Practical considerations for contractors

There are various matters that should be borne in mind by contractors when engaging in nuclear work, the most important of which are arguably:

1. Forms of procurement;
2. Contract forms;
3. Testing and commissioning; and
4. Effective risk management.

Each of these is dealt with in turn below.

1. Forms of Procurement

The three main options that are currently under consideration for the new build are:

A. EPC turnkey
B. Multi-contracting
C. Hybrid or split EPC

A. EPC Turnkey

EPC is the traditional model used by the energy industry for the delivery of projects under which the contractor is obliged to deliver the works on a turnkey basis (which makes this form of procurement relatively expensive). EPC contracts have fixed programmes with certain completion dates, a fixed price and guaranteed performance levels.

Because all major risks are assumed by the contractor, it is imperative for there to be a realistic work schedule, a completed design before works start on site, a detailed knowledge of the regulatory regime and a competent workforce to prevent any problems from arising further up the line.1

B. Multi-Contracting

Under multi-contracting, construction is divided into various contractual work packages.2 This form of procurement tends to be used by very experienced clients such as EDF who are accustomed to nuclear build work and who wish to retain a greater influence over the project management side than would otherwise be the case under a turnkey contract.

The client assumes responsibility for coordinating the various work packages and manages the interface and lines of communication between them. Multi-contracting only works well if it is properly managed, as a lack of co-ordination could lead to significant delays, additional construction costs and performance problems, all of which are particularly difficult to analyse in the nuclear context in light of the technical complexity inherent in power plants.

These risks can, however, be reduced and mitigated by limiting the number of subcontractors and providing single (as opposed to multi-) contract packages wherever possible so as to provide a single point of responsibility.

C. Hybrid or Split EPC

A hybrid or split EPC aims to divide a traditional EPC contract into two or more separate contracts with parallel work streams. The aim is to achieve a delivery method that has as few contracts as possible (and therefore less coordination risk) to facilitate easy project management by the client.3

D. Preferred Form of Procurement

Given the novelty and technical complexity of the new build, and with companies such as EDF driving the build, the preferred procurement route is most likely to be EPC or multi-contracting using NEC3. However, significant amendments to NEC3 would be necessary to make the contract project specific and ensure it complies with the regulatory regime discussed above.

2. Contract Forms

There are two main contenders for nuclear work, FIDIC and NEC3.

A. FIDIC

The current FIDIC suite is well suited to nuclear work in that it includes contracts for building and engineering works (Red Book), electrical and mechanical plant (Yellow Book) and EPC / turnkey contracts (Silver Book).

Where the main responsibility for design is to rest with the contractor, the Yellow and Silver books are most appropriate and generally contain a fair allocation of risk between the employer and contractor. These books also have the additional benefit of being well known to funders.

B. NEC

Compared with FIDIC, NEC3 is relatively simple and brief, with fewer terms and conditions and clauses. Its intention is to provide a collaborate model that is based on modern project management, risk management, and problem solving by the client. The project manager under NEC3 has a key role and it is essential for the smooth operation of an NEC3 contract for the client to select an appropriate contract manager / organisation to carry out this role.

During the preparation of the contract, it is vital that the works information is adequate for nuclear work: this means that it should contain more information than the standard bills of quantities or employer’s requirements documents. The extent to which the contractor is responsible for the design,4 the works that are to be carried out by the client or third parties, and procedures for the submission and review of information must be clear. Success is very much dependent upon detailed and early preparation at the pre-contract stage.

NEC3 has been approved by the Office of Government Commerce and is being used by the Nuclear Decommissioning Authority for nuclear decommissioning work. For that reason, it should probably therefore be regarded as the first choice form of contract for nuclear build work.

EDF has made the following comments in relation to NEC3:

“We recognise the UK supply chain operates differently to France (where the company is building a nuclear power station at Flamanville). The French way is to go for large lump sum turnkey contracts. The UK supply chain is more complex and relationship based. We’ll use the NEC form as it is more collaborative and what we want on these plants is good solid relationships.

We’ll be looking closely at how main contractors collaborate with their supply chain.

Nuclear work is about getting it right first time, every time. What we are doing is running a marathon. We need to train for the marathon. So getting the right people is a key issue.”5

3. Testing and commissioning

It goes without saying that safety is paramount in nuclear build and any contractual testing and commissioning regime must be properly implemented and effective. A very detailed testing regime should be agreed with the benefit of appropriate technical advisers prior to the contract documents being entered into to ensure that the regime forms part of the contractual undertakings of the parties and to ensure that everyone is aware of what is required in order for the build to be “complete”.

4. Effective risk management

Limiting liability

i. Strict liability for the new build is undoubtedly a daunting prospect and one that developers might seek to pass down to contractors in the form of contract amendments. As daunting as this might seem, in fact only around 20% of nuclear build work is actually nuclear in nature,6 and the overwhelming majority of construction work that is undertaken in the course of nuclear build work is in fact standard to all construction projects.7 The risks for the nuclear aspect remain, however, and the consequences of any mistake would be severe. Steps should therefore be taken to limit liability.

ii. If some liability does have to be assumed by contractors, the extent and type of liability should be managed through contractual negotiation, with a view to limiting liability to the contract price. This is something that nuclear developers are used to seeing, since nuclear suppliers commonly limit any contractual liability that they might have to the nuclear operator further up the chain.

Insurance

iii. It is a common misconception that nuclear build work is not easily insurable on the grounds of availability and cost. As an unidentified broker who had been responsible for a nuclear insurance pool quoted in 2006:

“It is wrong [to believe] that insurers will not touch nuclear power stations. In fact, wherever they are available to private sector insurers, Western-designed nuclear installations are sought-after business because of their high engineering and risk management standards. This has been the case for fifty years.”

iv. He went further, adding:

“My comment refers very much to the world scene and is not contentious. Apart from Three Mile Island, the claim experience has been very good. Chernobyl was not insured. Significantly, because Chernobyl was of a design that would not have been an acceptable risk at the time, notably the lack of a containment structure, the accident had no impact on premium rates for Western plants.”

v. He continued:

“The structure of insurance of nuclear installations is different from ordinary industrial risks. It involves international conventions, national legislation channelling liability to the operators, and pooling of insurance capacity in more than twenty countries. The national nuclear insurance pool approach was particularly developed in the UK in 1956 as a way of marshalling insurance capability for the possibility of [serious accidents]. Other national pools that followed were modelled on the UK pool — now known as Nuclear Risk Insurers Limited,8 and based in London.”9

vi. Whilst insurance is available, in the event that there was a major nuclear incident in the UK, the uninsured losses would be extensive. Not least because the insurance cover which is required to be held under the Nuclear Installations Act relates to claims in aggregate whereas the limit on liability is per occurrence.

vii. By 1991, the very lowest estimate of the total costs associated with Chernobyl was US$6 billion and the highest was £200 billion,10 which is far in excess of the current compulsory insurable limits. The costs to countries outside the former USSR have been estimated at between US$1.5 billion and US$4 billion, making Chernobyl the most expensive industrial accident in modern history.

viii. One of the key difficulties of the fallout post-Chernobyl was the drive to try and make the populated areas affected by the accident habitable, and this is reflective of the problems that the UK might suffer in the event of a nuclear incident. Estimates of the early cancer deaths and short-term costs alone of a major nuclear incident in the UK have been suggested by Earth Resources Research and Friends of the Earth as being around £15 billion.

ix. Given the considerable likely underinsurance in the event of a nuclear incident in the UK, it is more important than ever that contractors get it right first time.

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• 1. Delay to the construction of The Olkiluoto 3 Project in Finland was understood to have been caused in part by an absence of these requirements.
• 2. EDF used this method for the construction of Flamanville 3 in Normandy, France and has advised that it is to be repeated for Hinckley Point in the UK.
• 3. Elements of split EPCs can be found in EDF’s procurement strategy.
• 4. See the Sellafield case of Shawton Engineering Ltd v DGP International Ltd and Others, CA, 18 November 2005, in which the failure of the contract to make clear whether the contractor was responsible for the development of the initial design, or was to produce manufacturing drawings, resulted in termination of the contract by reason of delay in the absence of a contractual provision for an extension of time.
• 5. Former EDF Head of Procurement Alan Cumming, New Civil Engineer, 8 July 2010.
• 6. According to a study released by the Nuclear Industry Association entitled The UK Capability to Deliver a New Build Programme, 2008 update.
• 7. For example, site investigations, site preparation works, temporary workers’ accommodation etc.
• 8. The majority of this insurance is provided by a pool of UK insurers which comprises 8 insurance companies and 16 Lloyd’s syndicates.
• 9. The original quote is cited in the “Liability for Nuclear Damage” section of www.world-nuclear.org.
• 10. See page 11 of the Greater London Authority Liability Paper.