Nuclear decontamination and decommissioning (D&D) projects are complex examples that show how and why contractors to the federal government can suffer disproportionately from budget reductions. Despite the negative effects of these budget cuts, federal contractors can take steps to protect their contractual—and financial—interests on these types of projects. While D&D projects are rare, the principles that contractors can use to protect their interests in these types of projects are also directly applicable to most federal projects and many other public agency projects.
As the world economy searches for firm footing after the global financial crisis, the usual stalwart pillar of federal construction is now beginning to show signs of weakness. Learning best practices from the 2012 and 2013 budget reductions will give construction owners clear insight into what is to come and how to best protect themselves in the upcoming years.
As was made clear in the April 15 official Department of Defense sequestration impact report, federal construction budgets will continue to shrink through 2015. As such, it will become increasingly important to understand how much these reductions will impact a project’s bottom line.
History of the Industry
D&D projects are scattered throughout the continental U.S., usually in unassuming rural environments, and they represent the legacy of cold war nuclear research. Most were constructed in the 1940s and 1950s to further the Manhattan Project’s goal of producing the world’s best nuclear weapon arsenal. During the early decades of these facilities’ existence, society had only a nascent understanding of the ramifications associated with radiological contamination to humans and the environment. The overarching goal at that time was to develop a top-notch nuclear stockpile quickly.
As a result, the routine disposal practices of the time have left these locations with widespread nuclear contamination. Within the walls of some structures, explosions (chemical explosions with fissionable material, but not nuclear explosions) and other accidents have occurred, requiring portions of these facilities to be sealed off until D&D can be completed. In the wake of Three Mile Island, Chernobyl and, more recently, the Fukushima Daiichi disaster—which reminded us that even a relatively modern nuclear facility’s design can be undone by unexpected natural forces—the U.S. government has made a concerted effort to D&D these outdated facilities.
Regulations Affecting the Work
Working in the nuclear D&D space is perhaps the most complex legal environment in the world. The mere listing of the titles of federal laws and regulations enumerated in a standard Federal Acquisition Regulation compliant contract covers 18 pages. The sources of law in these regulations run the gamut from international treaty requirements to federal, state and local laws, to union rules and regulations. As would be expected, a major underlying cause of delay often stems from a project team’s inability to perform certain critical path tasks due to the regulatory barriers presented by a law or rule.
The intricate web of regulations on these projects permeates every daily action and is so complex in its composition and subject matter that only the largest contractors can demonstrate sufficient expertise to even bid this work.
The regulatory minefield facing these contractors is reasonable in light of the unusual assortment of nuclear waste found in these structures. The two most troublesome waste elements are Neptunium-237 (with a half-life of 2 million years) and Plutonium-239 (half-life of 24,000 years). With half-lives in the millions of years—meaning it will take millions of years for a piece of nuclear material to disintegrate to half its present size—the decontamination process is of international significance and deserving of heavy regulation. Any mishap along the way from demolition to storage could have catastrophic, generation-lasting effects upon surrounding communities.
It is through this lens of hyper-regulation that one must consider the complexity involved in demonstrating a causal nexus between budget reduction and delay/cost overrun. Common delay analysis methods usually demonstrate how a single instruction or change order caused a project delay. However, on D&D and many other federal projects, a multistep causal chain must be developed to accurately demonstrate the contractor’s entitlement to an equitable adjustment.
Demonstrating Entitlement to an Equitable Adjustment
The coming years portend further cuts and periods of governmental indecision regarding federal funding. Due to the complexity of demonstrating the causal nexus between budget reductions and delay, contractors should initiate processes which objectively show the impact of funding reductions on a project’s physical progress.
The first step in this process is to identify and specifically address all standard clause requirements, including notice, description of cause, dates, etc.—these are threshold requirements for most federal contract requests for equitable adjustment. Next, identify the cost centers that will bear the brunt of budget cuts. On D&D projects, this requires segregating fixed from variable (productive or fee-earning) costs. D&D projects suffer disproportionately from funding reductions because fixed expenditures associated with regulatory oversight can account for as much as 40 percent of personnel costs.
These costs are fixed and would not begin to decrease significantly until all nuclear material contained within a structure has been removed (i.e. at the end of the project). In order to demonstrate the impact of budget cuts on the overall project completion date, a contractor must clearly show how much productive (non-regulatory) work was directly impacted by the reduction in funding.
The most effective data for demonstrating entitlement comes from accurate contemporaneous cost reporting. Specific cost codes should be established and maintained for furlough time, lost shifts, involuntary force reduction costs, etc. However, this data is better prepared with details such as job or schedule activity numbers, crew sizes and types of personnel performing work identified, surplus materials ordered or specialized procurement deferral, crew-reduction and/or re-deployment costs, demobilization of subcontractors and stand-by time. This additional level of detail will enable an outside auditor or contracting officer to clearly identify which schedule activities were affected and why. On federal projects, accuracy in capturing costs at the time that they occurred is more important because failure to properly document claim damages can subject contractors to draconian penalties associated with the False Claims Act. However, as with all large construction projects, it is difficult—if not impossible—to ensure that all personnel on a project accurately track their time. Virtually any sort of issue-specific record-keeping and/or tracking will reduce the burden of an auditor and provide management with the ability to assess the magnitude of this issue on the time and cost for completion and clearly articulate any cost increases or delays associated with a specific budget cut.
