Ironing out contracts

AS cost-cutting prevails despite early calls of an economic recovery, consultancy Coffey Mining argues these post-boom times offer mining companies a good opportunity to renegotiate with contractors and potentially save millions.
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Coffey Mining chief mining engineer Linton Kirk

Blair Price

Coffey Mining chief mining engineer Linton Kirk said many existing contracts were written during the peak of the resources boom, and many contracting companies may need to review, renegotiate and vary their contracts to deliver better terms and conditions.

“Contracts that were written in the boom times may no longer be suitable for the current economic conditions,” he said.

“Smarter businesses who review contracts, and create fairer and easier to administrate contracts, will go a long way towards ensuring their long-term survival.”

With more than 30 years in the mining industry under his belt, Kirk said most contracts had faults but some had more than others.

“Most faults arise from one of two things. The first is not looking at the contract from the other party’s point of view, resulting in future disputes due to omissions and a hastily negotiated contract variation.

“The second common fault is not defining how foreseeable changes will affect a contract.

“Changes such as suspension of works or an increase or decrease in mining rate may or may not happen, but need to be catered for.”

To avoid potential cost blow-outs, Kirk drew attention to the need to include simple details of a project into the mining contract.

“Simple details are frequently not included within the original contract and can result in lengthy renegotiations.

“For example, the largest component of any open pit mining contract cost is the amount of truck hours.

“Truck hours can easily be estimated if you know the loading method and equipment, volume that is going to be mined, the depth it will be mined from and where it will be transported to.

“The devil is in the detail, and good mine planning can save millions in a contract.”

He noted that common legal loopholes frequently caused conflicts between mining companies and contractors.

“Every contract is different, but terms and conditions that unreasonably bias one side or the other are the cause of most disputes.

“Terms such as the ‘right to terminate the contract for convenience’ or to ‘change the schedule frequently without adequate notice’ often cause problems.

“These conditions should always be qualified with reasonable compensation for the contractor.

“This not only protects the contractor for any expenses incurred but, from the mining company’s point of view, fixes an upper limit to which it may be liable.”

He said the termination clause or fee in any contract should vary for each year, declining as time draws towards the final year.

Kirk also suggested that current contracts could be modified to cut costs without either side incurring unfair penalties.

“If the mining company can provide any key consumables that are currently being supplied by the contractor, for instance fuels and explosives, there is an opportunity for the company to save on the additional fees typically added by the contractor on top of these consumables.

“Fuels and explosives are often provided by the mining company. If the company does take over the supply of this type of consumable, the contractor should be charged at least a nominal sum per unit. If this is not done, then the consumable may be wasted.

“For example, equipment may be left running rather than being shut down to save fuel.

“With explosives, the incentive to utilise the commodity most efficiently is reduced if the explosive is effectively free for the contractor.”