Many years ago there was an Independent Power Plant (IPP) developer who struck a deal with a industrial entrepreneur in Nigeria to build, own and operate a gas fired power plant and sell electricity over a 20 year term. After the celebrations it was time to build the power plant so that revenues from electricity sales could start.

The developer needed to get going quickly, they already had a firm quote for the prime equipment, all they needed to do was to find someone to build the plant and put it together, how difficult can that be? No need to waste money on finding a capable EPC contractor, they just needed to find a good project manager that could put it all together for them.

Finding a project manager took a bit longer than the developer thought, they found one in the end. Even though he had limited experience and had not worked on a power plant before, he was willing to live in Nigeria for a year or two, as long as he could take his family.

Through contacts the project manager was introduced to a local contractor who was ready to get going immediately. No need to go through any pre-qualification and tendering process as time needed to be gained. A short form contract prepared by the contractor was accepted.

The contractor turned out to be very helpful in getting the project manager settled, finding an apartment and school. They even helped getting him settled in a new country and shared various social events.

The contractor had no capability to undertake any of the detailed engineering work so he outsourced it. The project manager did not implement any quality controls for this but he trusted the contractor fully.

The contractor started building the power plant to its own design. The construction works did have some quality controls but it was all handled by contractor.

The time came that the industrial entrepreneur was expecting its electricity. The contractor was not yet ready but it would not be too much longer. The equipment was in place, most of the piping and electrical work had been done, they just needed a little bit more money from the IPP developer to finish off. The project manager decided the best way was to give the money to the contractor, after all it seemed fair to him and there was no need to get ‘contractual’.

The IPP developer fell of its chair when it heard it needed more money as it had not been warned and there seemed to be no justification. They quickly sent someone with experience to see what had happened.

The project had serious engineering and construction deficiencies, could not be commissioned and was not safe. Significant rectification works were required which the contractor was prepared to do but at a significant price, after all the project manager had been there throughout and had never raised any issues.

The project manager was sent home, the contractor and IPP developer entered into a dispute on who was going to pay for the rectification work. The contractor occupied the site and would not let the developer back on until they had their money. The industrial entrepreneur was also very unhappy and was applying damages on the developer because he was not delivering the electricity he had promised.

The dispute went to the local courts who were less than efficient in resolving the matter and there it stayed for the next year.

Eventually the industrial entrepreneur and the developer got together and found a way to resolve the dispute and get the contractor off the site. The developer rectified the power plant with other contractors, commissioned it and supplied electricity to the industrial entrepreneur.

There were no winners in the above story and the overall financial effect of this in both time and money was considerable for everyone involved.

Whilst the above story may seem extreme, it is a fair bet that there are quite a few readers out there who will find some or all of it familiar to their own experiences. One of the Mack partners happened to be the engineer that the developer sent out to find out what was going wrong.

In summary, just a few basic technical, commercial, and contractual disciplines would have avoided most if not all of the pain:

Pre-Contract
• Understand the risks and make sure that you adopt a construction strategy that is aligned with your risk appetite.
• Make sure the stakeholders are competent (engineers, project manager, contractor etc).
Spend time on ensuring that any contracts properly capture the agreement between the parties and include the usual boiler plate provisions with respect to responsibilities, liabilities management of change, including all-important dispute resolution clauses.

Contract
• Keep professional arm’s length relationships between the parties. Getting an independent company, such as Mack, to provide independent project review services would help avoid nasty surprises.
• Don’t underestimate the importance of the engineering and quality processes.
• Administer the Contract in accordance with its provisions.
• Monitor planned v actual on the costs in real time on a regular basis.
• Deal with difficult issues such as claims, extensions, variations etc., promptly.

Dispute
• Manage any dispute process fairly and ensure you use the contract provisions for this, whilst actively seeking a negotiated resolution.

Due to constraints of time and internal personnel, it is often not possible to resource a project with the requisite capabilities. However, Mack can support you to help identify commercial risks at the start of a project and then manage those risks right through to completion, with the objective of on time and on budget delivery.

About Mack Energy

Mack Energy provides professional results focused Commercial, Contract, Claims and Dispute solutions for Energy Sector EPC Projects.

Services are managed and delivered by our managing partners located in Dubai, Johannesburg and London – each having more than 25-years commercial experience on complex multidiscipline engineering & construction projects across the Energy sector, including O&G, petrochemical, power and renewables.

Mack Energy Solutions include:

1. Commercial & Contract – Services through complete project life cycle from tender to delivery, including contract drafting, review & negotiation, contract administration and final account process
2. Claims & Dispute Resolution – Services for claimant or respondent including claim preparation, review and the management of the resolution process whether through negotiation or a formal dispute process
3. Commercial Management – Services provide clients with expertise to develop or support the corporate commercial management function
4. Independent Project Review – Offers stakeholders including executive management and board of directors an independent audit and qualified appraisal of a project’s commercial status
5. Project Development – Services provide project management and commercial support to develop your energy project
6. Project Resourcing – For clients and contractors includes the provision of personnel including project managers, construction managers and superintendents

Mack Energy ensures that the most appropriate resources are used for each assignment, including sourcing additional resources and expertise from an established network as needed.

Our contact details can be found at www.mack.energy