Abstract
Engineering, procurement, and construction (EPC) has been applied in China’s hydropower projects for its value-added advantages compared with traditional project delivery systems in theory. However, the actual performance of large EPC hydropower projects has been challenged by the complexity of the stakeholders’ interest demands and conflicts. The increasing use of target cost contracts (TCC) in the construction industry has provided a pain/gain share mechanism for the owners to incentivize contractors to complete projects within cost budgets. The added-value sharing ratio is the core element of TCC, and it predetermines how much proportion of savings the contractor can get paid if the actual cost is below the target cost, and how much proportion of overspend the contractor has to pay if the actual cost is higher than the target cost. In this paper, we consider the added-value sharing ratio under the framework of TCC based on the principal-agent theory, and look at how the added-value sharing ratio is influenced by various factors and how it affects the owner and the contractor in large EPC hydropower projects. Determination of the added-value sharing ratio in both discrete and continuous conditions are discussed, respectively. It is found that the added-value sharing ratio is relatively explicit in the discrete case, while the optimal added-value sharing model in the continuous case is more complex, which can be used to analyze the relationship between the added-value sharing ratio and the key influencing factors. Our research conclusions can provide both theoretical guidance and practical suggestions to contract design in the implementation of EPC hydropower projects, to some extent.
Highlights
Society’s energy consumption worldwide has increased by up to 600% over the last century
For a given large-scale EPC hydropower project with high uncertainty, it is crucial to share the added-value between the owner and the general contractor, since the final project outcome is affected by the complexity of their interests and the liabilities involved
The key to the successful application of target cost contracts (TCC) in EPC hydropower projects is to design a mutually satisfactory added-value sharing ratio to motivate the EPC general contractor to carry out design optimization, making the potential added-value of EPC come true in practice
Summary
Society’s energy consumption worldwide has increased by up to 600% over the last century. This increase has been a direct result of population growth since the industrial revolution, in which energy has been provided mainly by fossil fuels [1]. Renewable energy sources can replace fossil fuels for electricity generation to a certain extent, contributing to the reduction of CO2 emission worldwide [2]. The international industry predicts that by 2050, the installed capacity of hydropower globally will double from the current 1 billion kilowatts to 2 billion kilowatts, and most of the hydropower resources to be developed will be concentrated in Africa, South America, and Southeast Asia, which is sure to provide a good development opportunity for China’s hydropower industry [4]
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