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Blog/December 10, 2014

Is Copy-and-Paste Compliance Enough?

is-copy-and-paste-compliance-enoughAn issue that is becoming an ever-increasing challenge in the oil and gas industry is subcontractors qualification. Up to this point in time, contractors have become extremely reliant upon technology and/or contractor management platforms for qualifying subcontractors, essentially “subcontracting” out the qualification process while retaining all of the risk. The industry needs a deeper understanding of risk, and that necessitates looking at the issue through a different lens.

Most may think that a formal process or qualification program is designed to exclude potential service providers instead of seeking ways to include. The limited options for subcontractors in the industry demands a process, which is inclusive as possible, while maintaining a firm grasp on the current and future risks. A number of companies solely utilizing technology or third-party qualification providers, do not understand the driving forces behind contractor qualification. These services do the dirty work of soliciting information. However, who establishes the necessary thresholds? Who makes the decision whether to include or eliminate service providers? If you think this can be done only utilizing technology, you should think again. While technology and contractor qualification providers are valuable to the process, they should not be the “brains” behind the decision. This brief article focuses on four key areas to improve the contractor qualification process in the oil and gas industry.

Environmental Health and Safety

Most qualification service providers and technology platforms do a great job of ensuring that insurance, certifications, EH&S programs and qualifications are up to par. There are upstream and downstream measurements that need to be understood and monitored in order to ensure that qualification is possible. Some of those measurements are:

  • ƒƒ OSHA Stats: TRIR, EMR, DART
  • ƒƒ Presence and Review of HSE&S Program
  • ƒƒ DOT
  • ƒƒ PHMSA
  • ƒƒ Environmental Regulations and Programs

Financial

“After a recession, contractors are three times as likely to default as they are going into a recession” (ENR.com, 1/14/13). Understanding that the industry is very flush with cash is a blessing and a curse. It is a blessing because margins within the industry are still healthy, but it is also a curse because it is attractive to companies that perhaps have minimal experience in oil and gas construction or in a specific region. This should shed light on the importance of checking on the company’s financial position, as it is essential to ensure that it can actually fulfill its contractual obligations. Here are a few items in which you should have deeper knowledge:

  • Financials – Balance Sheet, Income Statement, Statement of Cash Flow
  • Working Capital as Percentage to Revenue
  • ƒƒ Cash Position
  • ƒƒ Project Performance (Past Three years)
  • ƒƒ Equity as Percentage of Revenue
  • ƒƒ Overbillings/Underbillings

References

Most companies do not think of calling and checking on subcontractor references. It is routinely done when interviewing candidates for hire, but we rarely ask for references on a subcontractor. It may seem obvious, but why not call another company to check on the performance of a subcontractor before they starts work for you? Here are some resources that could provide you a better understanding:

  • ƒƒ References from other contractors
  • ƒƒ References from other owners
  • ƒƒ References from suppliers

Capabilities

Finally, if any company wants to bid the work that it has, it should show up with enough labor and tools to do the job. You do not want to find yourself in a position of “company building.” (i.e., You do not want to be the first one using a contractor on its first oil and gas job.) Contractors soliciting work warrant a thorough understanding of firms’ capabilities. It is also advisable for any subcontractor to present itself to clients in such a way that the conveyance of its capabilities is optimized in order to differentiate from competitors. Contractors should have a deep understanding of the capabilities of their contractors and of their own organizations. Some of the items worth investigating are:

  • ƒƒ Company Resume for Similar Work
  • ƒƒ Current Organizational Chart
  • ƒƒ Proposed Project Organizational Chart
  • ƒƒ Resumes for Project Team
  • ƒƒ Manpower Availability
  • ƒƒ Equipment Availability
  • ƒƒ Material Availability (Suppliers)

What is your company doing as investors become more demanding and capex budgets get tighter? What are you doing to meet the demands of midstream owners? What are you doing to better position yourself in the marketplace as a contractor or service provider? Consider developing a formalized internal process that focuses on the four key areas of risk with a better understanding of what the driving forces are and how to manage them appropriately. Then, utilizing technology, you will be able to collect data and turn that data into information and knowledge, affording owners and contractors the opportunities to make business decisions while properly managing risk.

For questions regarding this article, please contact Dustin A. Bass at dbass@fminet.com or Joseph Poliafico at jpoliafico@fminet.com. This article is part of FMI’s Q4 Oil and Gas Advisor. To download the full newsletter, please click the image below.

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