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