June 2017
eCERTO goes beyond Dynamic Pricing
Aberdeen, Scotland
eCERTO partnered with students from RGU's MSc in Energy Management to complete a project on pricing and contracting practices in the energy sector. The study confirmed that introducing dynamic pricing and using sophisticated commercial models can reduce project costs by 20~30%.
The students and eCERTO engaged 17 companies representing both project owners and contractors. We found that, whilst dynamic pricing was introduced by Southwest Airlines in the 70’s, driving the success of companies across sectors such as airbnb and UBER, its applications in the energy sector are negligible. Examples are limited to the use of indexing when pricing products that are exposed to the fluctuations of commodity prices such as steel and fuels.
The study also mapped the variety of commercial models used by companies across the globe. In the United Kingdom, we found that the prevalent contracting strategy for well construction is that the project owner awards individual products and services to numerous contractors who execute a limited scope. The owner acts as the project integrator.
In Norway, the use of ‘bundled services’ contracts for well construction is standard. Owners group scopes packages and award them to a smaller number of tier-1 contractors who deliver by subcontracting for services outside their portfolio. Owners still act as project integrators but have fewer contractors to coordinate.
Finally, the use of Lump Sum/Turnkey contracts is widespread in the Middle East and Latin America. Owners award the full scope to one (or two) tier-1 contractor(s) who manage the entire project to deliver an outcome. The contractor act as the project integrator.
The findings of the study led us to include commercial model innovation into our technology development plan. In addition to the implementation of Dynamic Pricing, our technology platform will use data from past projects and existing contracts to generate costs for a range of commercial strategies, so that owners can choose the optimal strategy for their project in collaboration with their contractors.
Stay tuned for further updates.