NUCLEAR SUPPLY CHAIN SYMPOSIUM

CanadianContracting Models

Darryl J. BrownGowling Lafleur Henderson LLP

November 10, 2015

Suite 16001 First Canadian Place

100 King Street WestToronto, Ontario

Canada M5X 1G5

Telephone (416) 862-7525Facsimile (416) 862-7661

www.gowlings.com

Canadian Procurement/ConstructionDelivery Methods

Various procurement/construction delivery methods exist to provide alternatives as to how risks and responsibilities are allocated for a project and how key factors such as time and price are addressed.

Traditional Delivery Method: Design-Bid-Build

· Stipulated Price· Cost Plus· Unit Price

Contemporary Delivery Methods: Construction Management (not-at-risk / at-risk) Design-Build P3’s

Overview of Design-Bid-Build Model Under this model the owner retains a design team/consultant

such as an architect or engineer to design a project. Once plans are completed, the owner, usually through a call for bids (or, possibly sole-sourced negotiations), retains a contractor to construct the project. The owner, therefore, enters into two separate contracts: one with the design team/consultant and the other with the contractor.

Each of the parties may subcontract with various other consultants, trades and suppliers in order to fulfill their obligations at each project stage.

Overview of Design-Bid-Build Model(cont’d)

Model’s pricing structure may take 3 basic forms: Stipulated Price Cost Plus Unit Price

Cost Plus Model also lends itself to more complex pricing structures Guaranteed Maximum Price (Fixed) Guaranteed Maximum Price with sharing of savings Target Price (margin and/or entire payment at risk above Target)

ConsiderationsDesign-Bid-Build Model In General: Structure is good for a risk-averse owner as risks do not flow back to the

owner for construction or design defect issues – they remain with the contractor and design team, respectively

Owner must await completion of the design before commencing construction of the project - it cannot be fast tracked

Owner is not fully aware of the price until tender which may delay financing arrangements, etc.

Design consultant and contractor have the potential to be at odds with each other should problems arise - both could deny fault and engage in finger-pointing resulting in delay

ConsiderationsStipulated Price: Easier for a contractor to provide a fixed price due to the design being

completed before pricing occurs Should result in fewer changes to the design thereby saving owner

money Contractor absorbing greater risk, therefore, higher contingency No scrutiny of contractor’s books/records

ConsiderationsCost Plus: Contractor must keep and disclose full and detailed accounts and records

necessary to document cost Contractor’s profits are tied to fees paid for all materials and services,

therefore, potentially less incentive to be efficient Owner does not know the total cost of the construction project at the time of

signing the contract

Unit Price: Suitable for projects where the required materials can be easily identified but

not the number of such items Owner does not know the total cost of the construction project at the time of

signing the contract

Construction Management Method

Similar in framework to traditional construction contract with the primary difference being that an owner retains a construction manager (or Owner self-performs) in place of the general contractor to provide project administration and technical services such as scheduling, budgeting, and material selection, but not to do any actual construction work

No single contractor assumes responsibility for the entire project

Construction manager may be “at risk” or “not at risk”

Considerations: CM Not-At-Risk

Cost advantages exist in that there is limited risk to the construction manager whose fees should therefore be less

Model is suitable for moving construction along at a fast pace because procurement/construction can start before design is finalized

Owner has better control over budget and schedule

Costs can be saved given that contractors enter into contracts directly with the owner with no markup by a middleman

Construction manager’s experience may be looked to by the design team and they can work together

Owner carries the risk of construction regarding scheduling and performance issues, etc. rather than the construction manager

Limited incentives for construction manager to aggressively seek cost savings

Final cost of the design is not known to the owner until everything is in place

Increased level of contractual complexity

Owner may be found to be the “constructor” given that the owner is entering into several contracts with contractors

Considerations: CM At-Risk

Similar to that of a Construction Manager Not-at-Risk model except that the risk of being found “constructor” now flows to the construction manager instead of the owner

Cost savings reduced as construction manager bears increased risk

ONE MODEL DOES NOT FIT ALL

Contract Delivery Models and Pricing Structures are becoming more complex to reflect the complexities of the scope of nuclear projects

EXAMPLE: Pricing OptionsHybrid Pricing Options arising to deal with different aspects of EPC contracting

1. Engineering Majority of pricing fixed First of a kind risks or areas with significant unknowns (such as

Inside the Vault) may require Target Price

2. Procurement Generally Fixed

3. Construction Variations of Fixed and Target Pricing to address allocation of

risks and risk sharing for significant unknowns

STICKS & CARROTS(Risk-Sharing)

A. STICKS Delay Liquidated Damages for failing to achieve milestones Escalating Loss of Margin or Entire Fee above Target Price

B. CARROTS Bonus if cost savings below Target Price Bonus if milestone dates achieved

CONCLUSION

The best Models allocate risks to the party best able to manage risk

Goal: achieve a partnership where both parties have an opportunity to succeed