Contract to distinguish owner mined from contract mined operations

24th May 2013


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The choice between owner- based mining and contract mining is becoming increasingly critical as mines focus on improving ore quantities and grades at lower production costs, says consulting engineering firm UWP Consulting international business director Rod Stewart.

While most mining operations involve a mix of in-house and outsourced functions, the control of the mining process determines whether an operation is owner mined or contract mined, and that the control normally vests with the party owning or leasing the mining equipment.

Once the decision has been made on contract or owner mining – or a combination of the two – there is the complex issue of compiling a contract document, says Stewart, adding that the quality of this document can either cost or save a mine a fortune.

“Corporate-, operational-, cost- and risk-related factors influence the selection of owner or contract mining,” he says.

The corporate issues relate mainly to strategies and policies of the mine owner, the required returns on invested capital and the perceptions of the markets, as well as influential individuals in the company.

Key operational issues involve the availability of equipment and human resources, the nature of the orebody and the duration, variability and complexity of the mining operation, while macro-level cost issues include the cost of actual mining, relative to total mine costs, and the justifiable premium paid when employing a contractor to undertake mining.

Further, the evaluation of whether to choose owner min- ing, as opposed to contract mining, must also focus on comparative risk areas, such as equipment selection and performance, production and operating costs, and industrial relations – including human resources management, health and safety, and the risk of litigation.

In light of these factors, there are disadvantages and benefits to both contract mining and owner mining, says Stewart.

“In contract mining situations, the contractors are able to promptly deploy modern equipment and a skilled workforce, and provide cost efficiencies and effective performance management systems, while securing attractive commercial terms for additional capital equipment requirements. The tender process should also result in competitive rates.”

Conversely, contractors are unlikely to have large specialised equipment available immediately, such as draglines and ultralarge loading and hauling units.

Further, if contract terms are not carefully structured, contractors may be driven by quantity, rather than quality, and may charge for perceived risk, while changes in scope may result in costly change orders, which may result in time consuming and expensive disputes, says Stewart.

Meanwhile, in an owner-mined operation, the owner has the advantage of direct control over mining operations, thereby, eliminating the contractor’s risk premiums and profit margins.

Greater job security may be provided for employees, while health, safety and skills development become mine priorities, and changes in scope do not incur unnecessary cost. Tendering and contract administration costs are also avoided, says Stewart.

Disadvantages include that capital is needed to procure equipment, therefore, the focus on other core business may be diluted and if the result is inadequate or limited equipment and personnel resources, it can make it difficult to quickly respond to changes in the pace and nature of mining operations. Related labour disputes can result in industrial action.

In addition, a lack of resources and a relative unfamiliarity with best practice, may manifest in higher unit operational costs than could be expected from a mining contractor, Stewart points out.

Finding Balance
An alternative contract strategy developed by UWP Consulting, which seeks to find middle ground, is starting to find favour among mine owners in several Southern African countries, says Stewart.

He quotes the CEO of a large mining contracting firm as saying “the coal mining industry has been crying out for something like this for years”.

Known as the Integrated Construction Unit (ICU), Stewart says this methodology provides a flexible and cost-efficient risk management contract strategy.

The contract documentation is New Engineering Contract 3- (NEC3-) based, to facilitate the implementation of sound project management principles and practices, and to define legal relationships.

The basis of the contract includes provision of equipment and personnel resources by the contractor at tendered time-based rates. Payment is based on actual resource use, but performance incentives such as production and safety, and low performance damages such as resource availability and safety, are also incorporated into the payment structure.

Although NEC3 Option B – Priced contract with bill of quantities – is the basis of measure, the ICU method is essentially a hybrid of NEC3 Option A, which is a priced contract with activity schedule, Option D, which is a target contract with bill of quantities, and Option E, which is a cost-reimbursable contract – given its lump sum and target costing features, says Stewart.

The owner retains control of resources and, therefore, the mining process, including composition of the mining fleet and sequence of the works, while the responsibility for recruiting staff and for owning, operating, maintaining and insuring equipment lies with the contractor.

Therefore, the contractor’s exposure to risk is limited to compliance with performance specifications of the resources and the works information. “The reduced exposure to risk relative to ‘conventional’ contract strategies has yielded meaningful cost savings to the owner on mines where we have implemented the ICU – averaging about 30%,” says Stewart.

“Every mine is unique and the implementation strategy will differ from mine to mine.”

The flexibility of the ICU methodology accommodates changes to the scope, nature, sequence and tempo of the works without the need for variation orders or the risk of claims. Accordingly, production can be increased or decreased by adjusting the composition of the mining fleet.

First developed by UWP Consulting in 1985 and continuously refined since, the ICU has been successfully implemented on several mines throughout Africa with the aggregate value of work undertaken using this approach being more than $1- billion.

In addition to openpit mining, the ICU methodology has been extensively used for construction of mining and civil infrastructure, including road and water infrastructure, boxcut development for mine portals, decline shaft access, crusher tip retaining walls, dams, mass earthworks, tailings and return water infrastructure, buildings and reinforced concrete works.

Edited by Megan van Wyngaardt
Creamer Media Contributing Editor Online


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