Top 5 Contract Management Challenges for the Energy Industry – And How to Overcome Them
Everything in the energy sector is complex. Whenever new assets (greenfields) or refurbishment (brownfields) projects come up, all the elements that ensure service reliability, facility safety, and production efficiency add to contract challenges in the energy industry.
In the energy industry, contract lifecycle management (CLM), especially asset management, is particularly complex. Compliance, vendor selection, and supplier management are key considerations for both new construction and operational maintenance projects. At the same time, clients need mechanisms that help ensure engineering integrity while reducing costs for upgrading or acquiring new, intelligent assets.
At the heart of this complexity is keeping supply stable, ensuring cost-efficient production, and responding to issues quickly. To overcome the operational challenges, contract managers need to ensure compliance with a host of requirements that rarely feature in other industries.
A Complex Construction Environment – Contract Management Challenges in the Energy Industry
In the energy sector, projects regularly feature several main contractors (even when it’s a simple turnkey contract) where design authority, regulatory compliance, and risk mitigation are critical for project success. As contract packages have interdependencies, any delay in one contract could have knock-on effects on others leading to standing time delays and compensation events.
If an Engineering, Procurement, and Construction (EPC) company takes full responsibility for a project, the main challenge is managing every subcontract effectively to ensure compliance with the client’s requirements and regulatory constraints. The different legal interactions between all the stakeholders depend on detail-oriented, diligent contract managers who juggle daily challenges against the overall project costs, schedule, and regulatory compliance requirements.
To help you navigate these project complexities, we’ve assembled five top challenges facing the contract management discipline in the energy sector today. While many of these issues have been plaguing the industry for decades, modern technologies can help you overcome these challenges with improved governance, collaboration, speed, and efficiency.
1. Insufficient Risk Transfer and Mitigation Strategies
Your contract management system should allow you to transfer risks involved in the project’s execution explicitly to the responsible parties. Often, the necessary mitigation clauses require input from Subject Matter Experts (SMEs) from a variety of disciplines including material management, environmental law, hazardous operations, and systems engineering.
Due to the complexity of the Scope of Works (SOW), engineering input from all major disciplines should form part of the pre-contract award (aka pre-execution) phase. It’s also worth remembering that with advances in technologies (including control systems, data acquisition, and remote operations), the number of SMEs involved in these projects continues to increase every year. Contract management software can help you manage all these roles and interactions efficiently.
2. Compliance with Regulations and Internal Policies
Automated workflows and an auditable history of all changes to documents and agreements give organizations the ability to streamline all of their compliance tasks. A CLM system allows you to establish specific business rules and processes that ensure compliance with both your internal policies and external regulations.
When you want to audit a process, you can use the available history that includes specific edits, updates, comments, messages, and approval cycles that governed your contract-related activities. This eliminates the need to hunt through email strings, track down old versions, and sift through other types of communications. With contract management software, all versions, history, and exchanges are centralized and instantly locatable and audit-ready.
3. Inefficient Use of Contract Management Resources
Contractual issues and questions arise every day and need a professional resource with experience in dealing with these events. Traditionally, when a technical query does arrive about a particular agreement or related document, the contract manager would need to dig through an inbox of emails containing documents as attachments, hunt through folders on a shared drive to find a particular contract, or sort through complicated and potentially out-of-date spreadsheets before allowing an engineer or field representative to respond.
Reducing the resource loading to manage a contract (that remains the guiding document) starts with effective document and contract management and an intelligent and dynamic taxonomy. Managing changes to scope and responding to challenges that arise on the site can generate hundreds, if not thousands of documents during the project’s execution. Depending on manual processes and scanned PDFs won’t ease the burden on contract managers or buyers. A clear definition of scope – or an accurate division of responsibility (DoR) – that is searchable and links to all pertinent documentation, including parent-child contract relationships, can help reduce the burden on contract managers. Contract management software that supports a data-centric contract repository with intelligent search and reporting capabilities makes finding contracts and the information and language in them extremely easy and fast. You can view and filter all your contracts and documents by any relationship such as organization, contract type, contact, etc.
4. Shortcomings with Communication and Collaboration
Contract managers are the gateway between contractors and the company’s own expert technical resources. If the project is relying on traditional collaboration and communication tools (like emails), then it will increase the effort required exponentially.
Oversight and expert guidance will come from within the company but the only legal recourse available will be the wording of the contract document. An engineer may discover an issue on-site and alert the necessary supervisor before preparing a report on the problem. The report will then go to the contract manager who needs to rephrase the technical issue into a legal statement based on a contractual clause. If all of this back and forth is happening over email, then it takes a great deal of time and leaves open the possibility of a communication detail being missed.
The response from the responsible company will likely also come in the context of the contract. While this is legally accurate, the necessary technical details may become lost in the interactions. A Contract Lifecycle Management (CLM) tool that allows real-time collaboration between contract managers and their technical experts before sending letters out to contractors can improve communication and avoid misunderstandings. Some solutions make contract collaboration and negotiation extremely easy, allowing every party involved to publicly or privately message, comment, redline, and approve contracts from an intuitive, cloud-based destination. This makes the CLM tool the single source of truth for all contract-related communications.
5. Disconnected Processes Leading to Scope Gaps and Overruns
For owners and operators, Management of Change (MOC) is a major challenge throughout the contract administration lifecycle. Variation orders, changes to schedules, and scope creeps add costs every day as the project progresses. Whenever something happens on-site and someone fails to record the event, it could lead to arbitration when the contract closeout process starts. Disparate processes are one of the biggest challenges during project execution and events connecting to the contract’s lifecycle management.
A centralized repository of all exchanges, communications, notices, amendments, and addendums coupled with an auditable and automated contract workflow to ensure business rules are followed is the only way to connect site activities to contractual duties. In the worst case, a contract manager may discover a gap in the SOW, which could mean the contracting authority has to take responsibility for outstanding work after releasing a contractor and closing out the line item prematurely.
Adopting an Effective Contract Management Solution with Contract Logix
The contract lifecycle model used in any organization always seeks to find the equitable division of responsibility and acceptance of risk associated with the scope of work. From conceptual designs, to design approval and final system inspections, every facet of the project’s success comes down to the contractual responsibilities.
Most contract management systems can help you capture the documents and manage communications but fail to cover the entire lifecycle of the agreement. With Contract Logix, you have complete control over all contract requirements – down to the exact detail necessary. You can adopt the Out of the Box (OOTB) business processes or easily configure the software to your specific contracting model. For organizations that need a granular approach to managing every clause in the contract, Contract Logix allows you to compose your documents using your legal team’s approved clause and template libraries, and allows for quick search and retrieval of all related documents and legal language.
Customizable, drag-and-drop workflows ensure you can speed up and automate review and approval cycles, while the clause and template libraries speed up contract authoring. Contract managers can report on their progress easily with stage and status updates captured in real-time. A data-driven approach to managing all contracts, supporting documents, and relationships help establish a detailed audit trail of all interactions and findings, enabling the organization to review contract performance and benchmark and track KPIs for their different suppliers. Dashboards keep everyone informed while highlighting any issues early, helping the project to maintain its critical paths.
If you need any additional information about how to overcome your contract challenges in the energy industry, schedule a demo with Contract Logix today.