The NDA's contracting strategy

1.4 Through the Magnox competition, the NDA aimed to deliver its decommissioning strategy for the sites at a lower cost than the previous contracts. The NDA estimated that, had it renewed the previous contracts, the decommissioning costs would have been £6.9 billion over a period of 14 years (not including the costs of dealing with waste and asbestos on the sites), whereas a newly awarded contract would cost £6.2 billion. HM Treasury provided approval for the NDA to conduct a PBO competition on the basis that the new contract would achieve cost savings of at least 5% on this £6.2 billion baseline. HM Treasury later increased this target to 10% in the 2013 Spending Round.

1.5 The NDA planned to achieve savings in two ways. It aimed to unlock economies of scale by tendering the contract to a single PBO. It also decided to replace the existing cost-plus incentive fee contracts with a target cost incentive fee contract. In a cost-plus contract, a contractor is reimbursed for all its allowed costs, and paid a fee regardless of how large the costs of decommissioning are. In a target cost incentive fee contract, the contractor is also reimbursed for all its allowed costs, but the contractor's fee goes up if it can bring the costs of decommissioning down below an agreed target cost. The fee reduces if the costs of decommissioning increase (Figure 4).

Figure 4

Comparison of the previous contracts with the Magnox contract

The new contract was designed to provide an additional incentive for the contactor to control costs

Payment mechanism	Old 'cost plus' contracts	New 'target cost incentive fee' contract
Contractor recovers costs of decommissioning work in full from the NDA	Yes	Yes
Contractor earns fee conditional on meeting key milestones	Yes	Yes
Contractor's fee goes up if work is delivered at lower cost, and down if work is delivered at higher cost	No	Yes
Expected cost	£6.9 billion over 14 years, not including additional costs of waste and asbestos	£6.2 billion1, not including additional costs of waste and asbestos

Note

1 HM Treasury gave the NDA approval for the competition on the basis that the contract would need to cost 10% less than the NDA's initial expectation of £6.2 billion, that is, £5.6 billion or less.

Source: National Audit Office analysis

1.6 The NDA believed it had the prerequisites to let a target-cost contract successfully: it thought the plan for decommissioning the sites was robust, with a defined scope and indicative schedule. The NDA told all bidders to use certain key assumptions from its plan in order to ensure that they were all competing on a "level playing field". It did not assure these assumptions before the competition (paragraph 2.9). The NDA's contracting strategy allowed for a process of adjusting the target cost after the contract had been awarded (Part Two). Figure 5 overleaf sets out the NDA's intended phases of the contract and the events as they materialised.