CHAPTER 7 INCREASING COMPETITION IN MINING PROJECTS

• Jurisdiction: United States

Mining Agreements: Contracting for Goods & Services
(Sep 2015)
CHAPTER 7
INCREASING COMPETITION IN MINING PROJECTS
Joseph P. Henner
Partner
Kilpatrick Townsend
Atlanta, Georgia
Neil Gaudion
Senior Managing Director
Global Construction Solutions
FTI Consulting
Atlanta, Georgia

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JOSEPH P. HENNER is a partner in the law firm of Kilpatrick Townsend & Stockton LLP in Atlanta, Georgia. He has represented all major participants in the construction Industry, including public and private owners, developers, large general contractors, specialty government subcontractors, and sureties. A significant portion of Mr. Henner's practice involves claims avoidance and educating clients through in-house seminars and day-to-day review of projects, contracts, issues and project correspondence. Mr. Henner has been actively involved in many high-rise, mixed use and condominium projects. He concentrates on front end issues in order to avoid disputes and misunderstandings. Mr. Henner has been involved in alternative dispute resolution procedures such as mediations and numerous arbitrations. His cases have involved a wide variety of construction projects, throughout many industries and throughout the country. In 2012, Mr. Henner was recommended by Legal 500 US in the area of Real Estate and Construction. He is listed in the 2009,2010, and 2015 editions of Chambers USA: America's Leading Lawyers for Business for Construction Law. Mr. Henner was named a 2009 Georgia "Super Lawyer" in the area of Construction/Surety by Super Lawyers magazine.

NEIL GAUDION is a Senior Managing Director in FTI Consulting's Global Construction Solutions practice and is based in Atlanta. Neil focuses his practice on the implementation of project controls and dispute advisory services for the petrochemical, mining, and power sectors. Neil has extensive experience in consulting on large EPC contracts valued from $100 million to over $10+ billion. Recent projects have been located in Madagascar, Canada, Peru, Chile, Mexico, Brazil, and throughout the United States. Neil is experienced in many forms of troubled EPC projects, particularly with cost and schedule pressures. Neil has navigated through many difficult ongoing project disputes and led them to a successful resolution. Should such mid-project resolution not be attainable, Neil has also testified as expert witness in international arbitrations with respect to cost and schedule claims in excess of $500 million. Neil holds a Mechanical Engineering degree from Tufts University, and an MBA, and is credentialed as a Planning and Scheduling Professional, Certified Cost Professional, and a Member of the Royal Institute of Chartered Surveyors.

I. Introduction

Recently, many high-profile Mega-Projects in the mining industry have been significantly over budget and late to achieve first ore. Many are late even after incurring huge premiums to accelerate the schedule. Many reasons exist for these issues, including a failure to achieve a high level of competition in the bidding and procurement process. Most projects are private and the owners are free to procure the work however they desire. The statutory requirements for public projects do not apply to private construction projects.

Unfortunately, most owners feel that only a few contractors are capable of performing the Mega-Projects. As a result, these contractors have been able to negotiate these projects to a time and material (cost plus) delivery method. Some contractors agree with the owners that they can run the work through direct hires. This means that the contractors hire all the workers, from the supervisors to the craft labor. In remote areas of the world, an owner may well be forced to follow this process. This results in little to no competition and the contractors could be incentivized to take as long as possible and incur as much costs as possible to maximize their profits.

A key to a successful project is to align the parties' interests. This paper discusses the considerations to maximize competition and align the parties' interest to incentivize the correct behavior. We will discuss the different delivery methods, considerations when procuring a construction project, the creation of the bidding process and incentives to be considered in the mining industry. All projects have different considerations and no one process is the best for all projects. However, the proper discussions and planning before the start of the project can help lead to a more successful project, in terms of costs and schedule.

II. Considerations at the Start

Owners need to have a trusted advisor to work through its needs, the alternatives and provide the proper guidance for the creation of the proper procurement process. The first consideration is the location of the project. Is the project in a remote location where the resources are scarce and the number of contractors willing to perform the work low? In those cases, the owner must recognize that it really has two choices: hire a large full service contractor to "handle" the project or create a large infrastructure of employees and processes that can coordinate all of the requirements for a Mega-Project. Although some of the issues discussed in this paper could be considered on these remote Mega-Projects, this paper is designed for projects where sufficient numbers of contractors exist to have meaningful competition.

The next step is the required duration for the project. Is it a fast tracked project where just in time engineering will be used or can the owner procure the contractors with engineering that is sufficiently advanced to bid a fixed and complete scope of work? In our experience, this is a key consideration on all mining projects and many are fast tracked to achieve operational targets or cash flow considerations. Although we have not seen many studies on this topic, we have always wondered whether fast tracked projects actually achieve mechanical completion any

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earlier than projects with a more traditional engineer, then build approach? Obviously, it is more difficult to have true competition on fast tracked projects; however, an owner can still have a competitive procurement process even on these projects.

The type of work involved is also a key consideration. Most mining projects involve heavy civil work, the construction of some shell buildings, a great deal of mechanical, piping and electrical / instrumentation work and the setting of large pieces of equipment. The specialty work is usually restricted to the building/setting of the large pieces of mechanical equipment. If the work involves an acid plant or smelter, an owner must make sure the contractors are very experienced with this type of work. Another obvious consideration is whether it is a greenfield or brownfield site. While there are several advantages with expansions of a brownfield site, determining the number of qualified contractors to maintain an operating mine in a safe and productive manner is a huge concern.

An owner should also do an objective evaluation of its in house staff when determining the right procurement process. Does the owner have a sufficient engineering and construction group to manage the work? If not, project management firms may be needed to properly administer the projects. These companies typically take very little risk and the employees are essentially seconded to the owner for the projects. If a project management firm is required, an owner must decide how much it wants to be involved in the procurement process. Unless an owner has a staff that is skilled and experienced with procurement in the construction context, it can be very dangerous to interfere with the procurement process.

Even where an owner intends to utilize an EPC instead of a EPCM delivery method, an owner can still dictate the required procurement process to maximize competition. The engineers should be selected based on its experience, quality of work and resource availability. As discussed later, obtaining as much information from the engineer regarding past projects, current backlog, as well as references, is a good way to evaluate the true quality of an engineer. However, in our opinion, an owner should not procure the engineer based on the cost. The construction costs are usually 10 to 20 times that of the engineer and the best way to minimize construction costs is to have timely, high quality, coordinated and completed issued for construction engineering. However, the Procurement and Construction aspects of an EPC and EPCM can still have high levels of competition if the project's engineering is a timely and quality product.

III. Delivery Methods Defined

Delivery Methods means the ways that the services and work are procured. Examples of delivery methods can be EPC, EPCM, Design/Build, Design/Bid/Build and every combination of those can be utilized. The main factor in defining the delivery method is whether the contractor is at risk for the cost and enters into the contracts with the suppliers and construction contractors. This is when a contractor is said to be "at risk". However, the true definition of whether a contractor is at risk depends on the degree that the contractor has agreed to a lump sum cost or Guaranteed Maximum Price for a fixed scope of work. Regardless of the delivery method, if the payment is a cost reimbursable model, the contractor typically has limited risk with respect to cost.

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With every delivery method, an owner can also dictate the method that the contractor is paid. These can range from lump sum to cost reimbursable, also referred to as T&M. An owner can also agree to a not to exceed price, but that generally ends up being a form of cost reimbursable. A cost structure that should be considered on more mining projects is a guaranteed maximum price ("GMP"). A project with a GMP can better align the parties' interest. The categories of costs are...