Hydrocarbon Processing - November 2021 - 34

Engineering and Construction
accepts them after issuance, but not every
contract is a PO. Therefore, contracts are
sometimes used in conjunction with POs
so that both legal and commercial aspects
of the purchases are addressed.
Purchase agreement. This document
is essentially a contract, and it contains the
same information as previously discussed.
Generally, local and global sites try to use
common equipment, materials or services,
which are driven by a corporate group.
In real estate transactions, the terminology
of a purchase agreement is used in creating
a binding contract. The document used
to purchase services is often called a contract
or service agreement. For materials
or equipment, the document is typically
called a contract. As with a contract, a
purchase agreement becomes binding between
the buyer and seller as soon as it is
signed and before issuing. This document
also has a specific start and expiration date.
Key considerations. There is no simple
rule that determines whether to use a PO or
a contract. The choice depends on the nature
of the transaction and on the relationship
between the buyer and seller. The following
are some important considerations.
Commodities vs. services. Commodities
(e.g., steel, pipe and concrete)
are well defined in terms of size, shape
and materials. Prices for commodities
from various suppliers can be easily compared.
The purchase of these materials is
routine and entails little risk. Therefore,
POs with standard terms and conditions
are appropriate for this type of purchase,
especially if it is a one-time transaction.
For repeat purchases, a blanket PO is used
to expedite the transaction. A blanket PO
often contains discount pricing based on
volume. This kind of arrangement is good
for both the buyer and seller.
Conversely, services tend to be unique
and are typically site specific. The scope,
complexity and duration are influenced
by conditions at the site. A good example
is a site maintenance agreement. Therefore,
the transaction is more complex and
open-ended. A contract is more useful in
these situations to cover price, warranty,
insurance, force majeure, liability and termination
stated in the general terms and
conditions document.
Short-term vs. long-term agreements.
POs are typically used for single
business transactions, although blanket
POs are commonly used for repeat orders.
34 NOVEMBER 2021 | HydrocarbonProcessing.com
Contracts and purchase agreements are
used for the long-term agreement between
the buyer and vendor. Contracts may also
include renewal options. For multipleyear
contracts and purchase agreements,
there are generally provisions to allow for
agreed price increases for future years that
are generally pegged to a mutually agreedupon
benchmark or index.
Risk. Price is usually at the forefront of
people's minds when making a purchase.
However, equally important is the risk associated
with quality and schedule. Getting
a low price may not constitute success
if the delivery of the product or service is
delayed or if the quality is subpar. The
main components of a construction contract
have been described in literature.1
The important risks are associated with
an event that could not have been foreseen
(such as acts of God, floods, hurricanes or
fire). It may be important to include language
in terms of limits of liability and
liquidated damages. In these situations, a
contract, which is legally binding, would
likely be appropriate. To minimize risk,
many contractors carry bid bonds and
performance bonds, which guarantee the
bid and performance of the work.
Dollar value. The absolute magnitude
of the transaction needs to be considered
in relation to the cost of developing a contract.
For example, if the transaction for a
grassroots petrochemicals plant is worth
millions of dollars, it is certainly worth creating
a detailed contract and developing
the necessary legal paperwork by using external
professional legal services or company
lawyers. If the transaction is a routine
purchase of office supplies that can be obtained
from other suppliers in a worst-case
scenario, then a PO may suffice.
Ease of use. It is a good idea to minimize
paperwork and contractual documents,
given the nature of the transaction.
Paperwork does not add value to either
party, and it is in the interest of both parties
to keep it simple, while protecting their individual
interests. Having a sound and robust
ERP platform and an electronic document
management system certainly helps.
Relationship. A PO or contract is helpful
to both the buyer and seller. It defines
the transaction precisely on paper, thereby
removing uncertainty, reducing risks and
creating a certain level of comfort. If the
buyer and seller have a long-standing relationship
based on mutual trust built on
positive prior experiences, the paperwork
can be simplified. Paperwork is needed to
resolve conflict if something goes wrong.
If the transaction proceeds smoothly
and both parties are satisfied, the paperwork
is usually redundant and sits in a
file. Very rarely do conflicts get escalated
to a court of law. However, it does happen
when the right strategy is not adopted
and followed correctly.
International vs. domestic procurement.
Depending on the local costs of
materials and labor, international procurement
can save money. When purchases
are just as likely to be made internationally
as they are domestically, it is important
to be extra vigilant regarding foreign
purchases and logistics, as well as shipping
and customs complexities (e.g., import
taxes). More specific contract language
is usually warranted with international
purchases to keep the process on track.
Therefore, a contract is preferred over a
PO with standard terms and conditions.
Governing regulations vary from country
to country, so it is important to explicitly
spell out procurement requirements.
There should even be a discussion of dispute
resolution if the process reaches loggerheads.
This may involve the courts in a
neutral location. Extra effort is needed to
understand local codes and custom duties.
Time differences, along with culture and
language differences, can also add complexities
to the procurement process. Very
often, it is desirable to use a combination
of the approaches previously described.
Using a combination of approaches.
There may be instances where it is prudent
to use both a contract and PO(s). An
example is the case where multiple purchases
of different commodities and/or
services will be made from a given vendor
through the course of a project. A contract
can be used to define overall requirements
with specific terms and conditions.
Then, each purchase with this vendor can
be made with a simplified PO. Another
reason for a contract with a PO is to highlight
the importance of project requirements.
For example, if a process plant or
a skid unit is engineered and partially fabricated
at a different location or country,
and if the balance of work is required to be
completed at the buyer's site, using local
materials and services, then such a combination
approach can be taken. Again,
the devil is in the details, and the project
scope must be written clearly and also
understood and agreed upon by both par
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