Analysis of Stakeholder Involvement in Nuclear Power Plant Cost Overruns and Implications for Contract Structuring

TL;DR

This paper develops a framework to analyze how different stakeholders contribute to and are affected by cost overruns in nuclear power plant projects, highlighting the importance of contract structure and owner involvement.

Contribution

It introduces a novel framework for modeling stakeholder-specific cost overruns and evaluates how contract types influence profit misallocations and project outcomes.

Findings

Stakeholder contributions to overruns vary significantly.

Contract structure impacts profit distribution and incentives.

Owner involvement is critical for minimizing overruns.

Abstract

This study introduces a novel framework to model cost overruns associated with four key stakeholders in nuclear power plant construction: equipment suppliers, construction subcontractors, the design and management team, and creditors. The framework estimates the share of overruns caused by each stakeholder and the share of overruns they receive as payment. The results show that the share of cost overruns a given stakeholder causes and the share of overruns they receive as payment are often starkly different, which can lead to profit misallocations and litigation between parties, further exacerbating overruns. The magnitude of these potential profit misallocations is examined under three common contract structures - fixed-price, cost-plus, and performance-based - revealing the advantages and disadvantages of each framework for aligning stakeholder incentives. Regardless of the contract type chosen, strong owner involvement is crucial for project success, and the study concludes with specific recommendations for project owners seeking to minimize cost overruns.