NEW BUILD | MANAGING RISK THROUGH PARTNERSHIPS
Finding the way on construction risk
As large and complex construction projects single entities, either from private enterprise or government, can struggle to manage the contract risk associated with nuclear projects. While the battle between fixed and variable-price contracts has traditionally failed to fully address these risk management issues satisfactorily, there is a third way.
By Geun Park, Director of Overseas NPP Project Office at KHNP
AS ENERGY SECURITY AND CARBON neutrality have become important challenges globally, the demand for nuclear new builds and life extensions for operating units is rising. However, it has been more difficult to deliver nuclear power projects on time and within budget due to unexpected variables such as global uncertainties, post- pandemic supply chain disruptions and a stricter regulatory environment. With growing uncertainties of external factors that hinder the success of the nuclear industry, concerns over Engineering, Procurement and Construction (EPC) contracts where one single supplier is responsible for all these elements are also increasing.
The risk management conflict To minimise the risks caused by project uncertainties, owners and suppliers often establish their plans independently of each other, but their plans inevitably conflict since they are positioned at the opposite ends of their interest. Most owners prefer to share risks with suppliers as part of their risk management scheme. The risk allocation strategies that owners often adopt include: sharing risks associated with construction licensing delays with suppliers; requesting equity investment to enhance the supplier’s accountability for the project, and; pursuing fixed-price contracts to minimise the potential for increases in project costs.
Conversely, nuclear suppliers do not want to assume any of the licensing risks and prefer turn-key contracts without equity investment while preparing for unexpected cost overruns through variable price contracts. In fact, there have been cases where unresolved conflicts of interest between owners and suppliers at the negotiation table has led ultimately to the failure of contract signing and project cancellation or suspension. Taking a new approach between fixed and variable prices owner and suppliers addressed conflicting interests that saw a recent project successfully move to contract signing. The project has meaningful implications for the nuclear sector.
Counting the costs of project over-runs While suppliers tend to prefer variable-price contracts over conventional fixed price deals, the positions of owners typically differ. When it comes to large-scale and long- term projects such as building new nuclear power plants, variable price contracts can be burdensome from the owners’ perspective, as it is nearly impossible to determine the exact amount of budget required for factors such as government support and due to the fact that extreme cost overruns may occur in nuclear new-build projects. For example, a fixed price contract was signed in 2003 for the development of Finland’s Olkiluoto unit 3. The project was estimated to cost €3.3bn and be completed in 2009.
Above: Upgrades to the Cernavoda unit 1 will extend its operational life by 30 years Source: WANO 20 | April 2025 |
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