Depending on the size and duration of the new contract, it may be necessary to update the contract with changes and conduct a contract review, typically if the duration is around two years or more.
It is quite common for longer-term contacts to be adjusted from time to time based on the mutual agreement of the parties. Such changes are usually formalized in one of the following methods:
Exercising of an option period
This is used to document a mutually agreed change to the original contract, and will be signed and dated by approved signatories from both the Client and Supplier organizations.
A variation order normally concerns an important change to the contract scope of work, either in terms of volume or content, and may involve new or amended pricing. Depending on the situation, a client may issue a variation order or the contract holder may request one, in accordance with a mechanism described on the contract itself.
Many contracts will contain provision for regular price adjustments based on a given frequency and formula, often based on an approved third party statistical index. The contract holder should be careful to understand the terms in the contract, for example if the wording used is that a price adjustment "shall" or "may" take place, with the latter being no guarantee of acceptance, and whether there is any deadline that applies to when the adjustment should be formally requested. In some cases, a deadline missed will invalidate any adjustment for that year or until the next scheduled window opens for an adjustment.
It is also important to check the actual index used and calculation made extremely carefully. Indexes are often updated, discontinued, or merged with other indexes, meaning the link or reference to the relevant index no longer functions. Sometimes the index contains multiple variations with very similar terminology and it is easy to select the wrong one. Sometimes the formula is inconsistent with when the index information is available, meaning a risk that the price adjustment can’t be calculated within the deadline given in the contract. The actual mathematical calculation of the formula can be incorrectly performed.
For all of these reasons, it is important to very carefully check the accuracy of any price adjustment prior to submission or acceptance.
Contract options are likely to be either "Mutual" or "Client Only". Mutual options give both parties the chance to make a decision about whether or not to extend the term of the contract. Client only options mean that the Client will decide if they want to extend the term of the contract, and in that situation, they can apply pressure to the supplier, and possibly try to re-negotiate pricing in exchange for exercising the option. Market conditions at the time may influence the negotiating position of either party.
Periodic contract review
The purpose of this review is to review the latest updated version of the contract to:
Ensure that any changes to the contract have been communicated to the delivery team and are being correctly applied
Ensure that any new personnel in the delivery team are aware of the contract requirements and their own responsibilities
The format is the same as the initial contract handover meeting, with all the relevant persons in the delivery team in attendance and would be called after approximately one year of the contact.
Again, the meeting should be minuted, and the key points of the contract should be summarized in a presentation and a spreadsheet capturing the contract requirements and whether or not these were compliant. Copies of these documents should be added to the same contract archive as the original handover meeting to be available in the event of any client audit.
If the contract is for 3 years or longer, then this review process should be continued every year on the anniversary of the start date until the end of the contract, to ensure that the supplier continues to deliver the goods or services in accordance with the contract terms and conditions and the client's expectations.
Alan has worked in the oil and gas industry since 1974 in various administrative, operational and managerial roles in the UK, Netherlands and Norway. In 1993 he joined Halliburton in Norway as country manager of their new Drilling Systems division. Following a merger with Dresser industries in 1998, he moved to Business Development where he established a BD support team providing centralised expertise for tendering, contract management, market intelligence and various BD software systems. After managing up to 200 tenders and proposals annually for over 20 years, Alan retired at the beginning of 2020 with plans to explore Norway, and spend time with family overseas, He enjoys downhill skiing in the winter, golfing in the summer and following the Formula 1 racing season throughout the year.
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