WORK PRODUCT PRICING (WPP)
Frequently Asked Questions
1. What is Work Product Pricing (WPP)?
It’s the beginning of the demise of paying day rates to consultants in the oil and gas industry. It’s charging the client by the work product produced. WPP changes the incentive system.
2. How are the charges determined?
A determination is first made on the types of files the Trust Members will be working with and the accessibility to those files. Several factors go into that determination: organization of the files and organization of the data room. Badly organized files, haphazardly thrown in a room, will cost more because it takes more time to access them (and will be subject to an hourly downtime charge). In due diligence for a Buyer in an acquisition, if the Seller insists on a file clerk to retrieve and access files, that will be more expensive because of the probability that file clerk will be unresponsive and inefficient (which will also be subject to an hourly downtime charge). We encourage our acquisition clients to be very focused in their PSA’s that deal with the process used to provide information to its due diligence team. It’s in every one’s best interest for us to have clear access to the needed data.
3. What is the range of possible charges?
In a producing leasehold project, either a divestment or an acquisition, assuming a property consists of one well and its associated agreements and documents, the price can range between $500 to $1,000 for each property evaluation, depending on the scope of the analysis. Analyzing leases can range between $10 to $100 per lease, again depending on the depth of the analysis. Mineral acquisitions also depend on the detail of the analysis, but a non-producing mineral examination can run in the neighborhood of between $200 to $600 per property, if a chain of title is not examined. Charges for examining a chain of title are based on the number of documents in it and the number of years it covers. Each project is different and each pricing scenario is customized for our client.
4. What about situations where a Trust Member has to answer questions for the client, attend meetings, or is generally taken away from analyzing files?
In that situation, where the Trust Member is required to be away from his or her work for a prolonged time, there will be a hourly downtime charge, determined at the outset of the project. The time it takes to answer typical questions about a Trust Member’s work submission is already calculated in our WPP pricing structure at the beginning of each project.
5. Are there Team Leaders from Mesilla at each project and what do they charge?
Yes, there is always a team leader for every project that interacts with the client and communicates with the Trust Members. The Team Leader is there working alongside the other Trust Members, under the same WPP scheme. It’s usually the team leaders that end up charging the hourly charge mentioned above, because of the normal administrative duties that accompany that role.
6. What are the advantages of Work Product Pricing?
Here’s the dirty secret about day rates: When they are low, they don’t attract talent and experience. If someone with the talent and experience does accept a low day rate, they adjust their work flow accordingly to prolong the project and get more revenue. Actually, this is rational behavior for a profession whose compensation rates have not increased at all in 30 years and symptomatic of an industry that experiences boom and bust periods. With WPP, the incentive structure is reversed from the old day rate incentive structure. Trust Members make more money being productive and getting the job done sooner. Typically, that results in a quicker completion compared to a team working on a day rate that is prolonging the project to its final date. In the best case scenario, WPP can be cheaper. Worst case, WPP is probably the same cost to the client as a day rate project, except the work product will be better.
7. What are the other advantages of Work Product Pricing?
The client knows upfront how much a due diligence job is going to cost (plus any hourly charges mentioned above, which should be minimal). If the client wants to look at a certain number of properties, each with a certain number of leases, with WPP, the client knows the cost before the project even starts. With day rate pricing, it’s always a guessing game. How many people? How many days? What kind of work product will be delivered?
8. I am comfortable paying a day rate and uncomfortable with this idea of Work Product Pricing. Why should my attitude change?
You should not be uncomfortable with WPP. It’s the members of the Trust who are taking the risk. They need to make enough money to cover their expenses and to make a profit. The client is not taking any risk at all with this pricing scenario. Plus, the Trust Members want repeat business. We are motivated to do a good job. With the aid of the Diligence DataBank, our efficiency on the job is high. There’s no messing around. We mean business!
9. Is Work Product Pricing more “American” than day rate pricing?
This question is not a joke! We believe that America was built on innovation, finding more efficient ways to do things and just plain hard work. Day rates are more like socialism! Everyone gets the same rate, regardless of what kind of job they do. It does not incentivize productivity, efficiency or competency. We believe WPP for consultants and attorneys is the future of the oil and gas business.
10. If you don’t have good people doing a job, it does not make any difference what price is charged, does it?
Yes, that’s right. The members of the Trust have at least 20+ years of experience with oil and gas contracts and title. Some are ex-Land Managers, others are practicing title attorneys. In any circumstance, the work product from the Due Diligence Trust will be better. Let’s face it, not every consultant can work in a WPP environment. That’s why we vet all our team members to find very experienced people that are really focused on details. Not only details, but connecting the dots. We want our examiners to make money and they don’t want to be in a situation where they are not making money. Due diligence is not rocket science, despite what other acquisition due diligence firms will tell you. What it is, is organization, planning, focus and getting the right people in the right position. We don’t just take people because they applied on a job site and are breathing!
11. Times are tough in the Oil Patch. In the past for such projects, I have insisted on hiring local contractors to keep costs down.
If the data room is a physical data room, with WPP, paying for expenses is a thing of the past. Therefore, hiring local contractors goes out the door. WPP allows the best people to be on the job, no matter where they live. If the data room is a cyber data room, WPP and the Diligence DataBank are particularly well suited for this situation. With day rates and a cyber data room, management’s worry is if the consultants are really working during their billed time. With WPP, that worry goes out the window! To make money on a project, Trust members have to not only be efficient and produce, but they have to be good!
12. Are there other charges involved?
Yes. Before each project, the Databank is customized based on the client’s preferences and the defect language of the executed PSA. The template DataBank Mesilla has now is the “Cadillac” of due diligence inquiry and the client may want to modify it. Programming charges for modification run $100 per hour. In addition, there is an $80 per month charge for each Trust Member working on the job, prorated by the days worked (in the instance a full month is not worked).