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

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
Location
Situated in the North-Western Province of the
Republic of Zambia
Kabompo River flows entirely within Zambia

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

Contractual
The scheme is being developed under a concession
agreement

Status
Preferred EPC Contractor identified negotiations in
progress

Reasons for selecting the FIDIC Contract

as the preferred form of Contract
CEC does not have its own standard form of Contract
The FIDIC and NEC3 suites of contracts were both
considered
CEC has experience with the FIDIC contracts and it has
been used extensively in the region

Two options were considered

The FIDIC Conditions
of Contract for EPC /
Turnkey Projects
(Silver Book)

FIDIC Conditions
of Contract for
Construction
(Red Book)

Employer

Contractor

Lender

Selection of the FIDIC EPC

/Turnkey Form of Contract
Significant interest in the
Project from potential
Contractors

Geological and
Hydrology risk
Silver book requires
less input from the
Employer than the
Red Book
High degree of
certainty of the
Contract price

Silver Book allows

for supervision by
the Employers
Personnel so that
the quality of the
work can be
monitored

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 remeasurable 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

Cost Variance (US Dollars)

Contractor B
Contractor A

Likelihood of
Occurrence

Slightly better than

base case

Base case

Slightly worse than

base case

Significantly worse
than base case

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 poor to
extremely poor
throughout
very low
Not expected to
happen

Ground Conditions Encountered Throughout the Scheme

Extremely poor
throughout
extremely
low
Virtually
impossible

Results of the Dam Excavation Base

Case based on information supplied by
the Contractors

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 Contractors application of the risk sharing

by
mechanism
Contractors
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 No high premium placed on the All Risk Price

appetite for Contractors preferred to carry the geotechnical
risk
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 Remeasurable 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
Advantages

All risk is carried by the

Contractor
The Contractor will price for the
risk taken
Contract Price higher than under
other forms of contract

Silver
Book

Disadvantages

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

The Construction price should be
significantly lower
Advantages

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

Red
Book

Disadvantages

The Employer takes substantial

risk, particularly the risk of
unforeseeable physical conditions
and design risk

The Risk
Sharing
Mechanism
selected