INLA Inter-Jura Congress 2014 Nuclear New Build Contracts – Effective Incentivisation Mechanisms Graham Alty Partner Pinsent Masons

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 StartComplete Complete WorksWorksDefects Obligations 3% of each payment retained 50% of retained sum released Milestones achieved Progress of Works

Retention StartComplete Complete WorksWorksDefects Obligations 3% of each payment retained 50% of retained sum released Progress of Works I N E R T “More of a cash bond than incentive”

Milestone Payments StartComplete Complete WorksWorksDefects Obligations Milestones achieved Progress of Works “Cash flow is the lifeblood of the construction industry”

Milestone Payments StartComplete Complete WorksWorksDefects Obligations Milestones achieved Progress of Works “Cash flow is the lifeblood of the construction industry”

Milestone Payments StartComplete Complete WorksWorksDefects Obligations Milestones achieved Progress of Works “Cash flow is the lifeblood of the construction industry”

Milestone Payments StartComplete Complete WorksWorksDefects Obligations Milestones achieved Progress of Works “Cash flow is the lifeblood of the construction industry”

Milestone Payments StartComplete Complete WorksWorksDefects Obligations Milestones achieved “Cash flow is the lifeblood of the construction industry”

Fixed Delay Damages StartCompleteWorks $ Daily Fixed Damages Cap

Fixed Delay Damages StartCompleteWorks $ Daily Fixed Damages Cap S I G N I F I C A N T Actual progress Planned progress Incentive Impact

Fixed Delay Damages StartCompleteWorks $ Daily Fixed Damages Cap S I G N I F I C A N T Actual progress Planned progress Incentive Impact R E D U C I N G

Fixed Delay Damages StartCompleteWorks $ Daily Fixed Damages Cap S M A L L Actual progress Planned progress Incentive Impact

Fixed Delay Damages StartCompleteWorks $ Daily Fixed Damages Cap ? Actual progress Planned progress Incentive Impact

Output Mw 1000Required Plant Output Actual Plant Output 850 Fixed Performance Damages $ Per Mw Shortfall

Output $ Mw 1000Required Plant Output 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 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 NRC CNSC ASN CAEA CSN STUK Rostechnadzor ARN

Real-time Performance Management Commencement Date Accepted DelayAccepted Extension Completion Date Cost Impacts: Accepted increase in cost Delaying Event 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 weeks2 weeks4 weeks $ 100k $1m

Real-time Performance Management Commencement Date Additional Delay Completion Date Cost Impacts: Increase in cost Not 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 weeks2 weeks4 weeks2 weeks $ 100k EOT not accepted

Real-time Performance Management Commencement Date Accepted DelayAccepted Extension Completion Date Cost Impacts: Accepted increase in cost Delaying Event 4 weeks $1m 4 weeks

Real-time Performance Management Commencement Date AdditionalAccepted EOT Completion Date Cost Impacts: Accepted increase in cost Accepted 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 $1m

Pooling Mechanisms Profit/Loss Pool Contractors PROFITSPROFITS LOSSESLOSSES Sharing Mechanism

Actual Target 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?

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