In early 2016 oil prices dropped below $30 a barrel for the first time since 2004. The imbalance between supply and demand is dragging operators across the industry into an oil price bear-pit, leading to a string of profit warnings. These gloomy figures are a wake-up call across the oil and gas sector. Inefficiency can no longer be tolerated.
The answer is plain: we need enhanced contractual risk management. Without better commercial discipline, particularly around the deployment of capital in large projects, tough conditions will become brutal.
Cost overruns on capital projects are all too common and intolerably damaging. They fester into claims that put fierce pressure on the margins and share prices of Owner Operators, who can see now more than ever the need to deliver capital projects on time and within budget.
Starting early is the key. In the EPC phase of a project, the engineering cost is significantly lower than the procurement and construction costs. However, decisions made during engineering have a greater influence on the cost of a project than those made during procurement and construction. Therefore detecting potential problems in the engineering phase can avoid costly rework and delays.
In practical terms, this makes Early Warning Indicators (EWIs) an essential part of proactively managing contractual risk, especially in large, complex projects.
Capturing EWIs can alert the Owner Operator team of the need for corrective action before costs explode. These EWIs may include the “above- normal” growth rate of Change Orders, the amount of information missing from a FEED package, or signs of conflict between the Owner Operator project team and the Contractor team.
Many of these valuable EWIs are buried in the contractual correspondence between Owner Operator and Contractor: letters, minutes of meetings, or Change Order Requests. Spotting the dangers in this data is a fine art.
More and more, 8over8’s ProCon platform is being used to provide EWIs of likely challenges and problems. By bringing correspondence and documentation together into a single, transparent version of the truth they show which aspects need management attention before they fester into claims, schedule delays and cost overruns.
The ability to capture the real story hidden in large volumes of unstructured data, and then to alert management teams before costs escalate, makes ProCon indispensable in a difficult situation.
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Discover how you can cut project overrun and boost profit, download ‘Capex project overruns: Tackling the lasting negative effects of risk’