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;

- Contracting with a company that can provide all the work scope using its own resources
- Contracting with a company that then contracts some of the services from one or more other
companies (subcontractors)

Contract types:
Day rate:
- The drilling contractor is paid on a fixed daily rate for the duration of the contract. This contract type is
used when the scope of work cannot be defined at the start of the contract, or in cases where the risks
involved in the execution are of such a nature that they can only be poorly assessed.
- 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
- 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:
- Work is divided into smaller parts for which individual pricing schedules have been agreed, each of
which provides the contractor with a financial incentive to operate more efficiently
- 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, and in such a way both parties gain

Turnkey:
- The drilling contractor is paid a lump sum to deliver the end product in accordance with the
specifications laid down by the OU. 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.
- The financial risk to which the contractor is now exposed is certainly higher than that in the day rate
type of contract. For this reason special clauses are included that deal with unexpected and severe
problems. In this case the lump sum mode of reimbursement is temporarily suspended and replaced by
a day rate until the situation is resolved.

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
- 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
Topic 3: Going out to tender

Tender types:
1. Open competitive tendering:
- No limitations are imposed on the number of contractors who can bid for the work. This is generally
used for work of a low level of technical and management complexity.
- Very unusual in the drilling industry.
2. Limited competitive tendering
- A number of know and selected contractors, from a company approved bid list, are invited to bid. They
are all considered qualified for the job.
- Very common in the drilling industry.
3. Sole/Negotiated tender
- A single tender document is sent to one, or a few, qualified contractors as if it were a competitive
tender.
- The preferred method should be to directly negotiate with the contractor
- 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:
- Prior to preparation of the tender documents, 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.

Pre-qualificaiton:
- Contractors must be of know integrity, adequate financial standing, acceptable HSE performance, and
proven workmanship
- 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, Technical and Experience
information necessary

Invitation to tender:
- Its purpose is to solicit bids for a project and should be designed to allow potential tenderers to put a
price on the work, 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
- 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.
- 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:
 - 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.

Acknowledgement:
- An official statement which is required to be returned by the tenderer upon receipt of the tender
documents.
- He confirms in writing that he has received the tender documents and states whether or not he intends
to submit a bid.
- He also provides the details of the communication channels which he wishes the OU to use

Letter of tender aka Bid cover letter:

- The letter which the OU expects the tenderer to use as a covering letter with the tender submission
- It contains all the declarations and commitments which the company wishes to receive from the
tenderer, including the date up to which the tender should be valid
- The tenderer only has to fill in the numbers of any tender bulletins which have been issued, 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. Financial strength (income, bid capacity, credit worthiness)
2. Technical qualifications (management quality, staff quality, availability of suitable equipment)
3. Experience (previous similar projects, total successful projects)

Letter of intent:
- It is issued where they may be a time constraint or delay in the final contract award. It gives the
contractor some degree of confidence that he will be awarded the contract, while at the same time
avoiding committing the OU to its terms.
Contract awarded by signing the documents, according to due process, which authenticates the offer and its
acceptance by the respective parties.

Topic 5: The contract documents

Contract documents divided into 4 main elements:

1. The Form of Agreement (actual agreement and is where signatures are made)
a. Formally identifies the 2 parties
b. Formally states why the 2 parties are entering into the agreement
c. Formally states what both parties agree to do
d. Formally specify the relevant dates and durations
e. Formally state where the agreement is made
f. Formally incorporate all the supporting documents into the contract
2. The Conditions of Contract
o Defines the obligations of the two parties in more detail, but still in terms which are not specific
to the particular project
o Article 1: Definitions, interpretations and object
o Article 2: Commencement, Duration and Termination
o Article 3: Execution of the work
 o Article 4: Contractor’s Personnel
o Article 5: Materials, 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, 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. The Specific Conditions of Contract
a. Scope of Work
i. Provides detailed answers to the question “how does the contractor fulfill his
obligations?”
ii. It describes exactly what materials and services the contractor is expected to provide
b. Contractor’s Execution Plan
i. A bar chart representing the duration of every significant activity to be undertaken by
the contractor.
c. Provisions by Contractor
d. Provisions by Company
e. Standards
i. Defines the standards of construction and use, and operating practices, which must be
complied with during the execution of the work
ii. These standards apply to services and processes and the associated documentation
and technical equipment
f. Drawings
g. Schedule of Prices and Rates
i. Complete specs of the payment schedule relating to the contract
ii. The schedule includes details of currency, milestone payments, lump sum payments,
mobilization/demobilization payments, time based rates for equip, services and
personnel, unit rates and charges for transport and other services.
iii. Penalty payments
4. Additional Conditions of Contract
a. Administration Procedures
b. Performance Guarantee (optional)
i. Only required if the Contractor is a “local company” acting as agent for a major
contractor.
c. Performance Bond
i. A sum of money paid into a bank by the contractor prior to commencement of the
work
ii. This sum of money can be claimed by the OU if the contractor does not comply with his
obligations
iii. 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. It may be included as a disincentive in cases where, for non technical reasons, the bid
list has to include contractors who would not normally be able to pre-qualify