Brian Allan, MD, Chartered Surveyor, Construction Claims Specialist and practicing Expert Witness at QSI Consultancy Group discusses the key components of a successful contract management strategy for firms involved in new build nuclear.
Firms that have secured contracts on new build nuclear projects such as Hinkley Point C are rightly proud to have done so. To work on such prestigious projects can boost a company’s profile and put them in a good position for continuation on similar projects. However, given the benefits of securing such work, competition can be tough and margins for successful companies tight. Therefore, it is crucial that effective contract management policies and procedures are in place to optimise the commercial outcome of the contract. This applies equally to the project owner.
RISKS ASSOCIATED WITH NEW BUILD NUCLEAR
The long period between the commitment to build and the production of electricity increases the risk of unforeseen circumstances arising. For example; increases in the cost of finance, price escalation (materials and labour), exchange rate fluctuations, new licensing requirements (leading to increased costs), supply chain problems, labour problems, material shortages, detailed design difficulties, the impact of a pandemic. These risks can affect in particular both the owner and Tier 1 contractors.
Programme and Coordination Risks
The risk of delay generally tends to increase in line with project size and complexity. Nuclear power plant projects are no exception. Delays to the overall project can occur for multiple reasons; e.g. design delays, long/delayed lead times for components, manufacturing problems, civils difficulties, quality control issues, non-core plant issues (e.g. physical protection), technology advances during the project (e.g. I&C), late changes etc., therefore it is important to try to ensure that the project schedule(s) incorporate(s) reasonable float on critical items – failure to do so can lead to claims between the parties.
The extent to which these issues affects individual contractors depends on their own scope of work. From the point of view of the Owner and Tier 1 contractors, the consequence of programme change can be extremely disruptive. Every effort should be made to maintain schedule discipline. Changes, if any, should be introduced sufficiently early to avoid disruption. Multiple enforced late programme changes invariably leads to claims.
For all project participants, the lack of a sufficiently detailed, logic linked, feasible and achievable schedule at the outset can result in inefficient working and irreversible delays. An unrealistic schedule and poor schedule reporting creates uncertainty and puts completion dates in jeopardy.
Document Handling Risks
The creation, handling and review of the vast volume of technical documentation (e.g. system descriptions, construction plans) is a mammoth undertaking for the parties (supplier, owner, authorities). The schedule (or sub-critical parts thereof) is invariably driven at various points in time by document handling and approval, which leads to inevitable time pressures on the handling of the documents.
Perceived “delays” in such document handling can lead to multiple claims and disputes. The absence of clear contractual provisions relating to handling periods can be problematic. FOAK (first of a kind) implications can also make the licensing process uncertain.
3rd Party & Licensing Risks (Authorities)
The involvement of the Authorities is, to an extent, beyond the control of the contracting parties. Nuclear licensing is rightly stringent and, apart from the technical burden that this creates, can lead to contractual and commercial disputes. Typical areas where dispute can arise are:
- Liability for “unforeseen” Authority decisions
- Liability for Authority “changes”
- Liability for “late” Authority decisions
- Interpretation differences (e.g. regulator decisions are often expressed in performance terms rather than being technically prescriptive)
Other Risks
Other risks (to be considered in future articles) include:
- Turnkey dilution
- Licensability dilution
- Transfer of obligations
- Constructive change orders
- Delay and scope changes by authorities
- Preferential engineering (i.e. by owner or authorities)
- Constructive acceleration
- FOAK challenges, other technical risks
RISK AND CONTRACT MANAGEMENT
Formal risk management procedures should be implemented, which may encompass; supply chain risks, labour risks, construction risks, schedule risks, design risks. Potential risk should be closely (and regularly) monitored via a risk register in order that mitigation measures can be quickly implemented whenever possible. The risk register should be dynamic and not simply a list of unresolved issues.
Conditions of Contract
Whilst contractors and suppliers working at Hinkley Point C may have been engaged on standard forms of contract such as NEC and FIDIC, it is crucial that the contractual mechanisms within those contracts are properly administered (e.g. issuing of notices, prospective substantiation of Compensation Events under NEC). In addition, careful consideration should be given to the risks associated with any modifications to standards forms via particulars conditions or similar. From the owner’s perspective, it would be preferable that contractors are engaged on similar terms and conditions.
Effective Communication
Effective lines of communication within and between the client and supplier organisations promotes efficient execution of the works and mitigates against the risk of time and cost overruns versus planned. Communication processes should be optimised through the implementation of electronic systems and databases, encompassing; letters, technical transmittals, meetings, reports, regulator decisions, etc.
Regular discussion with counterparts and negotiated resolution of site level conflicts similarly minimises the risk of unnecessary escalation. Diligent and inclusive internal briefings and training minimises risks arising due to lack of knowledge or understanding (e.g. preferential engineering and constructive change orders).
Programme control & oversight
It is essential that the baseline programme contains realistic activity durations and is fully logic linked, since this will form the basis of all future project programmes. This is especially true for nuclear new build projects, which involve thousands of activities with complex inter-relationships covering many years (e.g. the design, manufacture, testing, inspection, transport, installation, inspection of a main component is a project in itself lasting some years).
Programmes should be regularly updated in order that as-built status is recorded and realistic future activity durations are planned. Delays should be quickly diagnosed in order that timely and effective mitigation measures can be introduced (e.g. re-sequencing, adding additional shifts etc). Contractual implications of any change and/ or modifications to the works schedule need to be identified.
Proper programme management and reporting mitigates the risk of time and cost overruns and allows the implementation of effective mitigation measures.
Commercial management & oversight
The following prerequisites to successful commercial management should be implemented:
- Cost control, forecasting and reporting – clear procedures should be established.
- Interim / partial payment control (inc. price escalation).
- Change management – implement procedures, consider and manage time and money impact contemporaneously.
- Cost mitigation – identify actual or future cost overruns early and introduce mitigation measures whenever possible.
- Regular liaison internally and externally.
- Reporting systems.
Effective commercial management and control provides the opportunity to mitigate potential loss and optimise project finances.
Claim Management
Ambiguities and uncertainties can arise in contract documents, especially on large and complex projects such as nuclear new build. Evolutionary and first of a kind projects have a steep learning curve and unforeseen or unplanned circumstances often arise leading to conflict between the parties.
Not every risk can be mitigated – this creates financial pressures resulting in liability arguments. For example, when detailed design is developed post contract such as in nuclear new build this tends to generate scope liability arguments. Fair and reasonable allocation of risk where possible should help minimise claims. Clear and unambiguous contracts should help minimise claims. Resolution of issues contemporaneously prevents uncertainty and claim escalation.
High CAPEX means that values in dispute could be high, and possibly disproportionate to the disputed event. Proactive actions and handling of disputes can greatly mitigate potential losses of both parties. Also, fair settlement of valid formal claims is good for the project and important for morale. If claims cannot be settled by agreement, effective Dispute Resolution proceedings should be implemented to ensure early resolution (to be considered in future articles).
CONCLUSIONS
Every attempt should be made to minimise risk through effective contract management and the implementation of mitigation measures. Schedule and commercial optimisation does not arise by chance, but rather is created through the implementation of effective systems and procedures, e.g.
- Risk Management
- Communications
- Project Controls (schedule & costs)
- Commercial Management
- Claim Management
- Dispute Resolution
Effective contract management not only benefits individual parties but contributes to the overall successful delivery of the project.
-Brian Allan, QSI Consulting Ltd.