Programmes Commercial Strategy

Magnox Limited (Magnox), a company owned by

Energy Solutions, manages and operates ten nuclear

licensed sites across the UK on behalf of the Nuclear

Decommissioning Authority (NDA).

Programmes

Primary delivery of decommissioning activities, principally through strategic frameworks.

Services

Activities that support or enable Programme delivery and operations. This includes Collaborative Procurement (joint procurement with other NDA Site Licensed Companies) and Site and Business Support frameworks and contracts for a range of site and business services, manpower resources and supplies to all Magnox locations.

Transactions

Local, tactical and site specifi c needs including a number of high value standalone projects. These directly support delivery activities, but do not warrant companywide frameworks. They do, however, include operational frameworks pertinent to activities at multiple sites which are at similar stages in their lifecycle (e.g. a targeted framework supporting generation).

Magnox has published its commercial strategy in which it refers to

three key themes:

This document describes the commercial strategy designed to support the delivery of Programmes. It explains what constitutes a Magnox Programme and how these are structured, managed and delivered. Programmes are fundamental to the Magnox Optimised Decommissioning Plan (MODP) and Commercial Strategy, accounting for about £2.5bn of Magnox’s expenditure during care and maintenance preparations. They encompass the most technically and commercially challenging decommissioning activities including critical path work associated with Intermediate Level Waste (ILW) retrieval, processing and passive storage and as such their importance to Magnox cannot be understated.

Transactions (Local site needs)

Services (Support activities)

Pr

ogrammes

(Deliverables) INTERMEDIATE LEVEL WASTE MANAGEMENT

PONDS DRAIN & SEAL

FUEL ELEMENT DEBRIS DISSOLUTION

PLANT & STRUCTURES DECOMMISSIONING

FM PROFESSIONAL SER VICES HEAL TH PHYSICS CONSUMABLES IT

02

Programmes

• Benefi t from the retention and transfer of relationships, resources, knowledge and/or capability from one activity to the next.

• Allow a “lead and learn” philosophy where continuous improvement in delivery is clearly demonstrable.

• Demand a proactive, hands on approach to leadership and management.

• Generally reside in the top right-hand box of the Boston Matrix (Figure 2) being, by defi nition, both high value and high risk.

In the Magnox environment, Programmes fall into one of two groups:

i. Those composed of individual projects aimed at creating a wider capability and delivery impact. For example, a project might deliver a decommissioned pond at an individual site, whereas a Programme would ensure that skills, learning and resources are transferred between sites, resulting in reduced costs, improved schedules and accelerated hazard reduction across the entire business. ii. Those that are a set (or portfolio) of projects,

where the objective is to exploit economies of scale and to reduce procurement effort, management costs and risks, e.g. Deplant and Demolition.

For Magnox, there are several criteria which determine whether activities are deemed to fi t within Programmes, Services or Transactions. Programmes are, therefore, those activities which:

• Are critical to the Magnox mission and which create outcomes through their delivery.

• Have a common theme across multiple sites.

• Consist of a number of discrete activities rather than a steady state provision.

• Lend themselves to sequencing similar activities and optimising resource requirements (internal or external), thus reducing peaks and troughs.

Figure 2 – Boston Matrix – Relationship between risk, value and activity categorisation

Strategic security Strategic critical

Tactical acquisition Tactical profit

HIGH HIGH Programmes Services Transactions Value Risk

A series of Programmes has

been identifi ed and developed by

Magnox, and for each a senior

manager has been appointed to

provide focus and leadership to

drive delivery. The series includes

Ponds, Fuel Element Debris (FED)

Treatment, ILW Management,

Plant & Structures (incorporating

Bulk Asbestos, Deplant and

Demolition and Construction/

Buildings). Other Programmes

may emerge over time where

activities match the above criteria.

These Programmes provide the

opportunity to stimulate the supply

chain, maximise commercial

leverage and optimise value.

2.1 Ponds Programme

A principal activity in the preparation of Magnox sites for care and maintenance is the emptying and cleaning of the pond structures used to store and cool used fuel prior to its dispatch to Sellafi eld for reprocessing. There are six main steps to ponds decommissioning:

1. Deplanting 2. Sludge retrieval 3. Drain and seal

4. Decontamination including concrete removal where necessary

5. Ancillary plant and equipment removal 6. Civil demolition

To capitalise upon existing best practice for ponds cleaning, a Programme approach has been developed to take the eight remaining sites to a point where their ponds are drained and sealed (Step 3). Estimated expenditure for this programme is £90m from 2010 to 2020.

2.2 FED Treatment Programme

FED is a major source of Solid ILW across Magnox sites. FED treatment has been used at Dungeness for many years as a means to reduce the volume of ILW requiring passive storage. The FED Treatment Programme seeks to build upon dissolution technology, which has improved signifi cantly, and apply it across other Magnox sites. Estimated expenditure is £80m for work to be undertaken at Bradwell, Sizewell, Hinkley, and Oldbury in the period 2010 to 2020, with the potential to be used at other sites in the Magnox fl eet.

2.3 ILW Management Programme

The Magnox ILW Management Programme represents new developments in the retrieval, processing, storage and disposal of ILW in the UK. Using high-integrity containers, ILW can be retrieved without the need for building the infrastructure typically associated with such projects, thereby allowing ILW to be retrieved faster and more cost effectively.

There are three key work streams to the ILW Management Programme:

• Design and supply of storage containers (Mini Stores). Initial Mini Stores procurement has been completed and longer term options are being developed to ensure a scalable and secure supply. Estimated expenditure is £183m.

• Design, supply, commissioning and operations of retrieval and processing equipment. For all sites, a multi-supplier framework has been developed with suppliers specialising in either wet ILW and/or solid ILW. Estimated expenditure is £350m during the period from 2010 to 2020.

• Design and build of ILW Interim Stores for the Mini Stores. Long-term storage of waste will require the provision of Interim Stores at each site and a framework has been developed for delivery of this element of the programme. Estimated expenditure is £25m for eight sites.

2.4 Plant and Structures

Programme

A relatively new Programme which brings together the majority of the major decommissioning activities related to site assets which are not covered elsewhere and are vital to enter care and maintenance. There are a number of work streams to the Plant and Structures Programme:

Asbestos Removal

Magnox Stations were designed and built in the 1950s and 60s and therefore, as is typical for the period, there is a preponderance of asbestos containing materials throughout the buildings and structures.

Three key routes are identifi ed for discharging asbestos retrieval work across Magnox:

• Asbestos Removal – to deal with bulk asbestos. The Asbestos Removal Programme builds upon the lessons learned from pathfi nder projects at Hinkley, Chapelcross and Sizewell and will be delivered via a strategic framework agreement with multiple suppliers to align with geographical coverage and intensity of delivery. Following supplier engagement, Magnox has combined the procurement of this framework agreement with Deplant and Demolition. Estimated expenditure for bulk asbestos is £120m from 2011 to 2020.

• Asbestos Consultancy – to identify and monitor asbestos containing materials. Estimated expenditure is £7m over 7 years. This work stream will reside under Services within the Magnox Commercial Strategy.

• Access and Insulation Maintenance – to provide ongoing maintenance type works and delivery of small projects. Estimated expenditure is £6m per annum. This work is delivered by a Collaborative Procurement (CP) framework which also resides under Services.

Deplant and Demolition

Deplant and Demolition (D&D) is a complex programme which is relatively diverse in nature with extensive interfaces with other programmes and activities (e.g. Asbestos). To simplify matters, and align with supply chain capabilities, Magnox has identifi ed two primary work streams:

• Conventional D&D – projects outside the Radiological Controlled Areas (RCA) such as Turbine Halls, Admin Buildings, etc (i.e. non-nuclear). Estimated expenditure is £160m for the period 2011 to 2020.

• Radiological D&D – projects inside the RCA such as Boiler Houses, Pile caps, etc (i.e. nuclear). Estimated expenditure is £110m for the period 2011 to 2020. This work will be delivered via a strategic framework agreement which, including Asbestos Removal, will consist of three specialist areas (one for each work stream), involving multiple suppliers.

All demolition work will require varying amounts of enabling activity such as electrical alterations, mechanical diversions and residual asbestos removal. Magnox will co-ordinate these activities through close liaison with

site teams, drawing upon existing Business Service Frameworks to provide support. This enabling activity is also ideal for local supply chain and socio-economic development where Magnox will encourage the formation of new relationships with framework suppliers and subcontractors to create lasting supply chains.

Magnox has applied its lead and learn approach to the D&D Programme by creating a hybrid framework, known as Mechanical and Engineering Core Support Services (MECS), which provides options to accelerate deplanting work. Lessons gained from this contract will be fed back into the D&D strategy and procurement plan.

Construction/buildings

The ongoing deterioration of ageing assets and the resultant cost of general asset care, combined with the need to provide long-term protection to retained structures, has led to Magnox identifying a separate Programme for works which range from major maintenance through to Safestore weather envelopes and temporary buildings and shelters. Early Programme development indicates delivery via a strategic framework with multiple suppliers to discharge an estimated expenditure of £108m by 2020.

Programmes are generally

delivered via strategic framework

agreements, following the

principles contained in the

Magnox Commercial Strategy

(long-term, sustainable, procure

once and use many times).

Exceptions are where Magnox

determines that in-sourced

solutions (make) will deliver

best value.

Frameworks are procured either through a call for competition using OJEU Notices or via a Periodic Indicative Notice and Achilles Utilities Vendor Database (or equivalent). Agreements are placed with one or more suppliers depending upon the scale, geographic spread, intensity and/or complexity of the Programme. Where multiple suppliers are appointed to a framework, a selection procedure is used either to select a single supplier or a consortium of suppliers from the framework or for mini competitions to be held allowing activities to be competed

Figure 3 – Employer and supplier risk relationships Employer s #OMMERCIALRISK s -ANAGEMENTEFFORT s #ONTROLOVERWORK Target price incentive based Total lump sum

Unit rates

Fixed fee & man hour rates

Total cost reimbursable Supplier

s #OMMERCIALRISK s -ANAGEMENTADMIN

s 3COPEDEFINITION The route to overall

risk reduction is by appropriate allocation and joint incentivisation rather than simply transferring risk

HIGH

HIGH

RISK TRANSFER AXIS

amongst the suppliers on the framework. The intention is to revert to mini competitions only when there is a compelling argument to do so and therefore they will be used only by exception. When mini competitions are deemed necessary, Magnox will normally employ a two stage approach. Initially, all interested framework suppliers will participate in a technical assessment, following which a reduced number will be invited to provide quotations from which a single supplier will be selected.

This approach is intended to

minimise the procurement

burden on all parties

The commercial strategy is designed to move the focus for demonstrating value for money away from tendering which, by its nature, can only compare well intended promises, to measuring and benchmarking the real out-turn performance, project after project.

Strategic framework agreements are based on the NEC3 Framework Contract which allows deployment of the most appropriate contract from the NEC3 suite to suit each particular circumstance. Due to the nature of the Programmes, the primary delivery contract is the Engineering & Construction Contract (ECC) supported by the Professional Services Contract (PSC) and the Term Service Contract (TSC). Given that Programmes sit in the high commercial risk arena (Figure 2), experience

to date, supported by procurement theory (Figure 3), leads to the natural contract pricing option being Option C – Target Contract with Activity Schedule, where risks can best be managed in a collaborative and inclusive manner. Typically, the supplier’s share of savings or overspends for design activities is small so that there is a relatively unconstrained ability to ensure that the right input is provided at this key project stage, whereas during project delivery the supplier’s share is likely to be higher around the target with any further supplier share reducing in both directions away from the target. The overarching intention is to ensure that the right price is set and both parties are appropriately incentivised for the optimum project delivery.

The use of Key Performance Indicators (KPIs) is fundamental to measurement and incentivisation arrangements. In developing its approach, Magnox has considered the work of Constructing Excellence in order to align KPIs with the wider construction and engineering sectors. It is recognised that in long-term framework arrangements, in order to demonstrate continuous improvement and value for money, measurement and benchmarking of out-turn performance, activity after activity, is essential if the dependency on market testing through competitive tendering is to be reduced. By deploying a standard suite of KPIs, Magnox will be able to not only undertake internal benchmarking within and between frameworks but also to participate in external benchmarking through bodies such as Constructing Excellence.

Magnox is committed, wherever possible, to single point accountability for the full lifecycle delivery of activities (cradle to grave). The stated intention is to engage suppliers early in the lifecycle of activities and, wherever possible, adopt a design and install (and potentially operate) approach.

Magnox has learnt over

many years that awarding

turnkey contracts for

decommissioning projects

with their inherent technical

uncertainty and attendant

commercial risks does not

deliver value for money

Accordingly Magnox has developed a staged approach to delivery wherein commercial commitments to suppliers are made only as far as risk can be reasonably foreseen, allocated and managed.

This has led to the development of four generic building blocks for delivery:

J1 DESIGN

To an agreed and clearly defi ned gate where suffi cient information has been developed and risks clearly managed suffi ciently to enable delivery of the next phase with confi dence. J2 INSTALL

A phase which may include manufacture, supply and/or build, but in all cases to include commissioning and full works testing to demonstrate that it does what it is intended to do prior to handover and completion. This includes an element of operation which helps inform the next phase.

J3 OPERATE

A phase which may be delivered by Magnox directly or in association with the supplier to retain the accountability trail (possibly by seconding Magnox resources to the supplier). J4 DISMANTLE

A fi nal phase which may include

decommissioning and/or transfer of facilities for re-use.

Project specifi c commercial strategy development will make use of these building blocks to determine the optimum approach for project execution, including determining the precise boundaries between each building block. However, it is clear that some programmes, such as FED treatment, will use all four blocks, whereas others, such as Interim Stores, where the risks can be assessed and managed, may only require the use of two or of combined building blocks.

Figure 4 – Fixed fee approach

Design phase

Target price

Budget price & fixed fee Package order Fixed fee

1

2

3

4

Linking phases by using fixed fees to incentivise lifecycle delivery within agreed budgets A possible downside of a phased approach is that suppliers can be perversely incentivised to over-engineer during design to increase the value of subsequent phases and thereby increase profi t margins. To counter this, Magnox has developed a fi xed fee approach whereby at the start of any phase, the supplier commits to an agreed lump sum fee for the subsequent phase. Thus, the traditional link between turnover and profi t is eliminated and instead the supplier is incentivised to reduce the cost of the subsequent phase in order to enhance his percentage return. This model delivers an important incentive to lifecycle delivery. The staged approach also allows Magnox to consider different suppliers for different phases where it is deemed that the added value of such an approach outweighs the inherent interface/handover risk.

Passionate and resolute leadership will be required to steer the frameworks on the journey of long-term collaborative working which is fundamental to their success and wellbeing. Recognising this, Magnox sees the position of Framework Manager to be a key leadership role which encompasses being:

• An ambassador for the Programme, both internally across sites and externally in the market.

• A salesman for the strategic framework agreement, constantly reminding all parties of the benefi ts.

• An enabler, helping project teams to engage with the suppliers to successfully deploy their services.

• A relationship manager, encouraging and supporting a collaborative approach across all parties.

• A co-ordinator of measurement and benchmarking to demonstrate improving value for money.

• A communicator with other groups in the Commercial Delivery Organisation to promote awareness of the Programmes and to help ensure that relative responsibilities are clear.

Magnox recognises that successful Programme delivery rests fi rmly

upon the success of the strategic framework agreements described in

this document. Establishing these agreements is breaking new ground

for Magnox and the long-term survival of these agreements depends

upon their ongoing care and maintenance.

Framework Managers are the focal point for supply chain management associated with Programme delivery across Magnox. They will lead behavioural change in order to develop and sustain a culture of continuous improvement where constructive challenging becomes the norm.

Magnox has developed a commercial team structure around its commercial strategy which clearly recognises the importance of Programmes alongside Services and Transactions (Figure 5). Framework Managers will be appointed for the life of the frameworks, from strategy development, through procurement and delivery to close out of the strategic agreements.

For each site which uses a strategic framework agreement, it is intended that there will be commercial resources allocated locally to provide subcontract management services. Such resource will retain direct reporting to the site team and also add a functional reporting route to the relevant Framework Manager. This matrix management will enable reporting and communications directly with the Framework Manager who carries accountability for the strategic framework agreement and supplier relationships.

Figure 5 – Organised to deliver Commercial delivery Framework Managers Strategic Delivery Frameworks Manager Divisional Commercial Manager Sites CP & Business Services Manager Programmes Ponds FED Dissolution Mini Stores Retrieval Interim Stores Deplant & Demolition IL W Management Plant & Structur es Bulk Asbestos MECS Construction/ buildings Services Transactions

Magnox sees the position

of Framework Manager to

be a key leadership role