Enel and contractor strike deal over cost over-runs at Victoria solar farm

Tempo’s contract including mechanical, electrical and civil works, a high voltage substation, and procurement of electrical cables, but the company discovered within weeks of work starting on its first solar project that there was a significant risk of having to fork out significant amount of additional working capital, and that this would “stress” its working capital facilities.

To put this in perspective, the $15 million project represents a significant amount of Temp’s annual revenues, so any cost blow out that would require Temp to add in more money would have significant consequences.

“The project also has a risk for potential claims over delays and variations that would have potential to increase costs that would have been material for Tempo and deleterious for the project and the Client,” Temp said in its statement. “The Board determined that if the risk was realised this would place the Company in an untenable position.”

After weeks of negotiations with Enel Green Power, Tempo says the two parties have now agreed variations to the contract which includes a conversion of the contracting model to a “target cost estimate” model.

“This removes the potential for unresolved claims causing any increased costs and aligns both parties to work in collaboration with each other to minimise potential cost increases,” it says, and it will include a fully transparent open-book unit-pricing mechanism; and no need for additional working capital to fund additional costs.

However, while it is saved from having to throw in more working capital, it notes that if the target cost is exceeded then Tempo’s profit margin will be at risk. There is no indication whether the “target cost” remains the same as the original agreement, but appears designed to protect Tempo’s capital, if not its profits.

The problems experienced with other projects have led to many EPC contractors to seek changes to the way such agreements are constructed, mostly because they do not want to be held responsible for the cost and damages claimed from delays due to connection and commissioning issues which might be outside their control.