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2016-02-19 18:03:37

Is really 'Open Book accounting' efficient for buyer?

CCM certification into the slide 'Acceptable levels of supplier profitability', it mentions the use of 'Open book accounting' strategy as a way to obtain an acceptable level of contract's profitability, ensuring that supplier profits are fair and reasonable. I would like to hear your opinion and experience as experts and as points of view of buyer (customer) about if this payment condition was favorable to project's productivity and financial. I have heard many controversy about this strategy some favorable and many on contrary.
I had the experience in a EPC contracts for a refinery upgrade that was converted from lump sum to this type of contract at detailed engineering stage, and the results was total reverse that expected, so contractors lost all initiative to improve, innovate or be competitive because all expenses was paid as reimbursable by man hours, the procurement was all reimbursable and likewise during construction, the quantity of workers were increased more than double from planned so the EPCM contractor requested more supervisors at field to improve productivity of construction contractor's. In fact, the construction contract was also as 'open book prices' by man hour, equipment hours, etc. My question is, it is not better to reduce the level of uncertainly at basic engineering extend it and launch a lump sum-unit price competitive EPC tender to obtain the maxim value of experience and knowledge from contractors, by innovating to improve design to optimize procurement and construction results instead? When customer use the 'open book strategy is not assuming all risk increasing scrutiny with a major level of supervision to guarantee the "acceptable" level of profitability? How can we define the "acceptable level of profitability"? What is the capability of contractor to create value and competitiveness when customer pays all as open book? How contractors can innovate or create value during desing when there is not any competition so price it will be paid 100 % as reimbursable?
 •   2016-02-24 07:19:07
I think you are confusing two points here, one is transparency in cost base as a fundamental basis to developing the trading relationship, understanding cost drivers and risks (and hence contigencies) for both parties, and one is the commercial basis of pricing.
By agreeing a baseline through open book (as means of auditing that baseline and hence adjustmets from it) you can then start to bring in incentivisation for better performance, for cost improvements etc through gainshare provisions.
Supplier X may have a target margin of Y%, and the pricing may be firm, but there is no reason why the parties cannot agree open book with a stated target margin for the supplier, and have a gainshare provision that rewards and therefore shares any upside.
Conversely, if a Supplier has a genuine issue and can demonstrate an emerging situation through open book, it should produce a more collaborative engagement to address the matter sooner rather than later.
Open Book does not mean "If you get any more above your target margin I want it all" - question the basis of the trading relationship if it is!
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