Mr Kirk says that given the current economic climate and the fact that many existing contracts were written during the peak of the resources boom, many contracting companies may need to review, re-negotiate and vary their contracts in an attempt to find ways to deliver better terms and conditions to the benefit of all parties.
“Contracts that were written in the boom times may no longer be suitable for the current economic conditions. Smarter businesses who review contracts, and create fairer and easier to administrate contracts, will go a long way towards ensuring their long term survival,” he said.
Mr Kirk, who has over 30 years of experience in the mining industry, said that although most contracts have faults, some have more than others.
“Most faults arise from one of two things. The first is not looking at the contract from the other parties’ 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/decrease in mining rate may or may not happen, but need to be catered for.”
Attention to detail
Mr Kirk believes that incorporating the simple details of a project into the contract can save mining companies millions.
“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.”
Conflicts between mining companies and contractors also frequently result from common legal loopholes.
“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.”
Mr Kirk says that the termination clause or fee in any contract should vary for each year, declining as time draws towards the final year. He also suggests that a number of cost reduction actions can be implemented by modifying current contracts without incurring unfair penalties to either side.
“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.”
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