Dayrate contracts
Dayrate (or time) contracts are those where the major element of contractor remuneration consists of a fixed rate per day (or hour, month) for work performed. The dayrate is a fixed price bid by, or negotiated with, the contractor. Dayrate contracts occur usually in the context of a drilling or construction project, where the contractor is to provide the main item of equipment, such as a drilling rig, construction laybarge, or similar pieces of equipment.
Under such contracts, as much as possible of the scope of work should be covered by unit rate contracting, such as drilling a specified footage of a well, laying a length of pipeline per specification, or moving the equipment. Dayrates apply in these contracts for those parts of the work where the scope of work cannot be sufficiently defined to allow lump sum contractor remuneration, or where significant or unquantifiable risks are present which would be unreasonable or uneconomic for the contractor to carry alone. Dayrate compensation can be either on an incentive or non-incentive basis.
On an incentive basis, the contractor has an effect on the quality of the product or service to be delivered, such as the timeliness, scheduling, safety, or technical performance. On a non-incentive basis, the contractor has little or no impact on the timeliness and quality of the product or service to be delivered.
Whatever dayrate compensation method is used, it should preferably include incentives. Criteria should be set out in the tender detailing how the bid dayrate element will be converted to an incentive scheme (e.g. based on footage drilled). There is also an option of “milestone” payments, which can be combined with a bonus scheme, where dayrate payments are invoiced only upon achieving defined milestones, rather than for regular monthly payments.
Pure dayrate contracts should be avoided wherever possible. The aim for all incentive schemes should be to reward a proper balance between timeliness and delivery of a quality product. Ideally, incentives should create a win-win situation for both parties. The Company wins by getting a quality product delivered on time, and the contractor wins the financial incentive.
Care should be taken to ensure that targets are aligned not only between the Company and the prime contractor, but also between other contractors, subcontractors and suppliers involved in the project. Incentives agreed with prime contractors should be applied ‘back-to-back’ with sub-contractors whenever possible.
Payment and cost control
Sufficient control mechanisms need to be put in place to monitor and control the process of conversion for parts of the scope of work from a dayrate to an incentive form during the contract period. These should be treated as variations to the contract unless the entire process is fully defined. Otherwise the same controls apply as set out under unit rates contracts.
- Lump sum contracts
- Unit Rate contracts
- Reimbursable cost contracts
- Time and Materials Contract for Projects | Advantages & Disadvantages
- Bills of quantities contracts