INLA Inter-Jura Congress 2014

Nuclear New Build Contracts – Effective Incentivisation Mechanisms

Graham Alty

Partner

Pinsent Masons

graham.alty@pinsentmasons.com

Traditional Incentivisation

• Focus on “passing of risk” – adversarial• “After the event” management

• If we are going to have a renaissance, why not benefit from experience on other nuclear projects?

• The traditional mechanisms are not defunct but others can also be embraced

So unless you have one of these ......

Alliancing Case Studies

• BP Andrew Oil Field– cost savings of 35%– schedule savings of 6 months

• ScottishPower Energy asset management– cost savings 20%– capex savings 10%– plant availability increase 22%– reduction in forced outage 25%

• Virgin/Alstom Trains– 15% reduction in cost– 15% improvement of availability

Milestone Payments and Retention

Start Complete CompleteWorks Works Defects Obligations

3% of each payment retained

50% of retained sum

released

50% of retained sum

released

Milestones achieved

Progress of Works

Retention

Start Complete CompleteWorks Works Defects Obligations

3% of each payment retained

50% of retained sum

released

50% of retained sum

releasedProgress of Works

I N E R T

“More of a cash bond than incentive”

Milestone Payments

Start Complete CompleteWorks Works Defects Obligations

Milestones achieved

Progress of Works

“Cash flow is the lifeblood of the construction

industry”

Milestone Payments

Start Complete CompleteWorks Works Defects Obligations

Milestones achieved

Progress of Works

“Cash flow is the lifeblood of the construction

industry”

Milestone Payments

Start Complete CompleteWorks Works Defects Obligations

Milestones achieved

Progress of Works

“Cash flow is the lifeblood of the construction

industry”

Milestone Payments

Start Complete CompleteWorks Works Defects Obligations

Milestones achieved

Progress of Works

“Cash flow is the lifeblood of the construction

industry”

Milestone Payments

Start Complete CompleteWorks Works Defects Obligations

Milestones achieved

“Cash flow is the lifeblood of the construction

industry”

Fixed Delay Damages

Start Complete

Works Works

$ Daily Fixed Damages Cap

Fixed Delay Damages

Start Complete

Works Works

$ Daily Fixed Damages Cap

S I G N I F I C A N TActual progress

Planned progress

Incentive Impact

Fixed Delay Damages

Start Complete

Works Works

$ Daily Fixed Damages Cap

S I G N I F I C A N TActual progress

Planned progress

Incentive Impact

R E D U C I N G

Fixed Delay Damages

Start Complete

Works Works

$ Daily Fixed Damages Cap

S M A L LActual progress

Planned progress

Incentive Impact

Fixed Delay Damages

Start Complete

Works Works

$ Daily Fixed Damages Cap

?Actual progress

Planned progress

Incentive Impact

Output

Mw

1000 Required Plant Output

950

900 Actual Plant Output

850

Fixed Performance Damages

$ Per Mw Shortfall

Output $Mw

1000 Required Plant Output

950

900 Actual Plant Output

850

Fixed Performance Damages

$ Per Mw Shortfall

Owner Losses

Contractor Damages

Under-performance over time

Fixed Performance Damages

Deliver good quality work ...

Check programme next steps ...

When is my next cup of tea?

Or ....?

Coincidence of Incentives

Cost to meet required performance

Cost of Fixed Damages

Cost of performance damages

Cost of delay damages

Cost of delay damages

Benefits from Bonus Pool

Cost of event in Contract 1

Cost of event in Contract 2

Key Performance Indicators

• poor health and safety

• poor accuracy in short term predictability

• not right first time

• bad results for audits on stores and work areas

• bad results for client satisfaction surveys

• too many incidents/accidents

• no transparency of reporting

• poor supplier reliability

• poor key people retention

Destination Port

Real-time Performance Management

Port Embarkation

Destination Port

Real-time Performance Management

Key Performance Indicators• good health and safety• good accuracy in short term

predictability• right first time• good results for audits on stores and

work areas• positive client satisfaction surveys• no/few incidents/accidents• good transparency of reporting• good supplier reliability• good key people retention

Port Embarkation

Regulatory Compliance

• Everyone needs to “buy-in” to the culture of safety and compliance

• Purchase of specialist services means reasonable to expect experienced supply chain to anticipate known regulatory requirements

NRA

ONR

NRCCNSC

ASN

CAEA

CSN

STUK

RostechnadzorARN

Real-time Performance Management

Commencement Date

Accepted Delay Accepted Extension

Completion Date

Cost Impacts:Accepted increase in cost

Delaying Event

4 weeks 4 weeks

Real-time Performance Management

Commencement Date

Additional Delay

Completion Date

Cost Impacts:

Delaying Event

• Ineffective communication over steps to reduce impacts of Delay Event

Extension of Time

4 weeks 2 weeks 4 weeks

$ 100k

$1m

Real-time Performance Management

Commencement Date

Additional Delay

Completion Date

Cost Impacts:Increase in costNot accepted

Delaying Event

• Ineffective communication over steps to reduce impacts of Delay Event

• Consequences of time impacts not agreed so lack of clarity in programme going forwards

Extension of Time

$ 100k

$1m

4 weeks 2 weeks 4 weeks2 weeks

$ 100k

EOT not accepted

Real-time Performance Management

Commencement Date

Accepted Delay Accepted Extension

Completion Date

Cost Impacts:Accepted increase in cost

Delaying Event

4 weeks

$1m

4 weeks

Real-time Performance Management

Commencement Date

Additional Accepted EOT

Completion Date

Cost Impacts:Accepted increase in costAccepted

Delaying Event

• Contractual communications protocol means parties are aware that failure to respond at the right time has financial consequences

• Time and cost impacts resolved meaning parties can get on with the project with new programme

$ 100k

$ 100k

$1m

Pooling Mechanisms

Profit/Loss Pool

Contractors

Contractors

Contractors

Contractors Contractors

Contractors

ContractorsPROFITS

LOSSES

Sharing Mechanism

ActualTarget Cost

Pain/Gain Sharing

OR

“Share” – varies greatly - Could be cost or element of profit

“Pain” – additional cost shared between parties

“Gain” – saving shared between parties

Branding/Publicity

• 3.2% ahead of no. 2...?

• The least respected?

1

1 Brand Index Buzz Poll

Most positive US brand first half 2014?

•

•

Contact

Graham AltyPartner

Tel: +44 7803 223051Email: graham.alty@pinsentmasons.com

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