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

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.

💡 Research Summary

The paper presents a novel quantitative framework for attributing cost overruns in nuclear power plant (NPP) construction to four key stakeholder groups—equipment suppliers, construction subcontractors, the design and management team, and creditors—and for determining how much of those overruns each group actually receives as payment. Using the U.S. Department of Energy’s publicly released Cost Reduction Tool, the authors model three primary sources of overruns: rework, low on‑site productivity, and financing overruns that are directly linked to the first two. The model incorporates stakeholder “proficiency” levels and learning curves, allowing the simulation of a series of two‑unit 1,117 MW LPSR (a surrogate for the AP1000) deployments under a “U.S. experience” scenario.

Key findings include:

1. Mismatch Between Cause and Payment – In early (first‑of‑a‑kind) plants, the design and management team is responsible for more than half of total overruns, yet they receive a relatively small share of the overrun payments. Conversely, creditors bear large financing overruns early on, but their payment share drops sharply as schedule delays are reduced.

2. Contract‑Type Implications –

   • Fixed‑Price contracts force subcontractors to absorb overruns, leaving the owner to bear design‑team errors. This structure requires strong pre‑design risk‑sharing mechanisms to avoid penalising the owner.
   • Cost‑Plus contracts pass all actual costs plus a fixed profit margin to the stakeholders, encouraging risk‑avoidance but weakening incentives to control costs. Upper‑bound caps or stage‑gate reviews are needed to curb excesses.
   • Performance‑Based contracts tie profit to specific milestones (schedule adherence, rework reduction). They impose penalties on the design team when their errors generate overruns, thereby aligning early‑stage quality with financial outcomes.

3. Learning Effects and Economies of Scale – By the fifth plant, all stakeholder groups reach peak proficiency; rework and productivity losses virtually disappear. This demonstrates the value of cross‑site standardisation, bulk ordering, modular construction, and continuous training.

4. Owner’s Central Role – Regardless of contract form, proactive owner involvement—direct oversight of design/management, dedicated project‑control offices, and clear risk‑allocation clauses—is essential to limit overruns. The authors recommend early independent design reviews, schedule‑linked financing penalties, and shared‑risk provisions for subcontractors and suppliers.

The study also contrasts vertically integrated projects (e.g., in Russia, China, South Korea, Japan) with the fragmented Western approach, suggesting that fewer, more tightly coordinated stakeholders naturally reduce the cause‑payment mismatch. While the financing model in the simulation assumes 100 % debt at a 4 % rate for simplicity, the authors acknowledge that real projects involve mixed equity, bonds, and government guarantees, and that future work should extend the model to more complex capital structures.

Overall, the paper advances the literature by moving beyond aggregate cost‑escalation analyses to a stakeholder‑level attribution model, providing concrete quantitative evidence on how different contract structures influence incentive alignment and cost outcomes. Its recommendations—tailored contract clauses, robust owner governance, and systematic learning programmes—offer actionable guidance for utilities, regulators, and policymakers seeking to curb the chronic cost overruns that have plagued recent Western nuclear projects.