Single v Multi Contracts in Nuclear Projects: The Size of the Burden

Introduction

The construction of nuclear energy projects is complex and capital-intensive, and the contracting structure can significantly affect project delivery, risk allocation, and commercial outcomes.

The single-contract model offers unified accountability through one contractor, usually responsible for design, procurement, and construction, who takes on all interfacing and coordination risk at a premium. This can be attractive to owners who want to enter the nuclear space but do not have experience in the sector. The multi-contract model contemplates distinct work packages which are individually contracted, providing an owner greater visibility over cost and the ability to appoint specialised contractors. The cost however is that the owner retains the risk of interface and coordination. This can however be attractive to owners who have existing in house technical and/or project management capabilities, and have the skills to manage the project themselves.

Which approach should be taken will depend on the specific project, and the owner’s experience, capabilities, and appetite for risk. This article discusses the advantages and disadvantages of each structure in more detail.

Single-Contract (Turnkey/EPC) Model

With a single-contract model, the owner enters into one contract with a single contractor or consortium. That single contractor or consortium then assumes responsibility for the design, procurement, and construction of the project. This model is widely used in large-scale energy and infrastructure projects across the world, although, as far as nuclear projects are concerned, the number of contractors capable of such an undertaking is quite limited.

• Interface & Coordination Risk: The main advantage of the single-contract approach is the allocation of interface risk. Because a single contractor takes responsibility for integrating all of the design and construction activities, the owner is largely insulated from any coordination risks that arise where multiple different contractors work in parallel on different but related scopes. The main contractor takes on the interface risk, and takes responsibility should anything go wrong. From a contractor’s perspective, this may also be preferred as the contractor is able to employ its own subcontractors and have greater oversight over their activities, including progress and quality, than if there were multiple ‘main’ contractors working in tandem.

• Accountability: It also makes it easier to manage the project. The single contractor or consortium represents a single point of accountability, which is easier to manage for the owner. It also creates a clear ‘chain of command’ for subcontractors, all of whom answer to the same main contractor and, again, over whom the main contractor has oversight. This can be particularly helpful on projects such as nuclear ones which necessarily have long completion timelines and strict regulatory requirements to adhere to.

• Management: A single main contractor is also in a stronger position to correct defects and delays, with the ability to require rectification or other relief from its own subcontractors, and the owner has a single point of contact with whom to negotiate. Similarly, when disputes arise, it is also far simpler for the owner to manage them, as all potential claims and variations arise from a single agreement rather than a web of interdependent contracts, so the owner avoids being drawn into disputes between multiple different contractors, all seeking to lay blame on one another.

• Financing: Financially, single-contract models are also simpler. A single or turnkey structure means greater cost certainty from the start, particularly where the contract is lump-sum. Lenders and export credit agencies also tend to favour single-contract structures as they reduce the complexity of any security arrangements which may be necessary to protect creditors.

• Influence: However, single-contract models necessarily result in the main contractor holding significant power, and the owner’s ability to control which subcontractors are appointed can be limited once the contract is awarded. Because of the risk assumption, single-contract structures can also incur high premiums for the work to be undertaken.

• Insolvency: In addition, should the main contractor find itself in financial distress or insolvent, the consequences of such issues can be more catastrophic to a project in a single-contract structure, rather than if one subcontractor of many experienced the same difficulties. Finding an alternative EPC contractor who is willing to take over from a distressed main contractor, and take on the same risks, can be incredibly difficult as it is, and can lead to prolonged delays and significant additional costs, as well as the risk of incomplete works. This difficulty is all the more prevalent in nuclear projects, where there is an even more limited number of contractors with the capability (and desire) to deliver nuclear projects.

Multi-Contract (Split Package) Model

Under a multi-contract, or split package, approach, the owner enters into multiple different contracts for different aspects of the work directly. The owner (often with a project management team) then holds the responsibility for interfacing between the various different contractors. This model can be particularly attractive to owners with significant in-house technical and/or project management experience.

• Flexibility: The multi-contract model also offers the owner greater flexibility and control. By dividing the project into discrete packages, the owner has greater freedom to choose which contractors to select. Not only is it able to engage contractors which best suit its needs for the different work packages, it is also able to engage specialist contractors with best-in-class skills, rather than a ‘one contractor fits all’ approach, as well as retaining greater oversight of the design and construction process.

• Strategy: At the same time, the owner is able to appoint contractors which may fit with its wider strategic goals. For example, it may want to prefer the appointment of domestic contractors over international contractors to support the local job market or achieve policy objectives, particularly where there may be pressure from project sponsors or local governments to do so.

• Accountability: A further advantage of the multi-contract structure is that it can be easier for an owner to hold certain contractors to account for specific work product or delays, and replace them more easily should the need arise. Greater accountability can be particularly important for nuclear projects where safety is paramount, and the work product must be of the highest quality to ensure such safety. Replacement of a contractor is far more difficult in a single-contract structure, where replacement of a main contractor would require a complete overhaul of the contracting structure, and an owner may not be able to insist on the replacement of a subcontractor.

• Interface & Coordination Risk: The main disadvantage of a multi-contract structure however is the retention of risk by the owner for all interfacing and coordination activities. Nuclear projects are, by their very nature, incredibly complex and necessitate high levels of interdependency between systems. Coupled with a scenario in which it may be the first time a contractor is building a project of this kind with a particular type of new technology, the risk of misalignment and delays is high. In order to manage a nuclear project, an owner must be prepared to be deeply involved in the day-to-day progress of the project.

• Disputes: In addition, where disputes arise during the course of the project, it can be difficult to attribute responsibility for delays or defects where multiple different contractors are involved in the same workstream, and therefore difficult to resolve. It is important therefore that owners consider including multi-party dispute resolution mechanisms in each contract to allow, for example, contractors to be joined to proceedings with another contractor if the subject matter overlaps.

• Oversight: The owner will also need to invest in robust project management processes, which of course adds to ongoing costs and organisational complexity.

• Financing: From a financing perspective, where multi-contract structures are employed, lenders may require more extensive due diligence on the owner and the contractors alike, as well as more complex security arrangements or additional protections to mitigate the additional interface/coordination risks.

Practicalities aside, and due to the number of potential contractors involved in one project, the contracts to be awarded are more demanding to draft and administer. Owners and contractors alike should be mindful of certain key features of their contracts, such as:

• Definition of scope
• Allocation of risks
• Strategies and processes put in place for interfacing and coordination, particularly for testing and commissioning
• Dispute resolution mechanisms

Conclusion

Both structures are viable for use in nuclear projects, and neither is inherently superior. Which model is the most appropriate will depend first and foremost on the owner’s internal technical and project management capabilities, and also its appetite for risk.

The single-contract model offers simplicity and the main contractor takes on the interfacing risk at a premium, while the multi-contract model offers flexibility but requires much greater owner involvement and oversight.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.