Going nuclear: contracts for decommissioning work

The recent focus on public sector spending has led to a greater number of contractors, consultants and suppliers looking to the nuclear decommissioning sector – worth an estimated £2-3bn per year – as a primary source of work. To help those who are keen, this three-part series will demystify the decommissioning sector and provide answers to questions such as “how does this sector work?”, “how are the contracts structured?”, “do I get the protections normally available under the Construction Act?” and “what are the problem areas to watch out for or avoid?”.

In the world of decommissioning, the Nuclear Decommissioning Authority (NDA) is the ultimate employer and essentially controls the workstream. The NDA is a non-departmental public body established under the Energy Act 2004 and is responsible for the decommissioning and site clean-up of the UK’s 19 civil public sector nuclear sites. It has responsibility for long-term management of higher radioactive waste and is developing a low level waste strategy. It is under pressure to make cost savings equivalent to 3% per year.

Decommissioning of the sites is likely to be of most interest to readers. It is important to note that the NDA does not enter into contracts direct with the various entities in the supply chain. Instead, the NDA has management and operation contracts with the companies that are licensed to run the sites (known as site licence companies or SLCs). It is the SLCs that perform and subcontract the work. The contract between the SLC and the NDA is a “tier one” contract and the contract between a SLC and a main contractor is a “tier two” contract. If a main contractor subcontracted work to another, that subcontract would be a “tier three” contract and so on.

The contractual framework

Although the NDA may not be party to tier 2 contracts, it does however place controls on those contracts by requiring the SLC to “flow-down” certain contractual rights and obligations. This “automatic” flow-down has been contentious especially because the one-size-fits all strategy has not been universally commercially acceptable. Small or medium site entities have often struggled to get insurers/bondsmen to accept the liabilities sought by the SLC. To that end, many have questioned the protections afforded by the Construction Act.

EU procurement rules

Although the NDA may not be a party to Tier 2 contracts, it does place controls on those contracts by requiring the SLC to ‘flow down’ certain contractual rights and obligations

 

The NDA holds the tier one contractor ultimately responsible for the performance of all and any subcontracted work. It also requires the tier one contractor to run open, fair and well-published tier two and tier three competitions and requires the tier one contractor to comply with EU procurement rules (the EU procurement rules prevail if they conflict with the tendering terms of a tier one contract). While a tier one contractor may want to do this anyway in order to spread risk, the NDA views competition as a necessary vehicle to increase innovation and stimulate the supply chain so that its own value-for-money targets can be better reached. Interested readers should keep a close eye on the tenders electronic database.

Applicability of the Construction Act?

This question is important both in terms of dealing with whether the statutory protections apply and when one needs to consider whether the contractual multi-tier dispute resolution provisions (common in the tier two contracts) can be overridden by the Construction Act – this is especially a problem in older tier two contracts based on NEC2 (which requires a contractor’s notification to the project manager as a condition precedent to adjudication). Part two will look at this issue in more detail.

The market

The NDA’s budget (made up of government funding and income from commercial assets) for the current year is about £2.7bn and the planned total expenditure for 2010/11 is expected to be about the same. Most of the spend is allocated to the largest and most complex site, Sellafield in Cumbria. Part three of this series will challenge these numbers and assess whether the market truly is as big as the published figures. The recession has had a tangible effect. Although the NDA has raised significant revenue from the disposal of assets to utilities keen on the new-build programme, it is not clear how much of it will be going to fund decommissioning.