Procuring Construction Contracts for Affordability and Risk Sharing

Procuring Construction Contracts for Affordability and Risk Sharing

Author: Mike Robertson, Sam Mottram
Conference: AFRICA 2015 Special Publication

Getting hydroelectric projects off the ground is increasingly challenging in terms of affordability (the sites are now generally more remote and in more challenging topography); the ever-tightening social and environmental restrictions (during construction and operation); and the availability of finance. This has led to the exploration of different methods for the procurement of construction in an attempt to reduce costs whilst still managing risks and providing a fair deal to all the parties concerned. This paper provides case studies of four different strategies employed recently by international consulting engineers Knight Piésold (KP), in Africa and Canada, for the development of hydroelectric projects.

Types of Construction Contract

The following types of contract are discussed in this paper:

  • Design-Bid-Build (DBB) Model. Also known as Schedule of Rates or Prices, Unit Price or Bill of Quantities. This is the old traditional model for procuring construction contracts. It has proved over time to provide a fair deal to all parties, by sharing the risks – essentially the owner and his consulting engineer take the design risk (which includes unforeseen conditions, primarily geotechnical foundation and weather) and the quantity risk, while the contractor takes the pricing risk. Failings of this model are that it allows no design input from the contractor, in terms of possible more constructible and affordable alternatives than that presented in the owner’s design, and that there is no price certainty when the contract is awarded – the final price depends on final quantities which are not guaranteed to be the same as those tendered.
  • Engineer, Procure, Construct (EPC) Model. Also known as Design-Build. This is an attractive model for the owner because it essentially assigns all risks to the contractor, has price certainty (which has become a requirement of many lending agencies), and involves minimal administration for him. Failings include the fact that it is typically more expensive (the contractor has to include a premium to cover the risks), and the owner loses full control of the design (here the ultimate responsibility of the contractor).
  • Owner Procurement and Construction (OPC) Model. This model is similar to the DBB model in that design is the owner’s responsibility but construction is done not by a procured contractor but by the owner, using his own equipment and other resources. This is a good model if the owner has good resources – equipment and technical and administrative manpower.
  • Alliance Model. Also known as Target Price. In this model, the owner and contractor work together to obtain the most economical contract cost, based on a target price set between the two parties at the outset. Actual contractor costs are open book and monitored against the target. Mechanisms are included to deal with variations between actual and target costs and which party pays for (or benefits from) them.

 

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