Page 348 - Hydrocarbon Exploration and Production Second Edition

Project and Contract Management 335

13.5. Types of Contract

To protect both parties in a contract arrangement it is good practice to make a
contract in which the scope of work, completion time and method of reimburse-
ment are agreed. Contracts are normally awarded through a competitive tendering
process or after negotiation if there is only one suitable contractor.
There are many varieties of contract for many different services, but some of the
more common types include
Lump Sum contract; contractor manages and executes specified work to an agreed
delivery date for a fixed price. Penalties may be due for late completion of the
work, and this provides an incentive for timely completion. Payment may be
staged when agreed milestones are reached.
Bills of Quantities contract; the total work is split into components which are
specified in detail, and rates are agreed for the materials and labour. The basis of
handling variations to cost are agreed.
Schedule of Rates contract; the cost of the labour is agreed on a rate basis, but the
cost of materials and the exact hours are not specified.
Cost Plus Profit contract; all costs incurred by the contractor are reimbursed in full,
and the contractor then adds an agreed percentage as a profit fee.
Lump sum contracts tend to be favoured by companies awarding work (if the
scope of work can be well defined) as they provide a clear incentive for the
contractor to complete a project on time and within an agreed price.
The choice of contract type will depend on the type of work, and the level of
control which the oil company wishes to maintain. There is a current trend for
the oil company to consider the contractor as a partner in the project (partnering
arrangements), and to work closely with the contractor at all stages of the project
development. The objective of this closer involvement of the contractor is to
provide a common incentive for the contractor and the oil company to improve
quality, efficiency, safety and most importantly to reduce cost. This type of contract
usually contains a significant element of sharing risk and reward of the project.