Panama Canal Proposes Way to Resolve Contractor Dispute

The Panama Canal Authority last Tuesday moved to resolve its dispute with the contracting consortium that is threatening to suspend construction work on its new locks.

The authority proposed that it and the contractor, Grupo Unidos por el Canal, jointly contribute $283 million to the project.

It said the joint contribution would allow GUPC to continue construction on the locks while the contractor’s claims cost overruns are resolved under the three-step process established under the contract the contract. GUPC is led by engineering firm Sacyr Vallehermoso of Spain and also comprises Impregilo of Italy, Jan De Nul of Luxembourg and Construction Urbana of Panama.

The dispute over costs broke out last month when GUPC sent a letter to the canal authority saying it would suspend work on the locks by Jan. 19 unless it received $1.6 billion for cost overruns, a claim that Canal Administrator Jorge Quijano rejected.

Under the proposal, GUPC would have to cancel its notification of intent to suspend the works.

The dispute has grown so intense that Spain’s public works minister and the chairman of Sacyr visited Panama last weekend to help resolve the dispute that is threatening to delay the Panama Canal expansion for the third time. It is not known whether their visit resulted in last Tuesday’s proposal. The bitter dispute had raised the possibility that completion of the massive $5.25 billion canal expansion might be further delayed beyond the already postponed date of the fourth quarter of 2015.

The project was originally scheduled for completion on Oct. 21, 2014, on the 100th anniversary of the opening to the original canal locks in 1914. But the contracting consortium’s inability to manufacture cement for the locks that would last another 100 years delayed the completion date until the second quarter of 2015. After that first delay, what were described as electromechanical problems with the locks delayed their opening until the end of 2015.

The canal authority’s proposal is designed to head off another postponement, which could result in further and possibly long-term diversion of cargo to the Suez Canal route from Asia to the U.S. East Coast. Under the proposal, the canal authority would advance $100 million to GUPC, which would be guaranteed by its lending banks, and extend by two months the moratorium on the repayment by GUPC of $83 million that the canal authority had advanced to the consortium.

In return for this, GUPC would have to provide a letter of credit guaranteeing payment of $100 million to contractors and subcontractors and ship to Panama the four lock gates that have been built in Italy, for which ACP has already paid 75 percent.

The consortium would also have to rehire the workers needed to complete the project. The canal authority had complained in a letter to GUPC last month that GUPC had cut its workforce on the project.

The canal authority has already paid GUPC about $2 billion of the $3.12 billion fixed-price contract that the consortium won in 2009. The consortium had submitted the lowest bid, $3.12 billion, which was substantially lower than the canal authority’s target price of $3.48 billion and lower than the bids of the other two bidding groups. U.S. industry executives think that the companies in the GUPC consortium knew they might lose money on the project when they submitted the lowest bid, but had done so in the hopes they could cover their losses through cost overruns. But the contract only provides for cost overruns on construction materials, such as concrete, rebar and diesel fuel.

Source: Journal of Commerce