Liquidated Damages

George was tired. For the past month, he had been listening to testimony on an arbitration case involving the imposition of liquidated damages for late commissioning of generating equipment at a project where “Murphys Law” — Everything that can go wrong, will go wrong — was clearly evident. The three-man panel consisted of George (an engineer) and two lawyers. Many of his evenings had been spent explaining the technical terms, everything from “head” to “spiral case.” Now the panel had to reach a decision, and the task was indeed complex. George could see that both the owner and the water-to-wire contractor had made poor decisions, and an unfortunate series of incidents had added to the delays.

The project should have been easy to construct. It involved adding a powerhouse to an existing low-level outlet at an irrigation dam in an arid country. The outlet works included an intake with a gate capable of flow control and a long tunnel terminating in a hollow cone valve. High flows had to be maintained throughout the six-month irrigation season, and flows had to be maintained at a lower rate during construction of the power facility. The feasibility study envisioned removing the valve and adding a short steel penstock with a bifurcation, with one leg leading to the re-installed hollow cone valve and the other to a silo-type powerhouse.

The powerhouse would contain an inlet valve followed by one 25 MW vertical axis Kaplan turbine, with an interconnection to the hollow cone valve to act as a relief valve for the turbine, allowing fast closure of the wicket gates. As is common in arid countries, the design flood was large, resulting in a 10 metre rise in tailwater at the powerhouse, hence the selection of a vertical axis unit. Because the project was marginal, the feasibility study envisioned the use of a mobile crane to install the unit and no powerhouse superstructure.

Tenders were called for “water to wire” equipment, and proposals were received for a variety of turbines, ranging from a vertical Kaplan to three horizontal-axis Francis units. Almost a year was needed to decide on the optimum proposal, and eventually a contract was awarded for two horizontal-axis Francis turbines with the turbine shaft set 3 metres below low tailwater. The contract included liquidated damages for late delivery tied to specific dates. Because of the low setting and large rise in tailwater, the powerhouse became a concrete-walled structure with flood tailwater only 0.4 metres below roof level. Installation of the equipment now required the use of a mobile crane to lower the equipment through a roof hatch and an 85-ton powerhouse overhead crane to move the equipment to its permanent location.

George could see the contract documents had not been fully revised to incorporate the changed concept. Not addressed included the addition of the powerhouse overhead crane, change from a custom assemble-in-place generator to use of a standard pre-engineered motor, and difficulty of interconnecting the hollow cone valve with two turbine units. Also, the civil work drawings had to be revised, resulting in delays to contract awards for the work.

The facility owner (a large conglomerate) decided to act as project manager, even though the company had no previous hydro experience. The owner awarded separate contracts for the penstock and bifurcation, dewatering and excavation, and powerhouse construction. Delays were experienced in all three contracts, and the powerhouse was not ready for the equipment water-to-wire contractor until many months after the original scheduled date.

During the arbitration testimony, it became evident the owner did not understand the implications of the change in powerhouse concept and believed the equipment could still be installed using a mobile crane. Also, it became evident that the original construction schedule was flawed, apparently showing ample time for all activities. In fact, due to a lack of “links” (for example, powerhouse excavation must be completed before concreting starts), the schedule was short by several months. This resulted in the owner still believing the project could be completed on time, even after delays in the excavation work. Hence no measures were implemented to accelerate the schedule.

The owner also believed the equipment contractor could use a mobile crane and commence equipment installation at the same time as the powerhouse contractor was still working, to make up for time lost by previous contractors. The cost implications of working in a dusty open floor, trying to install equipment in a small powerhouse with the contractor still building the walls and roof, were never discussed.

The water-to-wire contractor had considerable difficulty completing the contract. The contractor was used to dealing with small entrepreneurs, whose only concern was equipment delivery. The company was not prepared to deal with the large volume of documents required by the contract — such as schedules, layout drawings, single line diagrams, progress reports and equipment tests — and neglected to provide most of such data.

In addition, three incidents delayed deliveries. One was an accident on the railroad during transport that damaged the full-length steel draft tube liners, one of which required extensive repairs. This delayed the powerhouse contractor by delaying concreting of the draft tubes and concrete above the tubes.

Another incident occurred at the generator manufacturing plant. The sub-contractor for the coated stator coil wires had recently changed, and the manufacturing process for applying the coating insulation was not functioning consistently. The result was a burn-through failure during the stator insulation test on both stators. The burns were repaired and the stators installed, but the repairs delayed commissioning by several months.

The third incident was the bankruptcy of the sub-contractor manufacturing the control panels and switchgear just before the work was due for delivery. When another contractor took over, it was discovered the owner’s specification was flawed (incorrect standards) and the controls would not function as needed (incorrect logic) and were not integrated with the hollow cone valve. All this took considerable time to rectify.

Both parties used “experts” to provide opinions on several issues during the arbitration hearings, and the total testimony documentation amounted to enough three-ring binders to fill a bookcase 2 m2. All this had to be perused by the arbitration panel before rendering a decision. George could see the task would be onerous.

After several months of deliberations, the arbitration panel decided in favor of the project owner because the contractor had not abided by the terms of the contract, having neglected to reply to the owner’s requests for information and prompt production of plant layouts and work schedules.

Lessons learned

There are many lessons to be derived from this experience. They include:

— Never resort to arbitration. The cost is usually very high, in this case about a third of the liquidated damages. Always try to reach an acceptable solution.

— Read the contract! And read it again! This contract was clear on the extensive documentation and information required from the equipment contactor and the dates for data submission, most of which the contractor completely ignored.

— Contractors should develop a list of “deliverables” and the contract date stipulated for each. Yes, it is obvious anchor bolts are needed, but remember that a detailed drawing showing anchor location and forces is also a “deliverable.” The same can be said for all other paperwork.

Although George felt the project owner bore some responsibility for the delays, the arbitration decision had to be based on the terms of the signed contract. There were many mitigating circumstances but none could be taken into account.

During the hearings, it became evident that although there was an extensive exchange of e-mails and the occasional meeting during execution of the work, there was a lack of understanding of the complexity of the work by both parties and a misunderstanding of the role of a “project manager.” Always use a project manager with a track record in hydroelectric work.

The liquidated damages were tied to dates that were established before the award of the three civil works contracts. These dates did not reflect the site conditions and were not revised to account for delays in completion of the civil works. Always ensure that the delivery dates accurately reflect site conditions, and request extensions on dates when the site is not ready for components, an important action the equipment contractor failed to undertake.

When requesting bids for equipment, clearly specify the type of turbine required. In this case, the turbine selection was based on equipment price and an analysis of the energy produced from a defined flow pattern, without considering powerhouse cost.

When there is a major change in the project concept, review the new concept and ensure that it is appropriate to the site. In this case, the change to a powerhouse with tailwater at roof level is questionable. The extra cost associated with such a powerhouse does not appear to have been fully taken into account. With a much larger footprint for the two horizontal units, powerhouse concrete volume increased substantially, and anchors were added to counter floatation.

Also, the issue of turbine hydraulics was not considered in the concept change. For example, the hollow cone valve could easily be connected to one turbine to act as a relief valve, but connection to two turbines becomes complex and was eventually abandoned. This results in the generators going to full runaway overspeed on all faults, due to a very slow wicket gate closing time required by the long tunnel and waterhammer restrictions, not a desirable situation.

When awarding water-to-wire contracts, always ensure the equipment contractor has experience with such work and has the capability to respond to extensive documentation requirements. In this case, the small manufacturer totally underestimated the contract requirements and complexity of the work. Extensive documentation requirements usually add about 15% to equipment cost.

When difficulties arise, work with the contractors to arrive at an amicable solution. During the testimony, it became apparent there was no “meeting of the minds” at many of the discussions, and instead it became more of “It’s your problem, what are you going to do about it?”

Always ensure that specifications are up-to-date and are amended to include any changes offered by the bidder and accepted by the owner. In this case, the specification, which formed part of the contract documents, did not reflect the changes proposed in the bid.

Finally, keep schedules up to date, to reflect actual construction, and issue a new schedule at least every month. In this case, the schedule was not revised nor maintained up-to-date, and the linkage error was never detected.

Yes, a sad, sad case.

— By James L. Gordon, B.Sc., hydropower consultant

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