INDIA

International Practices and

Patterns of Preferences for EPC
vs Unit Rate Contracts

HYDROPOWER
SEMINAR
17 September Alessandro Palmieri
Water Infrastructure Adviser

2018 former Lead Dam Specialist,

World Bank

Palmieri – International Contractual Practices 1

 • Risks and Bankability
• Management of Geotechnical Risks
• Main contract types
Outline • Case study: Gibe II HPP Headrace
Tunnel
• Reflections

Palmieri – International Contractual

Practices
The concept
of
• Credit ratings that can extend from AAA (triple A)
“bankability” downwards
• BBB+ generally regarded as the threshold for an
Investment Grade project
• Bankability determines also the interest rate and the
tenor of the loan

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Practices
 • Measure of the commercial strength of
a project, judged typically over a
period of 15 to 20 years.

• Determines whether the project is

Financial robust enough to repay loans at
commercial rates of interest even
Viability under a downside scenario,

• and whether it is likely to provide a

sufficiently high return on equity to
attract private investors.

Palmieri – International Contractual

Practices
 Type of Risk Mitigation
Risk Political Guarantees
Assessment (Country)
Commercial Partially
• Risk has a (Market, insurable
Cost Defaulting Off-
• Risk Cost Taker)
depends on
how risk is Project (site Usually not
allocated specific, insurable
geotechnical)
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Practices
 • Geotechnical risks are, by far, the
largest source of cost and schedule
overrun in large civil works, especially
when these involve major
The underground activities.
relevance of • Total elimination of uncertainty is
impossible, hence the definition of a
geotechnical correct approach for its quantification
is required.
risks • The objective, where possible, is to
follow a quantification process that is
traceable and transparent to the
project’s stakeholders.

Palmieri – International Contractual

Practices
 • All stakeholders have interest in the
analysis of the geological risk;
implications may be technical,
environmental, social, and financial.
Sharing of • The Geological Model should evolve in
geological a contractual definition of what is
expected to occur during the works.
risk
• Geotechnical Baseline Report and Risk
Register are the instruments at the
base of geological risk sharing.

Palmieri – International Contractual

Practices
 Whatever the contract type, geotechnical
risk management tools are required:

Project Risk  Geotechnical Baseline Report

(GBR), and
Management
Geotechnical  Project Risk Register (PRR)
Risk
A meaningful investigation program is
essential for both.

Palmieri – International Contractual

Practices
 Investigation Program
The cost of an
investigation
program (IP) should
be related to the
cost variation of the
works, which is
always uncertain.

Typical criterion:

• ISRM (1975). Recommendations on Site Investigation Techniques.

• ISSMGE (2004).Guidelines for Professional Practice.
• ITA/AITES 2004. Accredited Material - Guidelines for tunnelling risk management:
International Tunnelling Association, Working Group No. 2 –
• Tunnelling and Underground Space Technology 19 (2004) 217–237.
• ISSMGE (2005). Recommended procedure for geotechnical ground investigations.
• The International Tunnelling Insurance Group, 2006. The Joint Code of Practice for Risk
Management of Tunnel Works. Essex R.J., 2007. Geotechnical Baseline Reports for
Underground Construction, ASCE.

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Practices
 • Contractual understanding of
the site conditions, referred to
as the geotechnical / geological
baseline.
• Contractor bears risk at or
Geotechnical below baseline; Employer
Baseline accepts risk above baseline.
• Baseline setting determines
Report risk allocation and has a great
influence on risk acceptance,
bid prices, quantity of change
orders and the final cost of the
project.
Re:“ASCE 2007, Geotechnical Baseline Report for Construction – Suggested Guidelines”
Palmieri – International Contractual
Practices
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Geotechnical parameters
in GBR should be clear and
quantitive:

Palmieri – International Contractual

Practices
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Practices
 Frequency or probability of occurrence
Project Risk
Register Preventive measures
Potential consequences, before
(PRR) remedial measures
• For each risk scenario Remedial measures
the following Resources and costs associated with
elements are
assessed:
remedial measures
Time influence after remedial measures

Cost consequences after remedial

measures

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Practices
 Jointly, GBR and PRR allow to:

• inform decision making on the most

appropriate project technology and
procurement strategy;

• inform contract documents preparation,

Project Risk and allocation of contingency funds;

Management • prepare an Health & Safety Management

Plan to be implemented during
construction;

• manage design variations and associated

claims during construction.

Palmieri – International Contractual

Practices
 A word of caution
• Historically, there has been a great reluctance on the part of
engineers to provide interpretations of geotechnical data to bidders
on a contract; regrettably, this practice is still present.
• Bidding circumstances do not afford contractors the time or budget
for an independent underground investigation.
• Geotechnical Baseline Reports have added a useful element to the
overall bidding process, but they have not totally eliminated
problems.
• When claim-stage is reached, so much depends upon the particular
circumstances, the capability of the disputes review board, the
arbitrators, the lawyers and the technical experts involved and the
"chemistry" between all of these components.

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Palmieri – International Contractual Practices

 Main Contract Types

• Traditional «unit rates» contract: public

sector finance (FIDIC’s «Red Book»)

• Turn-key contracts (FIDIC’s «Yellow

Book»)

• Engineering Procurement Construction –

EPC (FIDIC’s «Silver Book»)

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Practices
 Item Red Book Yellow Book Silver Book
Separate Contracts, e.g. Yes Yes No
Civil Works and
Electromechanical Works
Tender Design and Detailed Less detailed and specified in Performance
Specifications Employer’s Requirements Specifications only
Design and Employer Contractor Contractor
Responsibility for Design
Employer’s Influence on Total Less than Red Book, but Employer has None
Design Right to Approval
Design preparation Employer Contractor, Design must be approved Contractor, Design
by the Engineer must conform to
Employer’s
Requirements.
Construction Time Fixed, but may be Fixed, but may be extended or reduced Fixed
extended for for actual subsurface conditions (e.g.
agreed reasons. tunnels and foundations).

Geological Risks and Employer Risk Sharing, e.g. Contractor for above Contractor
Increased Quantities ground, and Employer for subsurface.

Payment Monthly, based on Fixed with payment schedule, but Fixed Lump Sum
unit rates and variations (additional payment or
measured credit) for actual subsurface
quantities. conditions.
Engineer for Supervision Yes Yes Employer’s
and Contract Representative
Administration 17
Palmieri – International Contractual Practices
 Case Study
Gibe II HPP- 25.5 km Headrace
Tunnel - Omo River- Ethiopia

Palmieri – International Contractual

Practices
Palmieri – International Contractual
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Practices
Gibe II’s HRT- basic data

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Practices
 Volcanic unit:
• Omo Vulcanites (Basalt flows with
intercalation of layers of Trachyte of Miocene
to Inferior Oligocene)
Weathered brecciated basalt:
• greenish grey, dark to light grey and brown
incolor, highly joined and fractured,
Rock mass moderately to highly weathered, weak to
moderately strong and slikensided basalt with
reddish brown, highly weathered to
description decomposed, weak and slickensided basalt.
Joint planes are filled with calcite and clay
infillings and shows slickensided features
Decomposed Basalt:
• reddish brown, highly weathered to
decomposed, weak and slickensided basalt,
grey to greyish grey, smooth to slickensided
highly weathered tuff-clay

Palmieri – International Contractual

Practices
 Overburden: 500 m – 1200 m
Five different formations
• Omo basalt with minor zones of trachyte
• Sequence of basalt, trachyte and rhyolitic
flows, trachyte to be prevalent
• High overburden up to 1200m, transition
Geological from lower Jimma, mixed volcanic layers,
and upper Jimma, rhyolite, rhyolite breccia,
Model tuff, trachyte, dacite and lattite
• High overburden up to 1200m, Jimma
rhyolite, trachyte, dacite with intrusions of
dolerite and syenite
• Same condition of the previous but lower
overburden

Palmieri – International Contractual

Practices
Problems begin

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Practices
 Problems begin

Damage to segmental lining

Tail shield and auxiliary cylinder deformations

Palmieri – International Contractual Practices 24
Getting worse

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Practices 25
Much worse
Hot (50°C) mud flowing
inside the main tunnel.
Four events for a total of
more than 1500 m3.

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Practices
Adits, probing, and consolidation works to free the blocked TBM

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Practices
TBM- inlet side: 21 months stoppage
315 m/m, average, when boring
177 m/m overall

Palmieri – International Contractual

Practices 28
TBM- outlet side: progress records (400 m/m, average)

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Practices
TBM disassembling

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Practices
Main bearing installation after refurbishment

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Practices
 After 21 months of very hard work

TBM moved inside the launching chamber

and approaching the frontface

Tunnel Breakthrough
Palmieri – International Contractual Practices 32
Project in
operation
from
December
2010

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Practices
 Although the technical difficulties had
a negative effect on the delivery time
of the Project, they did not
substantially affect the Project’s
benefits.

Gibe II – The existence of a GBR, and of annex

H «change conditions» (FIDIC’s sub-
lessons clause 4.12), proved extremely useful
and allowed the parties to efficiently
and fairly settle contractual issues.
learned
The GBR proved useful for both the
Employer and the EPC Contractor;
without it, settlement would have
been much more difficult to reach.

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Practices
 • Allowances made for:
– Faulted, fractured or latered rock
or otherwise soft grounf for tunnel
lenghts of up to 20m,
– Water inflow near the heading up
Annex H to 50 l/s,
«Change – Thermal water up to 20 l/s and
52°C.
Conditions» • Stoppage of the tunnel excavation for
continuous periods exceeding 48
hours.
• Tunnel standing rate: 25,000 €/day
 • When are GBR, and Change Conditions
Reflections clause necessary?
(and • Always in presence of major underground
opportunity works
for • Owner’s experience and capacity in
managing risks must be considered
discussions)
• Choice of contract type can also be of
some help

Owner capacity
Low Medium High
Contract
type
Unit Rates essential desirable
EPC/ essential essential desirable to
Turnkey essential (ref.
Gibe II)
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Practices
 Thank you

Palmieri – International Contractual Practices 37