Forensic audit reveals trouble from the start at Muskrat Falls

The latest Grant Thornton audit was released as the second phase of the inquiry into the controversial hydroelectric project began in Happy Valley-Goose Bay.

Latest Grant Thornton audit finds that Nalcor knew of problems early on, but did little to nothing about them

Scott Shaffer of Grant Thornton led the latest audit on Muskrat Falls. (Terry Roberts/CBC)

A forensic audit investigating cost and schedule overruns at Muskrat Falls reveals that Nalcor knew early on that its original estimates were in trouble.

But instead of pausing or stopping the project, the Crown corporation pressed ahead.

That's just one of the findings of Grant Thornton's latest audit of the controversial hydroelectric project.

The audit was released Monday during the start of Phase II of the ongoing public inquiry in Happy Valley-Goose Bay.

The second phase of the inquiry is focusing on the reasons why a project originally sanctioned at a capital cost of $6.2 billion in late 2012 has since ballooned to more than $10.1 billion. When financing and other charges are factored in, the full costs are nearing $13 billion for a public project led by Newfoundland and Labrador's energy corporation, Nalcor.

According to the audit, Nalcor awarded contracts in 2013 that exceeded the sanctioning estimate by $600 million, or 25 per cent higher than initially projected, according to Grant Thornton.

The overruns fell well short of Nalcor's tactical contingency of $368 million.

And a low bid by Astaldi for the critical power generation contract should have also raised concerns, according to the audit.

Despite the early warning signs, Nalcor did not attempt to recalculate its contingency amounts, or modify its capital cost estimates prior to signing a federal loan guarantee in November 2013.

Once the loan guarantee was signed, the provincial government was legally committed to finish the project, regardless of the amount of cost overruns.

When asked by auditors why changes to the estimates weren't made prior to signing the loan guarantee, project manager Paul Harrington said "not my call" and that such changes were the responsibility of "senior management and government."

The audit also revealed that Nalcor's seven per cent contingency allowance was below industry standards, with an independent engineer saying contingencies typically range from 12 to 18 per cent.

The Muskrat Falls Project is expected to deliver first power in 2019. (Nalcor)

And at the time of so-called financial close on the project in late 2013, the project was already six months behind schedule, which was another sign of trouble.

One expert quoted by Grant Thornton said taking risks with a megaproject's schedule is a "fool's game."

"Schedule pressure dooms more megaprojects that any other single factor," Edward Merrow of Independent Project Analysis Inc., is quoted at saying in the audit.

"When there is pressure to move a project along quickly from the outset, corners get cut and opportunists have a field day."

Cost estimates and actual

But Nalcor's decision to award the very important powerhouse contract to Astaldi Canada came in for the most scrutiny.

Astaldi's bid of $1.14 billion and 6.82 million labour hours was accepted in late 2013, and was significantly higher than Nalcor original estimate of $752 million and 3.66 million hours.

Astaldi was one of four bidders on the contract, with two companies offering to build the powerhouse for more than $2 billion, significantly higher than Astaldi's estimate.

Grant Thornton again quoted from a book by Edward Merrow to illustrate the perils of accepting the lowest bidder.

"Acceptance of such bids guarantees that the bidder does not fully understand the project or has made a disastrous bidding error. Either way, the sponsor will lose," Merrow wrote in a book entitled Industrial Megaprojects: Concepts, Strategies, and Practices for Success.

The Astaldi contract has been a source of ongoing controversy, and represents a significant portion of the cost overruns.

Acceptance of such bids guarantees that the bidder does not fully understand the project or has made a disastrous bidding error.- Edward Merrow

In a supplemental agreement in 2016, Nalcor agreed to pay Astaldi an additional $884 million, with a review determining that "negotiating with Astaldi provides the least cost-risk exposure" to Nalcor.

As of March 2018, the cost overruns for the powerhouse contact have reached $1.2 billion.

Last fall, Nalcor expelled Astaldi from the Muskrat Falls project, and another company, Pennecon, is now finishing the contract.

Grant Thornton's Scott Shaffer is schedule to testify at the inquiry until Thursday.

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