The second of our three-part series on the nuclear decommissioning sector looks at the target-cost clauses of tier two contracts – their benefits and pitfalls

The unique feature of nuclear decommissioning contracts is the high emphasis on incentives for the contractor. At the focal point of the legal and commercial relationship are the target-cost clauses in the tier two contract (see 9 April, page 50).

Target-cost arrangements provide a tangible benefit to the contractor if the decommissioning is completed ahead of the target price, but claims and disputes are common when the target price is exceeded. Tier two contractors will normally have their liability capped, but given the sums at stake, it is sensible to argue that the target-cost clauses do not apply if there has been a change in scope or acts of prevention by the employer that caused delays.

Many of the disputes in this area could be better resolved if the parties considered, at the time of tender, some of the following:

  • Precisely when can the target cost move?
  • How is the contractor to be paid pre and post the target cost?
  • Will the cost of trials/rework fall within the target-cost?
  • How can the contractor be incentivised to maintain high standards of health and safety and high productivity.

Problem clauses

A common problem is whether certain costs are “allowable” and further whether the project manager (who assesses such costs) is under a duty to act impartially or can be robust in seeking to avoid “pain-share”. This issue came up in the case of Costain & others vs Bechtel (2005) which came down in favour of the duty of impartiality.

Other contentious clauses are those dealing with the ownership of intellectual property developed during the currency of the contract. It is often the case that the contractor has invested heavily in the intellectual property before the contract is awarded and is, therefore, keen not to lose the commercial advantage this can bring.

A civils contractor is unlikely to accept all the risks of unforeseen ground conditions. Equally, why should a tier two contractor take all the risks associated with nuclear waste arisings? The battleground for such disputes is the legal interpretation of what is said in the site information or in the works information. Clearly, contractors can be caught out if the details of their scope of work are construed broadly.

Access to adjudication

Section 105(2)(C) of the Construction Act excludes the “assembly, installation or demolition of plant and machinery, or erection or demolition of steelwork for the purposes of access to plant or machinery, on a site where the primary activity is (i) nuclear processing, power generation …” Most decommissioning contracts will involve such work and so an essential question relates to whether a site is being used, primarily, for nuclear processing or power generation.

It is clear that many sites no longer carry out nuclear processing or power generation as their primary activities. For example, Bradwell ceased operating in 2002 such that it has a defuelling/decommissioning and termination status. This then would mean that tier two and tier three contracts dealing with “construction operations” would be “construction contracts” under the act and so certain protections on payment and recourse to statutory adjudication would be afforded to the contractor and subcontractor.

On other sites – for example, Sellafield – there may be nuclear processing. In such cases there may be a mismatch between the tier two and three contracts in terms of the applicability of the Construction Act, especially if the tier three contract deals with works that are construction operations and not related to plant or machinery. There are essentially two judicial views: the so-called narrow approach that says the above exclusion does not apply to construction operations that are part of or preparatory to excluded operations; and the broad approach that says that the exclusion applies to construction operations whenever they are necessary to achieve the wider aims of the employer where the primary activity of the site is excluded.

North Midland Construction vs AE&E

Lentjes UK provides further judicial support for the narrow approach. The judge recognised, however, that where disputes were not limited to construction operations, but also included the excluded works, then it “will be impossible to apply the adjudication provisions of the act to only part of the dispute”.

Contractors really must understand, fully, what they are being paid to do. The scope of work is key in the target-cost clauses, in the programming, in the waste arisings targets and in terms of profit and loss. If the scope cannot be assessed fully or properly, then perhaps the procurement route needs to be re-assessed – a topic discussed in part three.