How Technology Helps Overcome 10 of the Top Operational Challenges in the Energy Sector
Recent government legislation and initiatives have prompted positive momentum in the energy industry. From regulatory matters to technology upgrades to renewable energy trends boosted by the Inflation Reduction Act (IRA) tax incentives, energy demand and projects are increasing across the sector.
However, every opportunity comes with its own set of issues, especially if an organization lacks the right data, analytics, or visibility when managing its operations. Let’s explore 10 of the top operational challenges the energy sector faces and how technology can help circumvent them.
Ensuring Contract Accuracy
The first three challenges are found in the fine print—or lack thereof: 1) vagueness in vendor contract terms and conditions, 2) incomplete or inaccurate field timesheets, and 3) unconfirmed labor charges.
Contract Vagueness. Problems could arise from ambiguities in how someone gets paid for weather delays, call-out pay vs. hours, vendor-supplied consumables, off-site training, and more. Insufficient details in contracts can snowball into uncertainty, doubt, and overpayments. Consider, for instance, if a contractor submits a timesheet for a weather delay and the person signing the timesheet doesn’t know if it’s an eligible expense but signs for the time anyway. The vendor most often includes this time when invoicing the client.
It’s hard to contest something like this if it isn’t spelled out in the contract. The right software platform can help owners improve vendor partnerships by ensuring the contract includes specifics. It can also prevent non-contractual charges from being presented to the client for approval. By putting all parties on the same page, it helps eliminate mistrust around overbilling.
Incomplete and Inaccurate Timesheets. Timesheets can create problems in many ways. Field supervisors don’t have access to gate information. Field supervisors seldom, if ever, see the contract terms and conditions for the vendors they are responsible for. Outage and maintenance leaders seldom, if ever, see the actual invoices prior to payment.
Using technology that audits who comes in and out of the gate in real-time connects everyone to the terms and conditions of vendor contracts, quickly giving management the information needed to pay the right amount for what the vendors have earned and accurately forecast future commitments.
Unconfirmed Labor Charges. Inaccurate billings often occur when an energy company thinks it thoroughly audits the gate but ultimately can’t confirm the information in its entirety. They may use Excel spreadsheets to compare gate logs and timesheets or use a similar manual system that’s rife with errors. Contractor spend management software takes real-time data from the access control system, which saves time, reduces paperwork, and ensures accuracy.
Tackling Finance-Related Issues
The next three challenges occur in the finance and accounting area: 4) unverified equipment and material charges, 5) mixing up time and material vs. lump sum, and 6) payments processed without invoice verification.
Unverified Equipment and Material Charges. Miscalculations can occur when a vendor submits an invoice for a piece of equipment or machinery that isn’t accompanied by a timesheet signed by management. When timesheets are used to confirm the vendors are adhering to agreed-upon payment terms and quantities, supervisors can’t verify their accuracy.
Technology that applies, for example, the lowest possible rate for each piece of equipment and markup on materials is accurate. It provides the client with a real-time view of the allocations and holds the vendor accountable for agreed-upon terms. Management can even adjust the amount of equipment needed to finish the job.
Mixing Up Time and Material Vs. Lump Sum. Mistakes can lead to paying a contractor twice. A common error when vendors are supporting both types of work at a site is for an employee to show up on multiple timesheets for the same time period. The right software platform can ensure all on-site contractors are paid for the exact hours they worked that day under net-billable time.
Payments Processed Without Invoice Verification. This can happen when maintenance managers, outage managers, and project managers responsible for budgets and approving bills don’t see invoices. Managers tend to focus controls on the front end of the process but fail to compare invoices that show up in a company’s system.
The opportunity is that the invoice might not match what the manager thought he or she approved. What if, instead, technology created an authorized timesheet that could double as a vendor invoice—so it’s an exact match of what should be invoiced? By requiring the vendor timesheet and invoice to match, discrepancies will become a thing of the past.
Conquering Human Error and Lack of Oversight
The final four challenges are comprised of: 7) inaccurate purchase orders (POs) for labor, equipment, and materials, 8) invoicing incorrect skill classifications and non-billables, 9) liabilities exceeding purchase order amounts, and 10) failure to update expired contracts and rates.
Inaccurate Purchase Order Allocation for Labor, Equipment, and Materials. Incorrect apportionment is a common occurrence when the proverbial right hand doesn’t know what the left hand is doing. Vendors often get their timesheets signed by the field supervisor responsible for the work. The field supervisor should ensure workers are allocated on the timesheet to a job number or cost object because it allows owners to know how much each line item costs, which is important for budgeting future projects.
Timesheets are forwarded to vendor timekeepers for invoice creation, unless noted on the timesheets, these timekeepers round craftsman hours to their assigned shifts. However, when allocations are made to the wrong job numbers or cost objects, the client’s invoices are incorrect.
Contractor spend management software not only knows which vendors are on-site but automatically applies all contractual terms and conditions to each individual. In doing so, managers know that labor, equipment, and material allocation go to the correct job number or cost object prior to approval.
Invoicing Incorrect Skill Classifications and Non-Billables. This takes place when craftsmen at different skill levels are paid at the highest level. For instance, a site could have four skill levels of crane operators, who are paid four different rates. When supervisors sign off on timesheets, skill classifications are not typically included. These crane operators might be paid the wrong, highest-possible skill rate, even if they have not been approved for the increase.
Contractor-specific technology empowers supervisors to see the vendor’s default skills classification so the people approving timesheets approve the right rate. The software blocks the approval of all skills that do not match pre-approved skill assignments. Non-billables are managed in the same way.
Liabilities Exceed Purchase Order Amounts. Charges may go over when vendors (typical process) don’t notify their clients in a timely manner that POs are about to reach their limit. The technology ensures energy companies track cost allocations and notify them as PO limits are nearing. It also eliminates late invoicing surprises because it accounts for all outstanding commitments.
Discrepancies Through Using Expired Contracts and Rates. Inconsistencies occur when terms and conditions change, but those processing times have not been notified of the changes. When procurement alters a contract, contractor spend management software automatically flags discrepancies between those changes and the time the vendor timekeeper allocates in real time. This eliminates audit findings and extra work to correct discrepancies.
Embracing Opportunities and Overcoming Challenges That Accompany Them
Too many energy organizations make operational decisions in the dark by using siloed, home-grown systems. If the above scenarios sound all too familiar, it’s time to consider alternative solutions for managing your vendors’ labor, equipment, and material spend. The right platform should measure, track, and help you make more informed decisions around routine maintenance, shutdowns, turnarounds, outages, and more—all in one place.
Contractor spend management software is a must for energy companies that want to comply with governmental regulations, such as the IRA tax incentives. It provides proof of compliance for things like journeyman-apprentice ratios and prevailing wage expectations.
Change is in the air for the energy sector, with the U.S. experiencing positive progress prompted by governmental regulation and efforts to reduce the country’s carbon footprint. Companies are discovering it is easier to embrace these new opportunities and challenges with the help of the right technology.
—Bruce Grissom is an outages and maintenance consultant with Management Controls.