Mega Construction Projects-Planning for a Zero Dispute Implementation and Legalities of Construction Contracts
India has achieved a GDP growth of about 10% and desires to maintain/ accelerate it during the ongoing Five Year Plan. The main issues which need to be addressed are: (1) political will at state and central governments level, (2) evolving an equitable contract document to enable the executing authority to resolve disputes during the pendency of the contract. If this is achieved then the cashflow required for speedy execution could be maintained thereby executing the job expeditiously.
Contractor quotes his rates based on all costs as on the date of tender with suitable provision for overheads, supervision and profit. He does not do any speculation of probable increase in inputs due to reasons beyond his control. So long as the owner understand this situation, he will get the best price. There will be speedy implementation of project due to no adverse cash flow during the pendency of execution of the job. Having done this, the rates will be best without any cushion for neutralizing imponderables. In order to achieve this end result, risks and costs arising out of central/ state governments policies like increase in rate of taxes and duties, promulgation of new taxes etc. should be neutralized by suitable provision in the contract document. Also increase in all costs arising out of rise in crude oil prices and other major materials incorporated in works should also be neutralized by a suitable provision in contract document.
During the course of execution of the job there could be extra items of work required to be executed. In order to see that the data required for arriving at appropriate rates for deviations, a schedule of the following items should form part of contract:
- Overheads to include all indirect cost at site including interest on borrowings, bank guarantees etc. to be spelt out as a percentage of cost
- Day rates for workmen of all categories
- Day work for all supervisory staff
- Day work/ hourly rates for all equipment
- Hard costs will be worked out on actual.
As on date the contract document is one-sided and there is no effective mechanism to resolve disputes or give the executing agency required relief during the construction period. This results in insufficient cashflow and delays in execution. In the present scenario even if the client genuinely feels that payment is admissible to the executing agency he prefers to tell him to seek such relief under arbitration. A decade ago formation of a Dispute Resolution Board (DRB) was conceived and everybody felt that this was a big step forward and it would result in eliminating disputes in a major way and hence it would help expeditious execution of work. The disputes were required to be resolved by DRB during the pendency of contract and give required relief which in turn would help in doing speedier execution of jobs. But this has not taken place and as on now disputes are pending for twenty years due to every issue being referred to DRB-Arbitration-Courts-High Courts-Supreme Court. It appears that there is a fear of psychosis in the clients’ officers not to take any responsibility due to fear of CBI or IB vigilance enquiries.
This is a disastrous situation. One cannot conceive what could be the solution except producing a contract document which enables the Engineer-in-Charge to derive his strength for correct action from the contract document which is pending for change for two decades. When will this happen? In Norway, the government decided that they need to execute a minimum of 100 km of tunnels per year to match the required development of country. Since the client did not have adequate time to do geological and other investigations, they evolved a contract document which specified datum of execution of various equipment under variable conditions and I understand that the jobs are being done expeditiously. Foreign investors are shy of participating in Indian infrastructure due to our one-sided contract document. This needs to be corrected. May be we follow FIDIC document. Once the basic issue is sorted out there are adequate number of construction companies both Indian and non-Indian who could execute all infrastructure projects in time.
In order to get out of the obligations of owner on design, drawings, investigation, etc. it is considered appropriate to invite EPC tenders to see that these obligations are transferred to the contractor who sees that all those issues are sorted out in time to avoid any hold up in construction. This helps in speedy and timely execution of jobs which have stated in earlier pages.
A recent example of execution of one project named Parbati Stage-III in the Package of Head Race Tunnel, the TBM has got stuck at a point where there is a water inflow of more than 100 litre/ second and silt and debris flow of very high order which needs ground treatment. There is no provision in the contract for ground treatment for getting over this contingency and the job is at standstill for a period of over six months. The TBM contactor cannot proceed unless the treatment of ground is done to enable restart of tunnel boring. If there was a provision in the contract for dealing with such cases, the work could have been proceeded faster. Such situations have been dealt with in Niagara Tunnel Project, Ontario, Canada, and Karahnjukar Hydroelectric Project in Iceland wherein they have made provisions in the contract document to deal with bad ground situations by working out appropriate clauses for payment for the portion of bad geology to be crossed over for making speedy tunnel boring. It is therefore necessary to provide such a clause in all such contracts, more so for the Himalayan region, which is tectonically unstable and there are large quantum of fault zones which needs to be treated as the boring proceeds. This situation is faced in all TBM bored tunnels, but the high speed during normal boring has pushed up the average progress to more than 500 m/month.
In the past seven years, the method conceived for timely execution was BOT project for roads, BOT/ BOO projects for hydro and thermal power generation. Outstanding examples of BOO basis are Baspa Hydroelectric Project (300 MW) constructed in 5 years, Vishnu-Prayag Hydroelectric Project (400 MW) also in five years. As EPC contracts, timely executed projects are Chamera Stage-II Hydroelectric Project (300 MW) in 4½ years, Omkareshwar Hydroelectric Project (520 MW) in 4 years 8 months. At present a 1000 MW hydroelectric project by name Karcham-Wangtoo is under execution and it is planned to execute this project by 2011. The reason for timely completion or earlier completion is due to pressure of cashflow, interest payments and earning early revenue. In the BOT/ BOO project, no delays can be permitted since the interest on borrowed money can create a severe cashflow problem. In these projects, saving in time becomes saving of cost and making profit. This system is working. To start with, banks and financial institutions were shy of funding hydro-power projects as they always feared time and cost overrun. After completion of the above power projects, the banks and financial institutions are comfortable and there is no longer any problem of funding both from India and abroad.
The promoter needs to arrange equity participation as provided in the power development policy and should have a good credibility of having completed projects in time. It is also seen that due to timely execution of Baspa-II, Vishnuprayag, Chamera-II and Omkareshwar projects, there is an investor confidence developed and there has been good response from stock exchanges, banks and financial institutions and FIIs.
For works in which package bids are called for, the owner needs to complete the following:
- Land acquisition for the project and infrastructure
- Access roads to site
- Forest clearance
- Environment clearance
- Rehabilitation and resettlement done well in advance before commissioning
- Provision of adequate funds to effect timely payment
- Precise geological investigation reports
- Supply of design and drawings to conform to the programme
- Supply of materials and equipment as specified in tender documents
- Electricity supply at agreed points
- Skeleton infrastructure to expedite the work. This will be adequately augmented to cater for requirement of job
- All details of topography and hydrology
- Earmarked muck disposal areas
- Law and order in remote areas
After experience of over a decade in execution of hydro-power, it is seen that due to development of high political conscience, the issue of land acquisition, resettlement and rehabilitation has become one of the most important issues to be dealt with in execution of hydro-power projects. Instances have happened in developed countries like Brazil, China, Colombia, Canada etc. wherein they have decided to evolve a system of participation of people affected by construction of projects – land acquisition, resettlement and rehabilitation. Brief details of these are given below:
Participation of People Affected by Construction of Project – Land Acquisition, Resettlement & Rehabilitation
People affected by construction of reservoir projects could be in large number. This issue has been a burning issue at the world level and big projects like Itaipu (Brazil) and Shuikou (China) have dealt with this problem as per the details given in the following paras.
For enhanced land acquisition and resettlement, institutional capacity is needed well before start of civil works. During the design stage, the capacity of Revenue offices to be assessed, and where considerable increased volume of work is expected, commensurate staff and budget resources assigned, nodal officers are needed to coordinate tasks among agencies, with decentralized decision making to speed timely work progress.
|Cases to be considered for in-depth case studies|
|Colombia||Example of revenue sharing defined in legislation.
Lessons could be drawn from the way revenues transferred to regional entities and municipalities are managed in a number of projects in Colombia, including Urra 1.
|Brazil||Example of revenue sharing defined in legislation.
Lessons could be drawn from the way revenues transferred to regional entities and municipalities are managed in a number of projects in Colombia, including Itaipu.
|Minashtuk and Pesamit, Canada||Examples of an innovative equity sharing mechanism that was negotiated directly between a developer and an indigenous community.|
|Eastmain-1 Dam and
Eastmain-1A and Rupert Diversion Project, Canada
|Example of an innovative equity umbrella agreement between the State and indigenous communities on revenue sharing from development projects.
Example of an innovative IBA negotiated between a developer and an indigenous communities prior to EIA/ SIA studies.
|Lesotho Highland Water Project, South Africa, Lesotho||Example of development fund.
Explicit measurement of the rent.
Lessons can be drawn from the way the fund was established and managed.
|Norway||Example of taxes paid to regional and local authorities and of preferential electricity rates.
Lessons can be drawn from the tax regime applicable to hydroelectric projects in Norway, such as Glomma and Laagen and Tokke.
|China||Example of development fund defined in legislation.
Lessons can be drawn from the way this legislation was applied in a number of projects such as Shuikou.
Creating effective systems for better project delivery, marking corridor of impact, centre line and right of way to be completed by design consultants, before detailed designs, this will allow land acquisition processes to commence within project preparation rather than after. Specific requirements before award of civil works contracts, encumbrance free certificates will be based on completion of disbursement of compensation and R&R assistance and relocation for 100%.
Preparation of concept notes by state/ central agencies for analysis and assessment of the key issues mentioned above, support for improvement in land administration sytems and enhancement of capacity, follow-up state level workshops (e.g. Government of Tamil Nadu has proposed to organize a workshop).
On the basis of the desk review, the following cases could be considered. Other cases could also be considered taking into account those selected in other studies of the Dams Planning and Management Action Plan.
After having spelt out present situation of expeditious execution of jobs, issues pertaining to rehabilitation, resettlement and land acquisition, let us go through a case history of Norwegian Tunnelling Contract System, which was evolved to execute about 100 km of tunnel every year without major site investigation. This is given in the following paras:
The Norwegian Tunnelling Contract System (NTCS)
The main objectives are to share risk to:
- minimize project costs
- allow for flexibility under construction (do what is necessary: no more, no less)
- avoid disputations and legal actions
Main PrinciplesUnit price contract – the contractor is compensated for the quantities that actually have been used during construction.
Two main elements of risk:
- Ground Conditions:
The owner is responsible since he has chosen the tunnel location.
The contractor is responsible for the execution of the works, i.e. he keeps the risk for his own performance.
Main Elements of the Contract:
- Geological/ Geotechnical Reports Prepared by the Owner:
The main purpose is to:
- provide the basis for the Bill of Quantities (BoQ), and
- to give the contractor a general idea of the likely rock conditions.
Shall give full disclosure of the information (data) available.
May describe the owners interpretation of the data.
- Work Description and Bill of Quantities:
The work description prepared by the owner gives a detailed description of each activity, i.e. how to perform each step necessary to achieve the desired result.
The probable quantities for all work are given:
- rock support
- installations, etc.
Rock Support Work is Divided in Two Categories:
- Support works that delay the advance rates,
- Support works that do not delay the advance rates
- Construction Time:
- Standard capacities (“time equivalents”) are set for rock support work and grouting.
- Construction time and completion date are adjusted if the balance of “time equivalents” increases more than a specified amount.
Responsibilities During Construction
- Rock Support at the Tunnel Face:
- method proposed by the contractor and decided by both parties in agreement.
- quantities decided by the contractor.
- Rock support behind the tunnel face: decided by the owner.
- Extent of probe-drilling: may be preset in the contract, if not, decided by both parties in agreement.
- Pre-grouting: if the contract terms become insufficient, decisions are taken by both parties in agreement.
- decided by the contractor how to meet the contract terms on tunnel contour and blast induced vibrations.
- round length and full face/ half face etc. decided in agreement by both parties when stability problems are in question.
- Construction Time:
- Construction time and completion date are adjusted if the balance of “time equivalents” increases more than a specified amount (usually 1 to 4 weeks).
- Extra expenses for extension of the construction time (of more than 1 to 4 weeks) are compensated as a function of the extension and the contract sum.
Risk Sharing – Time Equivalents & Deviations Type Time equiv. Qty in contract Qty performed Deviation A. Support works that delay advance rates: Rock bolts 12 pcs/hr 6,000 pcs 9,000 pcs +250 hrs Shotcrete 6 m3/hr 2,000 m3 3,000 m3 +167 hrs Concrete lining 0.2 m/hr 100 m 50 m -250 hrs B. Support works that do not delay advance rates: Rock bolts 15 pcs/hr 3,000 pcs 2,500 pcs -33 hrs Shotcrete 8 m3/hr 800 m3 1,800 m3 +125 hrs Concrete lining 0.25 m/hr 50 m 120 m +280 hrs Total: +539 hrs
- Rock Support:
- The owner pays for quantities that actually have been used during construction, and carries most of the risk.
- Unit prices may be negotiated within +20% only if the total costs for rock support exceed the original costs by more than 100%.
- The unit price is not negotiable and the contractor is compensated for preset quantities.
- Difficulties with drilling
- Scaling of Loose Rock:
- The cost is included in the unit price for blasting and is therefore at the contractor’s risk.
- Probe-drilling and grouting:
- If time is defined as a quantity in the contract in addition to metre of drilling, kg of cement, etc. the owner carries the risk.
- The time is not defined as a quantity in the contract, the contractor carries some of the risk.
- In-situ Cast Lining for Waterproofing:
Requirements for NTCS to Work Properly
- Both parties need experienced staff members.
- Authority to take decisions:
Allowing technical and contractual issues to be solved at the site as they occur at the face decisions (rock support, pre-grouting, etc.) of critical importance.
- Good knowledge of the contract system
- Main Advantages:
- Flexibility: Elements of “design-as-you-go” – adaption to the actual ground conditions.
- Low Cost:
- Do what is necessary: No more, no less.
- Moderate risk taken by the contractor
- Main Disadvantage:
- Contractors role is limited to execute the work by methods specified by the owner:
- Few incentives to introduce innovative solutions
- Hinder design expertise by contractors.
- Contractors role is limited to execute the work by methods specified by the owner:
- Three large projects initiated by the Public Road Authorities:
- 30-40 km road
- Includes a large number of tunnels and bridges
- Two projects constructed
- Contractor’s responsibilities include:
- Detailed design
- Operation and maintenance for 25 years
- Two main purposes for initiating the BOT projects:
- More efficient accomplish- ment of road projects?
- Will it be possible for the authorities to maintain control and possibility for political directing?
- Before pre-qualification of contractors, the Road Authorities carries out:
- Development plan/ local plan
- Some geotechnical investig- ations
- Safety standard for the road
- Tender documents include:
- Standards and norms
- Specifications – functional requirements
- Risk Sharing
- Experience so far
- General positive evaluation of BOT
- Especially positive evaluation with respect to the result of projecting/ design and construction responsibilities placed by the contractor. e Optimized technical solutions.