Muskrat folly

The Compass - - EDITORIAL -

S ay you are build­ing a house, and are go­ing to be the gen­eral con­trac­tor your­self. You de­cide to hire car­pen­ters to frame up the struc­ture and build all the ex­te­rior walls. You ask com­pa­nies for es­ti­mates, and they come back with a va­ri­ety of bids. The best fram­ing bid, for ar­gu­ment’s sake, is $40,000, all in.

One com­pany of­fers to do the whole job. “Ig­nore those other com­pa­nies,” the com­pany says. “They’re just try­ing to rip you off. We’ll do it for $100 an hour, and it will prob­a­bly take us, I don’t know, 300 hours. At most. Maybe. We’ll see.”

You’d have to know you were deal­ing with ap­ples and or­anges - that one con­tract was a fixed price, and the other was some­thing of a slid­ing scale. One would re­ward ef­fi­ciency, while the other would re­ward tak­ing the most time pos­si­ble. You can’t con­fuse the two, can you? En­ter Nal­cor En­ergy, In 2014, Nal­cor head Ed Martin said that while costs were in­creas­ing at Muskrat Falls, 90 per cent of the project con­tracts had been awarded and 98 per cent of the en­gi­neer­ing was com­plete.

At that point, the fo­cus was on de­liv­ery: “I be­lieve that we have nar­rowed down the risk of ad­di­tional cost in­creases very, very, very sig­nif­i­cantly,” Martin said. “We’ve re­duced our risk of cost in­crease sig­nif­i­cantly, just be­cause of where we are in the project.”

But while the con­tracts may have been signed, the costs ap­par­ently weren’t.

In 2015, Martin told Nal­cor’s an­nual meet­ing that one ma­jor con­tract, the core con­tract with Ital­ian con­trac­tor Astaldi, was fixed rate: “They get a unit amount for ev­ery bit of con­crete that they in­stall,” Martin said. “So it’s called a unit-rate con­tract. Pro­vided we don’t change the en­gi­neer­ing specs, it’s es­sen­tially a fixed-price con­tract.”

Martin later said he didn’t remember say­ing that. And the con­tract wasn’t fixed rate. It turned out that Astaldi was be­ing paid by the hour, some­thing re­vealed by in­de­pen­dent con­sul­tant EY’s review of the project.

“This mech­a­nism did not cap­ture the po­ten­tial for poor con­tract man­age­ment of labour and the con­se­quent de­cou­pling of labour paid for from work com­pleted,” EY wrote. “As at De­cem­ber 2015, the pro­por­tion of con­tract value paid to the con­trac­tor is sig­nif­i­cantly greater than the pro­por­tion of the con­crete that has been placed.”

It’s Astaldi’s con­tract that is now the big­gest prob­lem. It’s in the midst of a dif­fi­cult rene­go­ti­a­tion, and the de­lays in get­ting work done are slow­ing the whole project.

When all the ques­tions are an­swered about how we got into such a huge hole, one of the big ones is go­ing to be where and why unit pric­ing fell off the ta­ble.

No mat­ter what size your project is, pay­ing by the hour isn’t even close to pay­ing by the job. This ed­i­to­rial orig­i­nally ap­peared in The Tele­gram

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