Successful contract mining requires a balanced approach of cultures, cooperation and the synergistic utilisation of the skills of the various participants. This objective can be facilitated by the involvement of a specialist commercial consultant.
The starting point and bed rock for success is the contract agreement used to control the relationship between the parties to the contract. The purpose of such a contract agreement is to manage the risks that could arise during the currency of the contract.
Since the original contract was made by a prospective contractor and a hopeful employer, which was probably something as simple as “ you do the work and I’ll pay you for it”, contract agreements have been refined to include mechanisms and provisions for dealing with the risks that most frequently occur during construction contracts, such as for example, change (variations), unforeseen adverse physical conditions, force majeure events and so forth.
Owing to the apparent differences between mining contracts and building and construction contracts, the tendency might be to adopt a bespoke contract document for a mining contract rather than using one of the tried and tested standard forms such as one of the NEC or FIDIC contracts. However, the major difference between a mining contract and a construction contract is how the contractor gets paid for his services. This “difference “does not warrant the drawing up of a complete bespoke contract.
Modern, standard forms of contract such as the NEC Engineering Construction Contract produced by the Institution of Civil Engineers in London recognises this payment risk and allows for six different payment options to allow the agreement to be adapted to suit the risk appetite of the Employer. This is the starting point from which the Employers implementation strategy for the project is launched.
On construction contracts, payment to the contractor is measured relative to the progress of his work, in meters of concrete poured, square meters of bricks laid and so forth.
Mining contracts often have different imperatives. To mitigate costs, it invariably suits the employer to provide some or all of the plant to be used for mining operations and the spares to be used in servicing the plant. Similarly, tyres for very large earthmoving equipment are a major expense. These too are often provided by the employer to the mining contractor. So the challenge is, how should the contractor be paid for operating and maintaining the employers fleet and how should he be rewarded and/or penalised if he doesn’t operate and service the plant properly and incurs excessive tyre usage?
These are not challenges that necessitate the drawing up of a bespoke contract but actually requires use of an adaptation of a standard form contract (using specially drafted particular conditions), with addendums attached dealing with the method of payment risk.
An excessively adversarial approach is also never to be advocated. Examples of where attempts have been made to pass excessive risk to contractors or to place additional hurdles to his making legitimate claims are numerous and always result in disaster. The recent power station construction contracts undertaken by Eskom in South Africa are a good example.
On mining contracts, it is suggested that a collaborative approach is not just beneficial, it is a necessity. Very often it is advantageous to allow the employer to participate in such things as operation location (for achievement of production and grade objectives) plant maintenance, stock control and procurement.
Although in South Africa in recent years our approach to contracts has been increasingly adversarial, this is contrary to the international trends where a collaborative approach is on the increase and is reaping benefits.
Mine management is normally precluded from any involvement in the mining contractor’s operations owing to the adversarial approach that is often adopted in these contracts.
A target cost contract approach where a small part of the contractors reward (profit) is included in his rates, where contingencies are stripped out of those rates is one collaborative approach that could be considered. The contractor’s efficiency of performance is rewarded or penalised via a” pain gain” arrangement which should be sufficient to encourage economic operations and cost savings. Participation from mine operational management staff in specific aspects of the mining contractors operations is also allowed in this arrangement and this sets a tone for the relationship between the parties that facilitates good communication, another corner stone of successful projects.
Another benefit of using standard form contracts is that they have been drawn up by internationally acclaimed experts. They are tried and tested and we have the precedent from various legal actions around the world to assist us in interpreting and applying them. They are respected and imbue confidence. Often that confidence leads to reduced prices.
Once the contracting strategy has been decided upon and the means for remunerating the contractor has been devised, the risks to be managed need to be decided upon. Such risks could include escalation, forex fluctuation, market influences on commodity demand and prices and so forth. Mechanisms to allocate and manage these risks need to be included into the contract form.
Another risk that prospective, unwary employers need to be aware of is the reliability and performance of the contractor to be employed. This can be managed either by a prequalification process to weed out the less reliable contractors or via adjudication criteria stipulated in the enquiry document by which tenderers can demonstrate their ability to perform the work required and compliance with their obligations under the contract.
When calling for tenders from prospective mining contractors and conceivably from process plant suppliers, a high level of confidence is necessary in the geotechnical information which is to hand and upon which the decision as to the type of mining operation and the process to be adopted to extract the ore has been based. Stories of overstated reserves, process plants that failed are legion and this eventuality must be avoided by thorough investigative work.
Once the mining contract has been awarded, the appointment of the contractor and employer representatives must take place and their levels of authority the must be established. Whether the implementation strategy is an adversarial or collaborative one will nevertheless require resources from the employer to manage and direct the operations of the mining contractor. Meaningful means of communication such as progress meetings must be set up. Similarly, records that might be needed to manage change if and when it occurs must be established. The guideline is that the communications and the records must be established such that the management of the identified and still to be identified risk is facilitated.
In every field of endeavour, since time immemorial, whenever any commercial interaction between two or more people, has taken place, differences of opinion and sometimes conflict has arisen. It is very important therefore that a meaningful mechanism is put into place that can resolve and settle such differences on a real time basis.
Obviously, the success of traditional dispute resolution techniques ranging from executive tribunals through to arbitration and litigation depends on the people involved and the circumstances under which the work is being carried out. There are again too many reliable accounts of unresolved differences on mining contracts and disputes that drag on not just for weeks and months but sometimes for years, for any conclusion to be drawn that the dispute resolution techniques normally used are fit for the purpose and that no alternative needs to be investigated.
Since the Latham Report investigations into the state of the construction industry in the United Kingdom, some 22 odd years ago, Adjudication has been adopted as the required means of settling construction disputes. It has demonstrated impressive results and has now been adopted as a means of resolving construction disputes in South Africa. It will shortly be gazetted as a statutory requirement under the soon to be promulgated Amendment to the CIDB Act.
The process can involve a standing adjudication board (either one or three people) or an ad hoc adjudication board that is only formed once a dispute has arisen.
MDA Consulting is South Africa’s leading adjudication consultancy but also provides a full spectrum of services to manage any implementation strategy from the choice and adaptation of standard form contracts, the enquiry strategy and the setting of tender adjudication criteria. Project launch workshops facilitated by MDA can identify risk and devise appropriate risk responses. Communication channels and the collection of information and data and the meaningful storage and access to records can also be arranged. The choice of candidates for the role of adjudicator and the procedures to be followed are also in MDA’s suite of services.
Visit MDA’s web site at www.mdaconsulting.co.za.