Avoiding fallout – A contractual playbook for approaching risks on nuclear power procurement

Nuclear projects are unlike any others for many reasons. Things such as engineering and technical complexities; the need for specialist expertise in short supply; the amount of proprietary know-how involved; the nature and volume of materials required; the importance of precision and safety in design and execution; the sheer scale in terms of capital expenditure and programme; the highly regulated environment throughout delivery and operation; and the political and environmental contexts.

In short, these are totally different beasts to other projects. Because they can run into tens of billions of any currency and take many years to deliver, they can't just be bought in the same way as other projects where you might get a relatively firm price and programme at the start or as you move from one phase to another. Even in the best case, few suppliers or contractors will have the technical competency, balance sheet capacity or risk appetite to take on substantial elements of a nuclear project. As it is, today's supply chain is re-assessing contracting arrangements in the face of many challenging headwinds.

Procurement of a nuclear project needs to be approached with a high degree of sophistication to find a solution that helps the supply chain without jeopardising project appraisals, secures delivery contracts which meet stakeholder's expectations and ensures the right balance between risk, reward and value for money. There is no one size fits all solution; but there always needs to be more focus on risk identification and mitigation, and not just on risk transfer and remedies for failure. In our experience the most successful procurements will see clients developing strong relationships with the supply chain and making sure suppliers are properly invested in successful project outcomes.

Nuclear projects lend themselves to unbundled procurement to a greater or lesser degree, such as several contracts for different packages of design, engineering, fabrication, logistics, installation, etc. At one end of the spectrum, we've seen projects with well over 200 separate contract packages, all of which need progressively tendering, negotiating, signing and managing to ensure the project comes together as a whole. The benefits of disaggregation include opening-up modules of work to a wider range of specialists and best in class suppliers; securing the design, buildability and operability benefits of early supplier involvement; enabling closer management of programme; spreading the risk of production capacity; and generally delivering efficiencies through increased competition, progressive procurement and optimised risk transfer and pricing.

A high degree of adaptability in pricing is usually required. While fixed prices are achievable for better defined elements of work and where schedule permits, they won't always be efficient or sufficiently align commercial interests. Target costs with gain/pain share are common for less well-defined scope, but they are not a panacea for the most challenging elements of procurement (such as civil works or on-site installation with an emerging scope or high volume of interfaces).

We are seeing an increasing range of incentive-based approaches. These modify things so, instead of punishing suppliers and potentially threatening their businesses for being late or over budget (which drives up cost or, worse, puts off tenderers), suppliers are covered for their costs of delivery but upside is only generated mainly or wholly through achieving KPIs. Reducing risk and linking rewards to successful outcomes is designed to set up suppliers to find productivity and other efficiencies to drive down cost rather than focus on protecting against downside risks. Some clients will also look at ways to encourage collaboration across contract lines to achieve overall project requirements, although there are limitations to how far this can be taken.