More active contract management in the UK oil and gas industry could deliver significant savings for companies within a supply chain worth up to £35billion a year, according to professional services firm KPMG.
KPMG’s experience of conducting more than 10,000 contract audits has revealed that 70% of contracts are not complied with, regularly leading to overbilling that often can be between one and five percent of high-risk spend
In the new era of cost reduction and fiscal control in the industry, supply chain and procurement (SC&P) has a critical role to play in assisting businesses in adapting to reduced oil prices by ensuring that contracts are effectively managed.
Organisations typically invest significant effort in negotiating contract terms to offer best value, but as priorities and responsibilities change over time, terms, incentives and breaks are often neglected. Despite original intentions, contract terms are often incorrectly reflected through invoicing.
A large number of contracts contain pricing mechanisms with an inherent blind spot when it comes to ensuring the buying organisation is receiving the correct price, such as cost plus pricing, open book arrangements or pass through costs from subcontractors.
Proactive contract management is essential to ensure that contracts are fit for purpose, the relationship is well managed and all parties benefit from the agreement framework. With the current market conditions in oil and gas, now is an ideal time to ensure that the deal which has been struck with a supplier is not eroded, giving away precious margin.
Ken Milliken, Forensic Associate Partner for Scotland at KPMG said: “There is no silver bullet for the oil and gas industry’s cost issues but avoiding loss by ensuring contracts are performing can restore cash to businesses and aid future contract negotiations. Conducting a contract audit can provide transparency on actual costs and identify inaccuracies such as non-inclusion of rebates and discounts, incorrect overhead apportionment and intercompany mark ups.
“For an individual business on an individual contract, a saving of one or two percent may only be seen as marginal. However, given the value of the overall supply chain in the UK oil and gas industry and the potential scale of overbilling that our own experience of contract audit has highlighted, there are very significant cumulative savings to be made by addressing this issue.
“Good contract discipline should therefore form part of the wider strategic focus within the industry on bringing down the per barrel production cost through transformation, innovation and collaboration.”