Will Building Nuclear Plants Always Pay Off? ... Time to Assess Construction Firms' "Bargaining Power" [Weekend Money]

Czech Nuclear Plant Construction Talks Collapse
Disagreement Over Additional Costs and Risk-Sharing
Rebidding Process Could Reveal Contractors' Negotiating Power

Artist's rendering of the new nuclear power plant in Dukovany, Czech Republic

Shareholders may smile at the news that a major construction contract has been won, but whether they can keep smiling after the work is done depends on the contract. The profits left over will vary depending on whether the company can receive additional payment if the scope of work exceeds expectations and who bears the cost burden. Construction stocks that had been moving on hopes of winning nuclear power plant contracts now need to factor in these calculations.

Korea Hydro & Nuclear Power (KHNP) said on October 29 that it would end negotiations on the construction contract for the Dukovany nuclear power plant in the Czech Republic with a consortium of Daewoo Engineering & Construction and Doosan Enerbility. The two sides negotiated for 15 months but failed to bridge their differences over the contract terms. KHNP plans to select a new construction contractor and sign a contract by July 2027. This does not mean that the Czech nuclear power plant project itself is being abandoned.

One of the key points of contention is how to calculate costs if the volume of construction work increases. KHNP proposed a "fixed lump-sum contract" that sets the construction price based on the basic design. Daewoo Engineering & Construction asked to be paid for additional work identified after the detailed design is completed. The two sides also disagreed over whether construction and indirect costs were appropriate, as well as who would take on which work and responsibility. In terms of a home renovation, they clashed over whether additional work should be covered by the original estimate or require extra payment.

This is unwelcome news for investors who had expected nuclear power plants to be a major source of profits. However, in a report on October 30, Kim Sunmi, a research fellow at Shinhan Securities, said the process of selecting a new contractor could provide an opportunity to gauge construction companies' negotiating power. The point is to look beyond the shock of the failed negotiations and consider what terms will be included in the next contract.

The rationale is that there are few companies capable of taking on the work. The report named Hyundai Engineering & Construction, Samsung C&T, and Daewoo Engineering & Construction as domestic companies capable of leading nuclear power plant construction. It said the volume of work that construction companies can undertake simultaneously is limited compared with projects such as U.S. nuclear power plants and small modular reactors (SMRs) being developed by Holtec and TerraPower. If there are plenty of opportunities to take on work, companies may have less incentive to enter bidding with overly aggressive prices.

That said, a new bidding process does not automatically guarantee a favorable outcome for construction companies. It remains to be seen whether the new contractor will receive adequate construction costs and how the burden of design changes will be shared. "The failed negotiations will provide an opportunity to gauge what the market has been most curious about: construction companies' negotiating power and the potential profitability they can expect based on it," Kim said. "With the likelihood of lead contractors submitting excessively aggressive bids limited, it is worth watching the process of selecting a new contractor."

Kim also stressed that there is no need to overgeneralize and assume that all "Team Korea" nuclear power projects to follow those included in U.S. investment will face the same risks. The U.S. investment projects are not being awarded through competitive bidding, and their project costs have yet to be finalized, leaving room to negotiate construction costs. She also cited the growing use of contracts in large-scale, long-term U.S. construction projects that settle actual costs or share gains and losses resulting from cost increases or decreases.

This content was produced with the assistance of AI translation services.