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Contract Management

Topic 1: Introduction to contracting

Contract:
- An agreement between 2 parties, A and B, that if A does somethings for B then B will do something for
A, and vice versa. It states that in consideration of A performing a certain operation, B agrees to pay a
certain amount to A; and in consideration of B paying that amount to A, A agrees to perform the
operation.

Reasons for contracting out:
- Contractor’s ability to supply the works, services or goods at lower cost/risk than that which the OU is
willing to assume
- Availability to the contractor of suitably qualified and experienced personnel which cannot be furnished
efficiently by the OU
- The corporate experience of the contractor in the type of operation to be undertaken, especially in the
specific geographical area and environment, which may be much greater than that available within the
Shell group
- The R&D efforts for Contractors can be much more focused on their own specialty and thus be more
effective

2 contract myths:
- Contracts are written in complicated legal language
- Contracts are the business of lawyers

A good contract will ensure that the operations staff of both parties will never be uncertain about the actions
that both may or must take. The language must therefore be simple and precise and may include drawings and
worked examples.
Contracts are the business of the engineers that have to operate them.

2 groups support engineers in the contracting process, lawyers and Commercial/Contract Services
- Lawyers help engineers identify risks, suggest structures and approaches. They ensure that the contract
documents correctly reflect the allocation of risks decided upon and that this can be enforced in the
appropriate country.
- Commercial/Contract services responsibilities are to:
o Ensure that a consistent and commercially sound contracting approach is adopted
o Provide advice on best practices in contracting particularly in the development of contracting
strategies
o Ensure that comprehensive input is obtained from all advisory functions including lawyers
o Ensure that the administration of the various contracts is properly coordinated

Tender board
- A group of nominated senior OU staff who have controlling responsibility with respect to the process of
contracting.
- The group should always include a representative of the finance section

Its responsibilities are: o Ensure that the OU’s commercial procedures are complied with o Make an independent assessment of the proposed contracting strategy o Make an independent assessment of the proposed award of a contract o Verify that the contract is in accordance with the commercial policies and interests of the OU Topic 2: The preparation phase Reducing the number of contracts can be achieved in 2 ways. For this reason special clauses are included that deal with unexpected and severe problems.Contracting with a company that can provide all the work scope using its own resources . and in such a way both parties gain Turnkey: .The contractor does exactly what he has been contracted to do and has little incentive to make additional efforts and/or initiatives to improve his performance . In this case the lump sum mode of reimbursement is temporarily suspended and replaced by a day rate until the situation is resolved. or in cases where the risks involved in the execution are of such a nature that they can only be poorly assessed. This contract type can only be used when the end product and its specs can be very accurately defined prior to the preparation and award of the contract. Contract scope of work: It is of major importance for 2 reasons: .Contractor must be able to price the work and uncertainties (which may result in cost increases) should be minimized . . . This contract type is used when the scope of work cannot be defined at the start of the contract.The drilling contractor is paid a lump sum to deliver the end product in accordance with the specifications laid down by the OU.Work is divided into smaller parts for which individual pricing schedules have been agreed.Contracting with a company that then contracts some of the services from one or more other companies (subcontractors) Contract types: Day rate: .The overall objective is to have the well drilled for a lower price in a shorter time than would have been done under a day rate contract. .Only incentive for contractor is to keep his equipment in good shape because cases of excessive downtime due to equipment failure will result in reduced rate penalties Unit rate: . . each of which provides the contractor with a financial incentive to operate more efficiently .The drilling contractor is paid on a fixed daily rate for the duration of the contract.Both parties need to have a clear understanding of their roles and responsibilities in execution of the work It must state what is to be performed clearly and unambiguously .The financial risk to which the contractor is now exposed is certainly higher than that in the day rate type of contract.

2.Contractors must be of know integrity. qualified contractors as if it were a competitive tender. . Technical and Experience information necessary Invitation to tender: .The tender document as issued can be seen as a contract proposal issued by the OU from which only the commercial prices and binding signatures are missing.No limitations are imposed on the number of contractors who can bid for the work. acceptable HSE performance.Very unusual in the drilling industry.This type of tender is either driven by necessity/availability or by circumstances whereby it is very obvious that a competitive tender will not result in a more favourable outcome for the company Preliminary Enquiry: . but the structure and content is also designed to ensure that: o Bids contain all the info required for the evaluation in a format that can be easily compared with other bids o Tenderers submit legally binding bids . They are all considered qualified for the job.The document “Standard Pre-qualification to Tender Document for Drilling and Drilling Related Services” is available from CPS-EP and is used to record the Commercial.A single tender document is sent to one.The preferred method should be to directly negotiate with the contractor .The invitation to tender letter formally invites the tenderer to submit a bid for the Work described in part 9 of the Contract documents and gives an overview of the work to be performed Instructions to tenderers: . or a few. from a company approved bid list.Prior to preparation of the tender documents.Very common in the drilling industry. Open competitive tendering: . are invited to bid. . Limited competitive tendering .A number of know and selected contractors. adequate financial standing. This is generally used for work of a low level of technical and management complexity. . it is useful to send out an Enquiry message to contractors and service companies who will potentially have suitable equipment available at the envisaged time of spudding the first well.Topic 3: Going out to tender Tender types: 1. 3. and proven workmanship . .Its purpose is to solicit bids for a project and should be designed to allow potential tenderers to put a price on the work. Pre-qualificaiton: . Sole/Negotiated tender .

The tenderer only has to fill in the numbers of any tender bulletins which have been issued.He confirms in writing that he has received the tender documents and states whether or not he intends to submit a bid. Formally specify the relevant dates and durations e.An official statement which is required to be returned by the tenderer upon receipt of the tender documents. Financial strength (income. Topic 5: The contract documents Contract documents divided into 4 main elements: 1. Formally states what both parties agree to do d.He also provides the details of the communication channels which he wishes the OU to use Letter of tender aka Bid cover letter: . credit worthiness) 2. Experience (previous similar projects. . availability of suitable equipment) 3. Formally states why the 2 parties are entering into the agreement c. . interpretations and object o Article 2: Commencement. Formally identifies the 2 parties b. Its purpose is to inform the tenderer of the proper procedures which must be adopted to satisfy the requirements of the OU for the submission of tenders and the award of a contract.The letter which the OU expects the tenderer to use as a covering letter with the tender submission . but still in terms which are not specific to the particular project o Article 1: Definitions. according to due process. Formally state where the agreement is made f.It contains all the declarations and commitments which the company wishes to receive from the tenderer. total successful projects) Letter of intent: . while at the same time avoiding committing the OU to its terms. . It gives the contractor some degree of confidence that he will be awarded the contract. The Form of Agreement (actual agreement and is where signatures are made) a. then date and sign the letter and add the formal name and address of the company submitting the bid Topic 4: Contract Award 3 Groups of factors used to evaluate a tender: 1.It is issued where they may be a time constraint or delay in the final contract award. Formally incorporate all the supporting documents into the contract 2. including the date up to which the tender should be valid . which authenticates the offer and its acceptance by the respective parties. bid capacity. Acknowledgement: . Contract awarded by signing the documents. The Conditions of Contract o Defines the obligations of the two parties in more detail. Technical qualifications (management quality. staff quality. Duration and Termination o Article 3: Execution of the work .

lump sum payments. services and personnel. The Specific Conditions of Contract a. personnel and operations o Article 12: Insurance o Article 13: Working conditions o Article 14: Special circumstances o Article 15: Subcontracting and assignment of contract o Article 16: General provisions 3. o Article 4: Contractor’s Personnel o Article 5: Materials. the bid list has to include contractors who would not normally be able to pre-qualify . tools and Equipment o Article 6: Standard of performance o Article 7: Prices and payments o Article 8: Taxes and duties o Article 9: Terms of payment o Article 10: Company’s audit rights o Article 11: Liability for equipment. Performance Guarantee (optional) i. Administration Procedures b. iii. Complete specs of the payment schedule relating to the contract ii. It describes exactly what materials and services the contractor is expected to provide b. It is very rarely included in a drilling contract since the tender procedure ensures that the contract will only be given to a contractor who is technically competent and financially sound iv. These standards apply to services and processes and the associated documentation and technical equipment f. Performance Bond i. The schedule includes details of currency. Schedule of Prices and Rates i. time based rates for equip. which must be complied with during the execution of the work ii. Additional Conditions of Contract a. Standards i. Provides detailed answers to the question “how does the contractor fulfill his obligations?” ii. milestone payments. c. A sum of money paid into a bank by the contractor prior to commencement of the work ii. mobilization/demobilization payments. Defines the standards of construction and use. Scope of Work i. It may be included as a disincentive in cases where. for non technical reasons. Provisions by Company e. Provisions by Contractor d. A bar chart representing the duration of every significant activity to be undertaken by the contractor. Drawings g. Only required if the Contractor is a “local company” acting as agent for a major contractor. c. Contractor’s Execution Plan i. unit rates and charges for transport and other services. Penalty payments 4. and operating practices. This sum of money can be claimed by the OU if the contractor does not comply with his obligations iii.