Hydro Electric Projects: Merits and Demerits

Merits and Demerits of Execution of Hydro Electric Projects on EPC/Turnkey Basis

Turnkey contract for the project as a whole

Risk Sharing Considerations

• The mode of contracting does not alter the overall project risks, which depend upon the technical features of the project, logistics involved and the physical conditions under which the project is to be executed. An objective pre-qualification process can be a strategic tool to allow selection of contractors who can handle the ‘risks’ if and when required.
• Risks are weighted more on the side of the contractor in the case of turnkey contracts as compared with the package contract approach. In such cases, the owner runs the risk of the turnkey contractor defaulting on the contract if the risks are found to be unmanageable.
• The risk sharing principles of package contracting are beneficial to both parties, as the owner will sign separate package contracts at lower prices and will only incur a further cost when a particular unforeseeable risk actually materializes. The contractor avoids pricing such risks which may or may not occur. Such risks are not easy to evaluate at the tendering stage in any event.
• Sharing of risks, if not handled in a constructive and fair manner, will result in more disputes. Handling of claims under the risk allocation scheme also becomes sensitive, with both parties tending to adhere to their interpretation for safeguarding their own interests.
• Many risks are basically unassessable at the time of tendering – otherwise they would not be categorized as risks, but the quality and risk-handling capability of the contractor can be assessed.