Brief
In volatile markets—particularly those impacted by inflation and currency instability—traditional pricing mechanisms often fall short in protecting project margins and enabling accurate financial planning. Recognizing this challenge, we supported an oil & gas company operating in a high-risk geography by developing a tailored Price Indexation Methodology. Our solution combined a mathematically sound indexation model with a comprehensive database of global and industry-specific cost indicators. This enabled the client to forecast cost fluctuations more precisely, enhance project pricing strategies, and strengthen their claim management capabilities.
Our Approach
We applied a forward-looking, data-driven approach to design a price indexation system that is both analytically rigorous and practically applicable across project lifecycles.
1. Methodology Design: We developed a customized price indexation model tailored to the realities of inflation and exchange rate volatility in oil & gas operations. The methodology provides:
- A mathematical structure to quantify cost escalation
- Flexibility to support both tender-stage pricing and retrospective cost recovery through claims
- Compatibility with various contract structures and financial frameworks
2. Development of a Global Price Indexation Database: To support the methodology, we built a robust database encompassing over 200 price indices and macroeconomic indicators covering 2017–2022. Data sources included, national statistical institutes, reputable global financial bodies (IMF, World Bank) and industry-specific indexes for commodities, labor, equipment, and logistics.
3.Integration & Application: We embedded the methodology into two core business functions:
- Business Development & Tendering: Improved pricing models by accounting for future cost shifts, enabling more accurate and competitive bids.
- Contract & Claim Management: Supported inflation and FX-related claims with credible, data-backed justifications, increasing recovery potential.
Through this structured risk-pricing approach, our client now has a reliable, data-backed methodology to manage cost fluctuations in a highly volatile global market.
Strategy
Our strategy focused on building a scalable, data-driven framework that would enhance financial foresight and reduce exposure to macroeconomic volatility across the project lifecycle. Key elements included:
- Proactive Risk Anticipation: Designed a forward-looking methodology to predict inflation and exchange rate impacts before they affect project budgets or margins.
- Data-Centric Design: Leveraged high-quality, credible data sources to ensure accuracy, reliability, and traceability in indexation calculations.
- Dual-Function Integration: Ensured that the solution could support both business development (accurate tender pricing) and project execution (claim preparation and cost recovery).
- Customization & Flexibility: Built a methodology adaptable to different project types, geographies, and contract models common in the oil & gas industry.
- Knowledge Transfer & Enablement: Delivered tools and training to internal teams, enabling self-sufficiency and ongoing application of the methodology.
Results
- Increased Pricing Accuracy: Enabled more realistic and competitive cost estimations for future projects by incorporating expected cost escalations.
- Stronger Financial Risk Management: Reduced the company’s exposure to inflation and currency fluctuations through proactive planning.
- Enhanced Claim Success Potential: Supported the preparation of well-evidenced compensation claims, improving chances of cost recovery.
- Institutionalized Data Intelligence: Established a long-term financial data repository that informs pricing, budgeting, and contract decisions.
- Improved Cross-Functional Alignment: Created a shared methodology usable by both commercial and project execution teams, ensuring consistency in financial narratives.
Through this approach, the client has strengthened its ability to navigate market uncertainty and maintain financial resilience in an increasingly unpredictable global environment.
