Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

Navigating Nuclear Risks

New approaches to contracting in a post-turnkey world.

Fortnightly Magazine - July 2008

the market strength today to largely prevail. These market realities complicate the ability of the owner to secure both supplier delivery capacity and attain a level of risk apportionment that corresponds to conventional perceptions of equitable sharing. In essence, owners now operate within a seller’s market where practical constraints exist with respect to achieving the same apportionment of risk that once characterized nuclear design and construction.

The implication of these new market dynamics for the owner–EPC relationship is that contracting has become vastly more difficult to complete. Owners and EPC firms have been rigid in avoiding risks that are viewed at cross-purposes with underlying desires to protect their respective interests. As a result, owners carry less leverage than they initially imagined, while EPC firms convey less transparency than they believe. The combination of these factors results in reduced visibility into estimates and potential displacement of execution risks from the EPC firm to the owner.

In response, most owners initially attempt to drive as much fixed-cost or firm-price philosophy into their contracting strategies as possible. However, the lack of completed engineering hampers both the owner and the EPC firm in accomplishing this objective, particularly in a perceived FOAKE environment. In order to reduce the risk of execution to the EPC firm, this results in large risk premiums being built into estimates, which typically are unacceptable to the owner.

The inability of owners to negotiate expected contracts and underlying terms and conditions is moving them to seek alternative arrangements to reduce uncertainties and preserve their interests. These approaches typically result in decomposition of the contract into discrete components or into defined timeframes to achieve greater estimating predictability and protection for the owner.

Consequently, the decomposition of plant components from broad descriptions, such as the nuclear or turbine islands, into discrete elements, such as reactor internals, condensers, valves and pumps, offers the potential to enable greater foresight into truly volatile and less predictable design and execution risks, as compared to the more familiar risks associated with traditional plant development. Decomposition allows greater consideration of design risks and scheduling dependencies. But, more important, it allows a finer evaluation of supply and price risks. The fundamental evaluation of underlying material and production markets, particularly in light of escalating commodity markets and limited capacity of prime component manufacturing, potentially is being oversimplified in escalation assumptions. Understanding these global market complexities is vital for developing confidence in cost and schedule estimates—and avoiding systemic underestimation.

Increased decomposition and evaluation of risk allows for breaking down, and repackaging, components and work into unique contract packages that can be closely evaluated and fit to a contract form that more accurately reflects the risks inherent with the design, supply and installation of the element. Thus, more predictable contract forms, such as fixed price or firm price with escalation, can be adopted without risks being asymmetrically absorbed by the owner, NSSS vendor or the EPC firm.

Our recent surveys clearly indicate the shift in market contracting given this realignment of the relative interests of owners and EPC firms. There has been a distinct move