The process industry has grown increasingly reliant on a contract labor workforce for both routine and complex maintenance. The transition from an employed workforce to one comprised largely of contract labor is a strategic move designed to help manufacturers compete globally.
This evolution has spurred a variety of contracting solutions. However, plant owners often miss the mark when it comes to contract management, allowing contract ambiguity to negatively impact maintenance schedules and budgets. With turnarounds that can reach the multi-million dollar mark, ambiguity can quickly lead to budget overruns as well as numerous other issues.
Contract negotiations and owner/contractor relationships in general are often best described as extended arm-wrestling sessions. One way to put disparate motivators aside and focus on common goals (like safety, reliability and quality) is to start with a well-written, risk-balanced agreement between plant owners and contractors.
To contract or not to contract?
The first question to be answered is, “Should we hire or contract?” The answer may differ from project to project, and year to year, and competitive pressures may modify last year’s strategy. But the decision must be a deliberate one.
Prime opportunities for contracting include:
- Tasks that are one-time or short duration;
- Project work—construction, demolition, turnarounds/outages/shutdowns;
- All non-core activities; and
- When specialized labor and equipment are needed for a limited time/project.
After the decision is made to contract, the next job is matching work to specific types of agreements. There are several dominant contract types used around the world: time and materials, fixed price or lump sum, and unit price.
Choosing the right contract type for the right project can result in a significant financial difference both in the bids you receive, and the final cost of the project. For example, it makes little sense to ask a contractor to provide a lump sum bid for a multi-year project with loosely defined scope. The contractor is left with no choice but to inflate his bid to attempt to protect his company from the uncertainties of the job, which in turn results in the owner paying a 20-30 percent premium for the dubious pleasure of attempting to shift risks to the contractor.
Competitive selection is an important part of the process. Prequalify and invite at least three capable contractors to bid. Keeping the playing field level throughout the process and demonstrating knowledge and fairness will encourage contractors to compete aggressively for work.
Time and materials contracts
When work scope is difficult to ascertain, a time and materials contract is often the best match. A well-drafted time-and-materials contract includes:
- A risk-shared legal boilerplate;
- Clearly stated rate structures for labor, equipment, materials, incidentals like per diem; and
- Balanced commercial terms and conditions.
Labor rates in North America are usually straight-time, time-and-a-half, and double-time with very clear descriptions for when each rate should be in effect. In a time-and-materials contract, the starting day (usually Monday at 12:01:01 a.m.) of the work period (typically a week that ends midnight Sunday) is defined. Nine-80s are also popular, as are rotating shifts that may span several months. Straight-time, time-and-a-half, and double-time are all defined. It’s important to note that time-and-a-half is not 150 percent of straight time nor is double-time 200 percent of straight time. They are more like 140 percent and 185 percent, respectively.
Well-written agreements will also specify the penalties associated with arriving late or exiting early. The logic of penalties has to do with the time it takes to get to the actual work site from the gate coupled with the idea of “a fair day’s pay for a fair day’s work.” Rounding rules often are written into contracts and can come into play here: for instance, if the worker is six minutes late, he will be docked 15 minutes.