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Performance-based contracts in E&P-I: They enhance innovation
Apr 26: There is a certain inevitability in the movement by oil and gas companies towards using performance-based contracts (PBCs).
8PBCs underline the output, outcome and quality of the product or service rather than prescribing how it is delivered or which resources to use
8Such contracts tie up at least a portion of the external partner’s payment to its accomplishment.
8The important characteristic of a PBC is a very clear separation between the buyer’s expectations (i.e., performance goal) and the external partner’s implementation (i.e., how it is achieved).
8PBCs are typically characterized by a relatively low degree of contractual detail, as the focus is on the external partner’s outcome and a high degree of partner rewards are linked to its performance.
8No doubt in PBCs, the overall compensation to the external partner, consisting of the base price and an incentive, may be higher, because the risk has shifted to the partner and premium is explicit rather than absorbed into the owner’s operating expenditures.
8The main benefit of a PBC is that it allows freedom for the external partner to deliver the product or service as it sees best.
8This results in more freedom for the external partner to engage in innovative activities as the partner is stimulated to lower its costs.
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