No Increased Construction Cost ProblemIncreased Construction Cost Problem
EF issued the following News Release 4 July 2008 ( I added Numbers)
1) EarthFirst Canada Inc. has increased the total capital cost estimate of the Dokie I wind project in the northeast British Columbia region, from $325-million to $360-million. The company notes that the project tendering process is now substantially complete.
2) Approximately $22-million of the increase is due to higher than anticipated tendered pricing, largely as a result of increased natural gas exploration and other economic activity in the area affecting labour and commodity costs.
3) The remainder of the increase comes from raising the contingency allocation from $23-million to $36-million. This change reflects the recommendations of the independent engineer contracted by the senior lenders to the project. Management will make every effort to reduce contingency spending through effective construction management and cost control.
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In item 3 above, the contingency fund has increased by $13 million, ( from $23 to $36 million) This $11 million increase is an allowance for future possible problems. It is not an actual committed cost increase.
In item 2 above , there has been a potential $22 million construction cost increase, due to labour shortages and high commodity prices. During this recession, manpower cost will not be a problem. Natural gas prices have fallen and this will decrease exploration. Also all commodity prices have fallen. It quite possible that project cost will be reduced, because steel and concrete costs have fallen.
EF maybe be able to renegotiate a lot of the construction costs to pre boom levels, based on Force Majeure contract terms. Most construction contracts have Force Majeure terms; most courts would agree that EF could impose the Force Majeure based on the banking system problems. This point would easily be settled, by the arbitration terms of the construction contract.
It appears that as a worst case scenario, the project may have a $22 million dollar construction cost increase. However as per item 3, the project had an initial $23 million contingency fund. So this cost increase used up the allowed contingency fund. It was for this reason they, increased the contingency fund by $13 million.
The bottom line is that, " the increase construction cost problem ", may no longer be a problem.