A Lesson in (the Lack of) Cost Control: Plant Vogtle Construction Cost Overruns

The Alvin W. Vogtle Electric Generating Plant, also known as Plant Vogtle, is a 2-unit nuclear power plant located in Burke County, near Waynesboro, Georgia.  Units 1 and 2 were completed in 1987 and 1989, respectively.

During Vogtle's initial construction, costs skyrocketed from an estimated $660 million to $8.87 billion. This was typical of the time due to increased regulations after the Three Mile Island accident. In 2009, the NRC renewed the licenses for both units for an additional 20 years, to the 2040s.

On August 15, 2006, Southern Nuclear (a division of Southern Company that runs the plant) formally applied for an Early Site Permit (ESP) for two additional units.  On April 9, 2008, Georgia Power Company reached a contract agreement with Westinghouse (owned by Toshiba) and the Shaw Group (Baton Rouge, LA) to construct two AP1000 reactors. The contract represents the first agreement for new nuclear development in the United States since the Three Mile Island accident in 1979, and received approval from the Georgia Public Service Commission (PSC) on March 17, 2009.

On November 21, 2011, AJC.com reported construction costs for Georgia Power’s planned expansion project at Plant Vogtle are $42 million over budget, and delays in getting federal approval to build the two reactors may push back the construction schedule roughly five months. The rise in construction costs are related to, among other things, a change in what labor may cost over the long term for the project.

The estimated cost of the project is $14 billion. Georgia Power is responsible for roughly $6.1 billion, 75 percent of which is construction costs and the balance is financing costs. The first reactor is scheduled to start producing power in April 2016, and the second one a year later.  Based upon the monthly construction monitoring report, that the first reactor may not start producing electricity until September 2016.

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How many of you think this $42 million cost overrun will never show up in their electric bill over the next 10 years? And if you believe that, I have a bridge in Brooklyn to sell you!  As a matter of fact, AJC.com reports that “a utility consultant says Georgia Power wants to charge customers too much when the company starts buying significantly more electricity from other places.” Nothing would prevent Georgia Power from going to the Georgia Public Service Commission (PSC) to start charging their customers for the increased cost of Plant Vogtle construction.

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Something can be done…

Not too long, VeNí Consulting had the opportunity to analyze a client’s cost overruns on a $200 million construction project very similar in scope to the Plant Vogtle Nuclear Plant Construction Project: an infrastructure construction project in which the client had very little expertise.  The client was required to outsource all of the engineering design and construction work to contractors.

One of the contractors apparently took advantage of our client’s lack of expertise in this area by low-balling early estimates (which quickly rose as the design phase began) and by providing poor quality engineering drawings (requiring re-work on engineering and construction which led to much higher project costs).  The price tag for poor quality was more than $50 million in increased project costs (close to 25% of the total cost of the project)!

Further analysis revealed that almost $15 million of the cost overrun could have been avoided had a rigorous contract administration and management system been in place.  VeNí Consulting was engaged to implement a Performance-based Service Contracting (PBSC) System with this client. PBSC will help to correct problems commonly associated with services contracts and identified in numerous audits, including cost overruns, poor quality deliverables, schedule delays, failure to achieve specified results, and other performance problems.

Performance-based Service Contracting (PBSC) requires the contractor to understand all project deliverables, to agree on the cost of all project deliverables, and most importantly, to conform to agreed upon standards of quality for all project deliverables.  All of these contract terms are in place PRIOR to the selection of the contractor!

PBSC is a standard which has been in use by most US Government agencies for over 10 years.  In converting from a traditional Statement of Work (SOW) contract to a PBSC Performance Work Statement (PWS) contract, some government agencies reported an increased initial up-front investment. However, the resulting savings to these agencies through the use of PBSC quickly offset the initial up-front costs. In addition, the quality improvement from this type of contract and the resulting reduction in overall contract administration costs again offset the initial up-front costs.

If your company does not have a contract management process to control project costs and deliverables quality, visit VeNí Consulting for more information about the right solution for your company.

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Read the AJC.com article about how costs rise by $42 million for Plant Vogtle construction before construction begins.

Read the AJC.com article about how Georgia Power is asking for high rate increases.

Read the Wikipedia article about the history of Georgia Power's Plant Vogtle.

Read the US Office of Management & Budget (OMB) memorandum about the implementation of Performance-based Service Contracting (PBSC) in the Federal Government.

Watch the VeNí Consulting video about the implementation of Performance-based Service Contracting (PBSC) in the utilities industry.

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By: Plez A. Joyner, CIO & Managing Partner, VeNi Consulting, LLC (c)2011

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