THE WELCH COMPANY
440 Davis Court #1602
San Francisco, CA 94111-2496
415 781 5700
S U M M A R Y
DIARY: January 20, 1992 10:10 AM Monday;
Memo to Wayne on speed increaser decision to replace v. retrofit.
......Note on Punch List
2...Communication Misunderstanding from Meaning Drift
3...Tudor Substantiated Recommendation to Replace Speed Increaser
.....Voith needs to submit working plan scenarios to which it would be
4...Lost Revenue Scenarios
.....The more likely retrofit option for making management decisions is
5...Replace SI = $490K
6...The cost of a new speed increaser should approximate $490K, since that
7...Retrofit SI = $250K
8...Since Voith must stand the cost of the new gear set and other items
9...DNRC at Most Liable for $240K to Replace SI
10...If Voith can demonstrate with competent evidence (which it has not
11...Lost Revenues Likely to Exceed $250K
.....Helical v. Spur
.....DNRC might permit Voith to install a spur gear to expedite the
13...Additionally, Voith is incurring exposure for delay costs at either
14...$6K or $1.5K per day. We are getting close to 3 years on this issue,
15...DNRC Decision Posture
16...From a management and risk mitigation standpoint, it appears that the
17...Voith has agreed to follow the directives of the Engineer and has
Click here to comment!
0201 - Dep Natrl Rscrs & Consvn O-00000395 0102
020101 - Mr. Wayne Wetzel
Engineering Management, Mitigation (Voith Instructions)
Engineering Management, Replace v. Retrofit, 920120
Welch Management Method, PM, Fundamentals & Overview
Priority, Executive Training, 930726
Discover & Fix Mistakes
Dig Out of the System, Proactive Analysis
Intelligence Analysis Organization
Meaning Changes Drifts in Circles without
Case Study Broadwater
Broadwater Dam Case Study Replace Defective Generator Gear
1712 - ..
1713 - Summary/Objective
171401 - Follow up ref SDS 8 0000, ref SDS 7 5I4N.
171403 - Considered DNCR decision to replace the speed increaser v. retrofit.
171404 - Discussed with Walt and Sarah, and prepared root cause analysis based
171405 - on project record, see below.
171408 - ..
171409 - Note on Punch List
171411 - This analysis completely ignores the pending punch list work
171412 - which seems extensive and getting more so, ref SDS 7 1652
171413 - Voith's 13 page review of the matter on Dec 10, 1991, ref DRP 2,
171414 - requires careful consideration for integration with speed
171415 - increaser work. However, the matter of whether to replace or
171416 - retrofit the SI is generally independent from punch list work,
171417 - and so that matter is not treated here.
171420 - ..
171421 - The record indicates the least costly solution may be to replace the
171422 - speed increaser for the reasons set out below. Timely notice to Voith
171423 - will further minimize the extra cost to all parties.
171425 - ..
171426 - Prepared memo for Wayne, ref DIT 1 0000, of this record, with a draft
171427 - letter, ref DIT 2 0000 for the Engineer to direct Voith to replace
171428 - speed increaser.
171431 - ..
1717 - Background
171801 - Communication Misunderstanding from Meaning Drift
171802 - Tudor Substantiated Recommendation to Replace Speed Increaser
171804 - Discovered management analyses attached to Tudor's 910816 letter on
171805 - repairing or replacing the existing speed increaser (see ref SDS 8
171806 - 8851).
171808 - This is similar to misunderstandings about engineering review of the
171809 - plant reported on 911009. ref SDS 1 3333
171811 - ..
171812 - Voith failure to perform engineering reported in root cause analysis
171813 - on 911116, Tudor's failure to demand performance of engineering
171814 - requirements, and to fire Voith for failure to perform, ref SDS 3
171815 - 0001, combined with Tudor's recommendation that DNRC waive
171816 - requirements for an independent Start-up Special Master, ref SDS 3
171817 - 9630, all caused the plant to fail. ref SDS 3 6291 All of the
171818 - submittals Voith made were 3 - 4 months after work was performed; they
171819 - were all rejected by the Engineer, but Tudor never required Voith to
171820 - submit corrections. ref SDS 3 R964
171822 - [On 920124 discussed with Rick Bondy miscommunication from his
171823 - discussion with Sarah about Aug 16 letter. ref SDS 9 4476
171825 - ..
171826 - [See explanation of "meaning drift" ref SDS 10 3734.]
171828 - ..
171829 - Discussed with Walt the idea of using Tudor's analyses with other
171830 - information developed since the Sep 3, 1991 Agreement with Voith, to
171831 - decide whether to demand that Voith provide a new speed increaser as
171832 - set out in DNRC's Nov 21, 1991 letter to Voith, ref DIP 1 0001, and
171833 - confirmed in the telecon on Dec 13, ref SDS 5 IO9O, submitted to Voith
171834 - at ref DIP 2 0001 on Dec 17.
171836 - ..
171837 - After about 45 minutes, Sarah joined the discussion while continuing
171838 - work on moving the DNRC chronological files from boxes to the filing
171839 - cabinets behind the Welch work area.
171841 - ..
171842 - I suggested that DNRC obtain a written analysis from the Engineer and
171843 - then do an internal analysis to develop a decision based on all
171844 - available information.
171847 - ..
171848 - Follow Up
171850 - Sarah needs to prepare legal opinion on DNRC's right to recover
171851 - lost revenue, and on the right to demand a new gear box.
171853 - In general the right to demand replacement of the SI appears
171854 - to flow from contract provision GC 13.11 and the admitted
171855 - defects in the unit, together with Voith's failed attempts to
171856 - make corrections. Sarah cited a good concept with respect to
171857 - how conflicting expert opinions on the adequacy of just
171858 - repairing the gear set can be treated within the discretion
171859 - of the Engineer. This concept should be developed fully and
171860 - formally as an organization resource to support decision
171861 - making.
171863 - ..
171864 - Walt should complete his York meeting report, and prepare his own
171865 - analysis of whether DNRC should insist upon a new speed increaser
171866 - or accept replacement. He has some strong views based upon inde-
171867 - pendent research that need to be set out in the record for DNRC
171868 - decision support.
171870 - ..
171871 - Engineer needs to report on the meeting with Voith and prepare a
171872 - preliminary opinion (with spreadsheet analysis) on most economical
171873 - way to proceed relative to replacing or repairing the speed
171874 - increaser. Tudor's Aug 16, 1991 analysis, ref DRP 1, should be
171875 - considered to maintain continuity in the record.
171877 - If Tudor's analysis is defective or incomplete it should be
171878 - corrected or completed. If it is sound, let us proceed with
171879 - it.
171880 - ..
171881 - Voith needs to submit working plan scenarios to which it would be
171882 - held in the event DNRC adopts a retrofit option that minimizes
171883 - lost revenue but has risks of unknown condition of existing unit.
171884 - This gives Voith the risk for the cost of lost revenue arising
171885 - from unknown conditions, even if it is not otherwise liable for
171886 - lost revenue.
171888 - ..
171889 - DNRC needs to decide and its Engineer should issues a directive,
171890 - per ref DIT 2 0001
171892 - Absolute knowledge is not necessary for this decision. Once
171893 - the Engineer directs Voith to replace the Speed Increaser,
171894 - Voith will have a duty of notice, if for any reason it
171895 - believes replacement is the more costly solution. If Voith
171896 - submits convincing evidence that retrofit is cheaper, then
171897 - such decision can be implemented.
171900 - ..
1722 - Preliminary Analysis
1723 - on Replace v. Retrofit Speed Increaser
172401 - This record begins a consideration on cost tradeoffs, lost revenue,
172402 - DNRC's claims, the contract provisions, Voith's contract performance
172403 - and the need for timely action. It incorporates information from
172404 - Tudor's Aug 16, 1991 analysis, ref DRP 1, and discussions with DNRC
172405 - staff on their research.
172407 - DNRC's decision process has been hampered by Voith's failure to
172408 - submit shop drawings requested at ref DIP 1 0001 and ref DIP 2
172409 - 0001 required by the contract, and promised by Voith at
172410 - ref DRP 2 HY8M Therefore, Voith has the burden to recover any
172411 - lost time.
172415 - ..
172416 - Lost Revenue Scenarios
172418 - Walt indicated today that Voith's estimate of the minimum period of
172419 - lost revenue for replacing the speed increaser is 3 months, and he
172420 - estimates the cost of lost revenue for that period would be $400K to
172421 - $500K, assuming the work commences in July (? or August ?).
172423 - ..
172424 - He said that the expected period of lost revenue if the speed
172425 - increaser is replaced is 1 month, and the estimated lost revenue for
172426 - that would be $100K.
172429 - ..
172430 - Tudor's Evaluations
172432 - The above valuations seem to differ somewhat from Tudor's report
172433 - of Aug 16, 1991, ref DRP 1 0001, and so require analysis for
172434 - support, as follows...
172436 - Tudor appears to estimate the minimum period of replacing the
172437 - speed increaser as approximately 2 months, instead of 1, but
172438 - values the revenue loss from $81K to $330K based on minimum to
172439 - maximum flows.
172441 - Note 1:
172443 - The schedule chart accompanying Tudor's narrative letter
172444 - may be missing some information. The page numbers are not
172445 - clear so the actual sequence Tudor proposes requires
172446 - consultation with Tudor to understand their analysis.
172447 - Voith should be required to submit its work plan though to
172448 - support the Engineer's analysis and DNRC's decision.
172451 - ..
172452 - Note 2:
172454 - The source for Tudor's lost revenue is not clear from the
172455 - report, and so should be investigated by the Engineer and
172456 - confirmed.
172459 - ..
172460 - The minimum period of "retrofit," which is Tudor's term for
172461 - repairing the existing speed increaser, is approximately 3 months
172462 - using double shifts and 6 day weeks, with NO construction prob-
172463 - lems?? Tudor sets a value for such loss from $120K to $532K based
172464 - on potential river flows, say $325K.
172467 - ..
172468 - The more likely retrofit option for making management decisions is
172469 - Tudor's #3 which assumes some delays. It shows minimum revenue
172470 - loss of $280K to $770K, for decision purposes, say $550K.
172472 - To this amount must be added the cost of additional equipment
172473 - which Walt is considering purchasing in the event such would
172474 - be needed, per recommendations from Geartech. Assume such
172475 - amount is $50,000. It is not clear why DNRC would purchase
172476 - such equipment instead of Voith, but in any event to deter-
172477 - mine the least cost, it would have to be added in.
172479 - ..
172480 - This seems to make lost revenue from retrofit option approximate
172481 - $600K.
172483 - ..
172484 - This analysis seems to overlook the plant down time for annual
172485 - maintenance which since it will be incurred anyway, should not be
172486 - included as lost revenue. If this period can be deferred to
172487 - coincide with the speed increaser work, i.e. moved to September,
172488 - October, November, etc. then even if it occurs during high peak
172489 - periods, it would be better than doing annual maintenance at its
172490 - regular time and then at a later date taking the plant off-line
172491 - again for the speed increaser work. There is likely a prudent
172492 - limit on how long annual maintenance can be deferred.
172495 - ..
172496 - Replace SI = $490K
172498 - The cost of a new speed increaser should approximate $490K, since that
172499 - is the amount bid. Inflation since 1987 has been approximately 3% per
172500 - year for 5 years, or 15%. This is the amount of the contractor's fee
172501 - to which it is not entitled for repair of defective work. As well, it
172502 - would seem the cost of engineering is largely eliminated, since the
172503 - drawings for the original speed increaser can be re-used, corrected
172504 - for any defects needed in the existing unit.
172506 - Note that corrections on the original design defects are required
172507 - in any event and so would not add to the cost of a new unit.
172508 - Examples include internal gear set support, structural support of
172509 - the housing, standpipe, shaft misalignment, etc.
172511 - ..
172512 - Walt indicated today that a new speed increaser would cost $600K,
172513 - but that is likely the street price from another vendor, rather
172514 - than the actual cost of manufacture by a vendor who has already
172515 - designed the unit, as involved here.
172518 - ..
172519 - Retrofit SI = $250K
172521 - Since Voith must stand the cost of the new gear set and other items
172522 - associated with retrofit option, we assume the cost of same to be
172523 - approximately $150K. At this time, there is no basis for this
172524 - valuation, other than the general duration indicated by Voith to
172525 - procure and fabricate the item. To the $150K must be added the extra
172526 - cost of disassembly, handling and general repair of the existing unit
172527 - that would not occur with a new unit, which cost may be $100K. Thus,
172528 - the order of magnitude of retrofit appears to approximate $250K, and
172529 - could be much higher. Voith needs to verify these valuations.
172532 - ..
172533 - DNRC at Most Liable for $240K to Replace SI
172535 - If Voith can demonstrate with competent evidence (which it has not
172536 - been able to do so far), that it can meet the contract specification
172537 - by retrofit, then DNRC might be liable to pay Voith for the difference
172538 - between the cost of repair (which could be much greater than $250K),
172539 - and the cost of a new unit (which could be much less than $490K), or
172540 - some $240K.
172543 - ..
172544 - Lost Revenues Likely to Exceed $250K
172546 - Since it appears that DNRC would expect to save from $300K to over $1M
172547 - in lost revenue by replacement rather than retrofit, replacement
172548 - appears to be the least costly solution.
172550 - ..
172551 - Helical v. Spur
172553 - DNRC might permit Voith to install a spur gear to expedite the
172554 - work by reusing existing shop drawings. In that case, Voith must
172555 - comply with GC 6.7.2 and 6.7.3. Walt is concerned that a helical
172556 - gear may not fit in the current configuration and so the cost of a
172557 - helical gear as specified would be increased as a result of
172558 - Voith's earlier errors. Voith can make this case, if it feels it
172559 - needs to be made.
172561 - ..
172562 - DNRC can then decide to accept a spur gear and accept a credit for
172563 - the difference in cost and/or performance of a helical.
172565 - ..
172566 - Noise Levels
172568 - The same consideration can be given to the noise level issue.
172569 - Demand they perform the contract. Let them request waiver and if
172570 - the Engineer feels some consideration can be given, negotiate a
172571 - credit.
172575 - ..
172576 - Settlement
172578 - DNRC is accumulating considerable extra expense in closing out the
172579 - Voith contract for engineering, construction management, legal,
172580 - special studies, administrative, and field work and materials. These
172581 - costs may exceed $500K by the time it is all over, if there is no
172582 - litigation.
172585 - ..
172586 - Additionally, Voith is incurring exposure for delay costs at either
172587 - $6K or $1.5K per day. We are getting close to 3 years on this issue,
172588 - so it is a $1.5M to $6M item. With adjustments for DNRC's revenue
172589 - during the period, it still makes DNRC's claims in the range of $2M to
172590 - $4M, after adding the direct cost elements described above.
172592 - This position offers leverage for DNRC to settle with Voith on any
172593 - claim Voith might make for the extra expense of replacement vs.
172594 - retrofit.
172596 - Note for example that replacement saves DNRC at least 2 months and
172597 - probably more in construction management expense over retrofit
172598 - which amount may exceed $50K.
172600 - ..
172601 - If DNRC seeks to recover lost revenue from Voith, a decision to
172602 - replace rather than retrofit shows DNRC mitigated the damage based
172603 - on the best information available at the time.
172605 - ..
172606 - Surety Payment
172608 - Voith's and/or Renk's insurance carrier will likely be helpful in
172609 - making an equitable settlement, provided DNRC's claim is properly
172610 - presented by Voith. Voith should be able to do this.
172614 - ..
172615 - DNRC Decision Posture
172617 - From a management and risk mitigation standpoint, it appears that the
172618 - Engineer should direct Voith to replace the speed increaser and advise
172619 - that if it incurs any additional expense, to submit same for payment.
172620 - The Engineer should advise Voith that it may submit for consideration
172621 - under GC 6.7.2 and 6.7.3 an alternate design under section 11257 sec-
172622 - tion 2.1 I.
172624 - If we lack confidence in the risks as presently understood, then
172625 - Voith can be directed to submit its own analysis of the cost of
172626 - replacement vs. retrofit.
172629 - ..
172630 - Voith has agreed to follow the directives of the Engineer and has
172631 - committed to carry out its contract, ref DRP 2 0001. It has shown
172632 - that when pressed (see ref DIP 1 line 104), it will do so, see
172633 - ref DRP 2 - 4. Why not therefore simply direct Voith to comply with
172634 - its contract, per draft at ref DIT 2?
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