The Dulhasti Power Plant - Case Study Example

The Dulhasti Power Plant 1. Explain the challenge of producing accurate cost estimation when working in harsh geographical conditions. It is very difficult for construction firms to carry out accurate cost estimation when working in harsh geographical conditions. From the given case study, it is clear that adverse geographical conditions caused the French consortium to experience project cost overruns and extensive period to complete the work. Since the point of construction was a disputed border region, it was greatly prone to terrorist attacks by Pakistan nationalist groups. Therefore, allotting additional funds for addressing the security concerns of the hydroelectric project was necessary. In addition, the selected region was very poor in terms of infrastructure development. More precisely, the region did not have an adequately developed logistic network including roads and rail lines. As a result, almost all construction supplies such as raw materials and labor had to be brought with air transportation. Another issue is that the construction site was far away from larger cities and urban areas. Therefore, the construction firms had to spend more on food and accommodation for its workers. In addition, the non-proximity to larger cities significantly increased the transportation costs of the French consortium. Since the company had to wait for a relatively long period to obtain the supply of raw materials, this situation led to delay in the completion of the project. Evidently, time delay involved in the project completion would end up in cost escalations. Probably, the adverse climatic conditions in this mountainous terrain might have also contributed to the project cost escalation. Management professionals point out that even highly experienced construction firms cannot accurately perform cost estimation when working under harsh geographical condition due to unforeseen contingencies. There are some regions that are extremely prone to natural contingencies like earthquakes, floods, drone, and wildfire. While working in such bad geographical regions, construction firms are most likely to experience cost overruns. Such threats not only impede the project development but also cause damages to construction firm’s resources including tools, equipments, and labors. Sometimes, issues like landslide or icy roads may disrupt transportation, and hence the construction firms may be compelled to stop their work temporarily. Undoubtedly, such incidents would cause construction firms to incur unanticipated fund needs. In order to manage contingency costs, construction firms are forced to increase the level of contingency funding, particularly when they work under fixed price contracts. If a normal construction project needs to reserve 10% for contingency funding, it is uncertain that how much has to be reserved for contingency funding while working on a construction project under harsh geographical conditions. Generally, it is safer for construction firms to rely on conservative cost estimates than making too many risky assumptions while dealing with those development projects. 2. The original bidding process favored the lowest project construction bids using a “fixed price” contract. What are the advantages and disadvantages to the Indian government from using this type of bidding process? How did it contribute to gross underbids and successive cost escalations? According to Ayers, fixed price contract reflects the idea that “for a specific sum of money, the bidder will agree to do a specific amount of work” (p.148). The fixed price contract offers a set of potential advantages to the Indian government, particularly while developing projects in harsh geographical conditions. Predictability is a major advantage to the Indian government while using this type of bidding process. More clearly, the fixed price contract assists the government not to be concerned regarding future price increases or other market abnormalities. Most notably, this type of bidding process would greatly benefit the government while performing construction projects in geographical areas which are vulnerable to natural contingencies, terrorist attacks, and other unforeseen issues. For instance, the fixed price contract evidently assisted the Indian government to save millions of dollars on the Dulhasti Power project. Although the project was awarded to the French consortium at a price of $50 billion, the total project cost increased 25 times its initial cost by the completion of the power plant construction (Case study). The project took a long time (20 years) to complete due its fits and starts resulting from harsh geographical conditions (Case study). However, the French consortium bore a significant percent of cost escalations before leaving the project with the consent of the Indian government. If the Indian government had not adopted the fixed price contract method, it would have incurred huge additional expenses. Another advantage of this type of bidding process is that it is beneficial for the government to take advantages of the stiff competition among construction firms and thereby ensure lowest possible price. Under the fixed price contract, the government can determine what it should spend to get the particular project completed within a specified period of time. Since the slow work would cost the construction firm more money, the firm will certainly try its best to complete the project at the earliest. Likewise, the fixed price contract would assist the Indian government to get rid of administration costs in terms of supervision and control. To be specific, the bidding strategy greatly assisted the Indian government to construct the Dulhasti power plant without incurring huge losses in spite of harsh geographical conditions including poor logistic network. Under the fixed price contract, the Indian government might have enjoyed minimum power over the performance of the contract. More clearly, making changes to the project is much difficult; instead, it is particularly essential to proceed exactly according to the plan under the fixed price contract. As the case study clearly indicates, the lack of flexibility can be attributed to the long delay involved in the completion of the Dulhasti power plant. Another major disadvantage of fixed price contract is that, the quality of the project development may be affected under this type of bidding. Evidently, the bidder would try to reduce expenses in every way possible and this practice is more likely to affect the quality of the work done. Therefore, the fixed price contract may thwart the performance of the project completed in a desired way. Works Cited Ayers, Chesley. Specifications for architecture, engineering, and construction. US: McGraw-Hill, 1984. Print. The Dulhasti Power Plant. Case Study. Read More