Post Award Contract Management: Soft Skills Differentiate Success

I recently spoke with an oil and gas executive, who shared with me his thoughts on post-award contract management.  He noted that “Demand management and specification management are some of the biggest problems encountered in post-award contracting.  A few years ago we reviewed this situation, and found that the biggest problems were often ones that we imposed on ourselves, and that the supplier couldn’t help us with!  As a result, I was appointed to a role that consists entirely of working with different business units to develop approaches that resolve issues in contracts.

The importance of assigning full-time managers from procurement who can address problems and issues was also empirically validated in a recent study that Marcos Oliviera and I have published in an upcoming article called “Effective Relationship Management In Oil & Gas Projects: Insights from Procurement Executives”, to be published in the new Journal of Strategic Contracting and Negotiation.

Managing post-contract projects in the oil and gas sector is particularly challenging, due to the extreme circumstances faced in oil and gas environments that lead to project disruptions and difficulties. A significant set of challenges are attributable to the macro level factors associated with the environment in which oil and gas projects take place. Because the majority of oil-exploration projects are in remote regions with poor logistics infrastructure and risky, there are significant challenges in the mobilization of equipment. Second, there are numerous sources of unquantifiable sources of instability, including regional conflict in producing areas, theft, and uncertainties raised by the nationalization of oil companies, which can lead to significant disruptions in both investment cycles and short-term availability.  Finally, corrupt contract award practices in oil-producing countries has a major impact on project outcomes, particularly at procurement and in permitting, permissions, and regulatory negotiations with local governments.

In our study, we find that when comparing successful versus unsuccessful projects, supply chain and procurement strategies play a significant role in project success, due to their impact on project value and on the way project risks are managed. In this study, we review insights gleaned from 13 oil and gas senior procurement executives, from which we derive a set of propositions and some preliminary results related to the success of these elements. .

In general, we find that relationship management plays a critical role in the outcomes associated with oil and gas project success. Procurement relationship management practices affect the way the needs of project stakeholders outside the contract (users, suppliers, communities affected by the project, etc.) are attended as well as the way project relationships are managed inside and outside project teams. As a result, those strategies are also related to important drivers of project success such as relationship and stakeholder management.

Projects deemed “successful” emphasized project measures that focused on being “on-time” (46%), meeting contractual scope (39%), and cost (15%). The way that projects were measured during post-contract award was also critical.  All of the executives interviewed during the course of the study similarly echoed the importance of using the “right” measures. A preoccupation with cost targets was deemed to provide only a limited as opposed to a holistic view of contract performance, and many emphasized the need to go beyond a value proposition expressed in dollars or reimbursable costs. A number of interesting contractual measures were identified through the interviews:

• Percent of contracts with a contract management plan – execution plan post award.
• Percent undergoing regularly scheduled performance reviews.
• Key process expectations – % of contract managers that have undergone training in their roles

Representative comments also included the following:

• “If senior leaders have the right data, they will know when to intervene. The financial measures from the project do not point to the contract…you get information on clusters of spending, but cannot easily see how specific projects and contracts are doing. People want to be the deal maker early on, but don’t want to manage the project!”
•  “How well we communicate expectations early on and translate that into scorecard that enable hitting the targets is key.”

Executives interviewed also emphasized the need to get the “right” parties engaged early on in the contract renewal or new project contract negotiation process.  Representative comments included the following:

• “Instead of just rounding up the usual suspects when a contract expires and needs to be renewed, procurement needs to be involved earlier in the process.”
• “Companies need to be able to have legal and contracting, commercial and financial side all represented. Most operators aren’t set up to do this.
• Relationships have to be an affirmation – I can’t say I have a relationship – you can’t say we have it – it has to be the other person (e.g. the supplier) who says we have a good relationship.

The importance of the “soft skills” – communication, early involvement, and open dialogue – rise to the top again as the key issues to management of complex contracts.