The power of project price indexation


The hardest part of any mega-project business lies with the trade-off between opportunities and risks. Poor prediction methods and inadequate estimation of the project complexity may break a project before it even gets off the ground.
On March 22, 2017 published an update on Rosarito Beach desalination mega-project worth of over US$ 460 million (Baja California, Mexico).
I try not to miss any news of this project as personally I consider the idea of its initiation brilliant in all aspects – economic, technical and commercial. It will not only solve the problem of water deficit, but will boost the area industrial development by adding thousands of new jobs.
Unexpectedly for me, this update labels the project as facing uncertain future. Guess what is the reason? Some insurmountable environmental laws? No. Overdue permits? No. Engineering blunder suddenly surfaced during detailed design? No.
As written in the update, the main reason is significant macroeconomic changes that adversely impacted the estimated construction, operating, and financing costs for the project. In terms of project engineering the same meaning may be expressed as follows.
The project price has not been indexed; the project contract has not included the price adjustment clause (PAC) covering fluctuation of labor, material and equipment prices.
I have listed the project indexation as a major risk source specifically for PPP and BOT contracts in my post "Handling Desalination Mega-Project Risks".
My personal experience shows that with narrowing project margins only inclusion of PAC ensures fair distribution of risk and reimbursement for work done between both parties – the contractor and the customer.
To prepare PAC by hand is not possible at all - computer program is needed. Crenger builds PAC by a button click.
The update details the company expenses related to the project activities in 2014 – 2016. The figures pose the obvious question – who will cover these expenses? To my understanding, the question would not have been relevant if the project contract had included the liquidated damages curve – another risk source mentioned in my post.
Can this curve be built by hand? Again the answer is negative as this curve is a result of Big Data processing (done by Crenger in the background).
Main takeaway? Try to learn from the mistakes of others. Especially if all the 150 tutorials are free for personal use.