Norms-based contracting set to take over the oil industry?
There is little the oil industry has not attempted in the search for cost reductions. Over time, it has continued to introduced new technologies and reformed old systems but sometimes it takes something as simple as a fresh look at conventional processes to save millions. This is exactly what has happened with the introduction of norms-based contracts – which looks set to revolutionise contracts between oil companies and suppliers.
Norms-based contracting is not something that has been tried before in the industry and it was only recently brought to light via a case by Imperial Oil. According to Imperial, this new method of procurement has saved them $80 million this year alone, implementing it for scaffolding, insulation repair, painting and coatings.
Norms-based contracting replaces the typical “completion time and material based contracting”. Instead of calculating these aforementioned resources, the company and the supplier together calculate and estimate the required labour, equipment running time, material costs and similar basic components of servicing and together with local market conditions, produce figures which are then used to create a project long “norm”, off of which the contract is then based. Like this both are aligned on productivity and standards.
Working with the norms in mind, the project aims to save costs, time and resources wherever possible – but not at any cost. If they manage to beat the norms, both sides benefit.
Compared to other methods, such as reverse auctioning, Imperial Oil say this has been much more effective. In the same time period reverse auctioning saved them $25 million (20%), while norms-based contracting has performed even better, even in its infancy. Depending on time-constricted conditions and further work, the system could save even more and work better for the supplier too. The idea behind chasing an ever-better result and beating the regular norm is motivating for the Supplier and a step in the right direction.
Dashboard feels strongly about improving efficiency, not only for oil companies but industry in general and sees great potential in norms-based contracting. With the correct support system in place, such as an electronic norm management tool, it could prove to be essential in maintaining cost effectivness.