministry Of Power

Suitable Contract Formulation and Administration Essential for Smooth Hydro Power Execution
[R V Shahi's Weekly Column for Infraline, November 19, 2007]

To have a correct understanding and appreciation of the problems which are associated with the execution of hydro power projects, it may be necessary to have a clear perspective of the distinctions between construction of a typical and moderately difficult hydro project, a typical and very difficult hydro project on the one hand and a typical thermal power project on the other. Experiences have brought out that our success rate in hydro project execution, and therefore the pace of developing new capacities, has not only been significantly lower than those in case of thermal projects, but our performance has been abysmally poor. To a great extent the reasons for the vast difference in securing success are really beyond the control of developers because of the inherent difficulties that are associated with these projects. To a great extent, however, these difficulties are also exaggerated and therefore the delays in such cases could be attributed to deficiencies in project management approach, systems, procedures, construction technologies and monitoring methods.

What are the distinguishing features? And, to what extent this difference could be overcome or atleast partly addressed? These two questions would, if addressed, partly mitigate the problems which are supposed to be beyond control. In any case the other sets of problems which are, as it is, attributable to reasons within have to be suitably answered through appropriate mitigatory mechanism. First let us take the distinguishing features which are inherently integral part of a typical hydro project.

  1. The unpredictable nature of hydrology poses a major construction challenge in most cases. What compounds the problem is also the location of the project. Difficult terrain, hilly and mountainous areas, inaccessibility, lack of other infrastructure, all put together make the construction activities difficult. These are such problems, however, as have got to be addressed through combination of technologies of construction, skill of people and managerial inputs. If not eliminated, they can be minimized substantially.

  2. Under the geological problems there could be two types - one relating to the general nature of fragile geology in many of our mountain ranges, more particularly in Himalayan rivers, and the second could be on account of totally unexpected geological surprises because of sheer zones. Normally in the case of excavation for an underground power house, head race tunnel (HRT), tail race tunnel (TRT), and desilting chambers, these difficulties are often faced. Here again, through proper investigations the impact could be reduced, if not eliminated. Sometimes these problems are accentuated on account of aggressive techniques of excavation, for example use of excessive explosives, much more than required, could lead to much bigger problems and if the extent of use is skillfully calibrated such incidences could be avoided. Choice of tunneling technology itself could play a significant role in minimizing such problems.

  3. The type of Dam that is selected for the project is obviously based on the most important consideration of whether the project is a storage project or a run of river project. But the type of Dam is also influenced by the nature of hydrology, the type of geology of the land on which the Dam has to be built and also the characteristic of the mountains/hills on the two sides. Proper choice could make a difference in implementation of the contract and therefore project execution.

Many of these simply do not exist in other types of power projects and therefore to that extent implementation does not suffer from these difficulties. While the issue of proper execution could be examined and analyzed from different points of view, here, in this paper, we are restricting the discussion only to the issue of suitable formulations and administration of a contract so that the project is implemented with convenience, smoothness, quality, safety and without cost and time overruns. A well structured, unambiguously documented and clear provisions for easy dispute resolution suitably incorporated contract will lead to not only a very harmonious operation at the level of execution but it can lend itself to an implementation which could be timely, contractors grievances redressed appropriately, payment flow streamlined and hopefully possibilities of cost and time overruns kept within manageable limits if not totally avoided.

One of the ways to minimize various types of construction risks, and more particularly the inter-contractors coordination problems, could be to have one Turn-Key contract to execute the entire project rather than a number of contract packages being implemented by several contracting agencies with the inevitable consequence of mismatches leading to overall project delays. However, opinions on this approach are divided because there are mixed experiences of success, and not so good success, while going through this route. As a result, there are more projects in the hydro sector which are implemented through three to four separate agencies rather than through one agency. My own assessment is that this issue requires a more detailed careful consideration before rejecting the Turn-Key contract approach. A dispassionate discussion among the engineering consulting organizations, the client owner organizations and major contracting agencies could definitely lead to formulation of an approach which can make Turn- Key contract arrangement succeed in most cases, if not in all cases. Such cases and such situations which may not lend themselves to this dispensation could be singled out to be dealt with through package contract approach.

In any project execution - and it is truer for hydro project execution - allocation of risks in an equitable and balanced manner is a difficult task and therefore skill lies in how best the risk allocation process is carried out. Any one sided approach, in the sense of one trying to score over the other, might give one party a satisfaction that it has scored over the other. However, this type of an approach is fraught with a serious consequence of the whole project getting into a lose-lose situation rather than effectively and smoothly implementing the project. Wisdom, therefore, lies in properly understanding the problem of the other party appropriately, accommodating those problems in the overall architecture of project contract configuration and subsequently a positive view on issues during implementation. Unless there is proper consideration for the other party in the mind of the first party the win-win situation cannot be secured. One must recognize that in a large project or even in medium size project, in the last year of the project more than 70% of the capital expenditure is already incurred. In a typical hydro project of a 1000 MW capacity with a capital estimate of Rs. 5000 crores, about Rs. 4000 crores would have been spent in the first four years. In the last one year therefore every month of delay will mean a direct loss of Rs. 40 crores apart from electricity generation loss and therefore the loss of revenue on sale of power. These figures and financial burdens have to be borne in the minds of all engaged in the project execution, both on the sides of the owner organization and of the contractor's organization. If project contract structure is formulated with each side putting itself in the shoes of the other side what can result is a workable, acceptable and effective contract.

Experiences of last few five year plans are so disturbing that it is time that these issues are properly addressed and resolved. Ministry of Power in association with Central Electricity Authority organized a day's deliberations on November 16, 2007, with participation of all the important players in the field - Hydro Power Generation Companies, Consulting Organizations, Contracting Organizations, Equipment Suppliers and others. Union Power Minister, Power Secretary and Chairman, CEA, spoke and provided the basic structure of the issues involved and emphasized the need for streamlining contract administration. CEA has prepared a good background document. A list of likely shortcomings in the contract document and during implementation is given below:

Shortcomings Attributable to the Owner

  • the Employer does not actually own the site, so the Contractor cannot start construction.

  • the Owner has not obtained the necessary clearances.

  • the owner has not performed sufficient site investigations.

  • project financing is not ready.

  • project cost estimates are not realistic.

  • risk allocation imposed on the Contractor is unworkable.

  • the designs are not frozen at the correct time.

  • insufficient collection or interpretation of relevant data.

  • unrealistic schedule and target completion date.

  • limited bidding time.

  • selection based on lowest price without adequate consideration of contractor capability.

  • due importance not given in deputing skilled & experienced Owner's team for project management.

  • lack of cordial relationship with Contractor.

  • delayed supply of drawings or instructions/decisions by Engineer.

  • not identifying the cause for a delay & failure to initiate timely remedial action.

  • delayed approval of construction programmes.

  • delayed response to Contractor's claims.

  • biased determination of compensation.

  • delayed interim certification & payment.

  • improper evaluation of Variations.

  • extension of time not awarded in a reasonable time frame.

  • excessive compromises on designs for commercial reasons.

  • non-levying of liquidated damages for delay in completion of works.

  • allowing the Contractor to execute works of specialised nature, when such works are specified to be executed by specialised agencies.

  • acceptance of defective works.

  • improper setting out of works at the time of handing over of site.

Shortcomings Attributable to the Contractor

  • failure to depute a competent project management team.

  • lack of forward planning and budgetary control.

  • casual attention towards critical targets of time, cost and quality.

  • failure to use proper tools and techniques such as CPM network analysis, relating to forward planning and control.

  • delays in procurement of materials and construction equipment due to a casual approach.

  • inadequate maintenance of construction equipment, inadequate workshop facilities for repair of construction equipment, and shortage of spare parts for construction equipment.

  • non-deployment of competent specialised sub-contractors.

  • delay in mobilisation.

  • improper documentation and logging of site records, copies of agreed minutes and other important data relating to the works being executed.

  • delayed and illogical submission of information while seeking important decisions/instructions from the owner in changed situations.

  • delay in submission of Method Statements for changed site conditions.

  • shortage of tradesmen and supervisors.

  • inadequate quality control facilities and staff.

  • delay in replacement/repair of defective works.

  • non-compliance with labour laws.

  • non-compliance with environmental and ecological requirements.

  • failure to implement the approved construction methodology.

  • delay in submission of concreting schedule.

  • Presenting inadmissible claims, leading to avoidable disputes.

Shortcomings Related to Valuation of Changed Conditions

  • Contractor's daily records of deployed resources are not maintained/submitted by Contractor and/or signed by Engineer.

  • Unit rates of variations are not submitted by Contractor and/or approved by Engineer in time.

  • Work is done but is not paid by Engineer in a timely manner.

  • Either extra work is not recognized and over-assessed by the Contractor or it is under-evaluated by the Engineer.

  • Impact of variations on construction schedule is not fairly determined by Engineer.

  • Unforeseen physical obstructions are not properly recognized by Contractor and/or Engineer.

  • Contractor's claims for additional "Time & Costs" impact are either not tenable or the Engineer or Owner do not respond properly.

  • Issues may not professionally handled, if the Engineer and the Contractor take their respective rigid stands while disregarding the needs of the project.

I had the privilege of chairing a session on "Contract Administration and Associated Issues" alongwith Addl. Secretary and Member (Hydro) CEA, Joint Secretary (Hydro), Ministry of Power, as panelists and three eminent speakers - two from the contracting agency and one from the owner organization. Excellent presentations and comments from the panel together with contributions from the participants generated lot of ideas and suggestions. I would like to highlight only a few important suggestions in this regard which, I consider, can be implemented without much of debate and delay.

  1. Selection of contracting agency is most important. Their technical and financial capabilities must be properly assessed at the stage of pre-qualification. Their resources - machinery and manpower vis-?-vis their commitments on other projects should be critically evaluated, and then only they should be qualified.

  2. Procedure for giving extra work during execution, which is normally necessitated by site conditions, should be provided in the contract itself. It should predict, based on experiences of last many years, typical situations warranting change in scope of work or additional work. If the authority or authorities entrusted with this responsibility are identified in the contract itself alongwith the procedure for dealing with this, the execution could become much more smooth.

  3. Similarly, the original contract could provide for different types of situations, which are normally faced during execution, and procedure for deciding on those issues could also be laid down. Engineer Incharge of the contract or concerned Manager or the General Manager of the project, depending on the nature of the issues could be identified as the designated authority who could be delegated the power to consider and decide these cases rather than waiting for dealing with these with consequent avoidable delays.

  4. In most cases, if the workers and officers of the contracting agencies are, right from the beginning, notified about an attractive incentive scheme linked to not only completion of intermediate milestones but also a major portion of the incentive linked to the commissioning of the project, this is likely to yield a more successful project implementation. The amount of incentive needs to be really attractive. The cost will be more than offset by the savings effected on account of timely or ahead of schedule commissioning.

  5. It should be provided in the contract - and more importantly it should be ensured that these provisions are implemented - that suitable infrastructure facilities like housing and other welfare majors are properly arranged for contractor's employees and labour. What normally lacks is a proper mindset for this.

  6. The contract document must provide a reasonably good amount of insurance cover at the cost of contractor for accidents etc. in respect of contractor's employees. These are measures which are not only essential but they have very strong potential for creating and sustaining a high level of confidence and motivation so essentially needed in the work environment in which hydro projects are normally constructed.

  7. Invariably the contract document itself should provide, in unambiguous formulations, for escalation linked to certain well established indices and for different types of situations. A proper implementation of these provisions will obviate the need for disputed claims in this regard.

  8. Client's expectation that claim for any extra amount should be regularly lodged rather than contractors accumulating and postponing these toward the end of the project, is valid and justified. There should be a proper procedure and time indicated in the contract document for lodging of extra claims and dispensation of these claims. What should be expected from both the contractors and the owners is that these provisions and procedures are meticulously followed.

  9. A very important suggestion that emerged is with regard to the structure of the contract. The principle that "there should be flexibility in the contract but the process should be rigid" would be a good guiding direction. Some of the above points are really the elements of flexibility in the contract. While they are strongly recommended, the process to arrive at these should be rigidly and transparently followed.

  10. Wherever the prequalification is done on the basis of the strength of a consortium partner, the contract document must ensure that the partner is not allowed to run away during implementation. Experience on this has been very bitter. The example of Parbati-II Project is an eye opener. Each of the consortium partners should be jointly and severally tied down in a manner, with their individual financial back-ups, so that they do not escape and pullout during execution.

  11. Quite often some of the contracting agencies tend to under-quote to fetch the contract with a clear intention, right from the beginning, that during execution they would make-up through extra claims. This obviously leads to protracted examination of their claims and non resolution leads to delays and stoppage of work because the rate quoted itself, to start with, was unworkable. This type of an approach is obviously short sighted. It benefits none - neither the owner nor the contractor in the long run.

  12. In hydro sector larger number of construction agencies need to be developed. The existing ones need to upgrade their construction infrastructure and resources besides their organization and manpower. They must introduce modern construction technologies and monitoring methods. Bigger hydro power development companies e.g. NHPC have a definite role in facilitating this process. Similarly large construction companies should encourage a number of feeder construction agencies to come up. For this managerially and financially they need to be guided and assisted.

Copy Right : R.V. SHAHI