Project management in the minerals processing industry has undergone a remarkable transformation over the past 15 – 20 years. This used to be the domain of engineering oriented professionals drawn from a multiplicity of backgrounds – fabrication shops, plant and process engineering, drawing and drafting departments.
The success or failure of a project was heavily dependent on the ability of these project managers to correctly select, inspect and deliver the goods on time and on budget. Moreover, there was a requirement to work closely with suppliers and customers and this was conventionally ac It has sometimes become more of a paper war than a focussed approach on the procedural execution of a set of work instructions. The volume of correspondence that evolves during the execution of the project, not to mention the information in completed manufacturer’s data reports, is testament to this fact. hieved through development of relationships within the entire supply chain.
Purchase orders contained a clear explanation of the supply scope, schedule, a brief specification, pricing data and some warranty definition. The level of trust between the parties made it unnecessary to generate reams of paperwork, although good quality documentary evidence has always been a prerequisite to enable the ultimate face-to-face negotiations to be concluded at the culmination of contracts.
Those days are gone.
In the current environment, project management has undergone a metamorphosis, principally because the Industry has correctly reacted to the provision of substandard equipment, dishonouring of warranty requirements and presentation of unreasonable claims by a relatively small number of unscrupulous operators.
The current practice of generating specifications by the “cut and paste” method has also helped this “explosion”. This has potentially serious project ramifications, as purchasing agents, who do not necessarily have the engineering skills to make an appropriate assessment of what is indeed relevant, can unwittingly generate conflicting information in two or more sets of specifications.
Conformed documents, which fully and accurately define the negotiated scope, terms and conditions prior to order placement, are sometimes overlooked in the interests of maintaining the programme and this can later lead to disagreements about the agreed scope. It is not unusual, in the current fast-track environment, for contracts to be kicked off many weeks before the actual order document is placed in the hands of the technology or equipment supplier.
Due to the extent of liabilities in modern-day contracts, project managers on both the supplier and client side often require support from legal counsel. This has the roll-on effect of inviting responses in the same legalistic vein.
Thus it is apparent that there is a paradigm shift in the dynamic of handling projects. Project managers have now become much less focussed on getting the job done and more so in keeping the documents flowing, an altogether unsatisfactory outcome.
The “hands-on” aspect where the project manager spends time reviewing manufacturing quality, schedule and coordination is lost to third party inspectors and expeditors, most of whom have little real understanding of the whole picture. A significant part of the experience brought to the project falls away.
Is it possible in this litigious society to develop a methodology that will enable companies to align themselves more closely, limit the potential for price gouging, yet still achieve the desired outcome of a project completed on time and on budget?
There is considerable benefit in jointly contemplating a model beneficial to all parties, while still minimising capital costs and maximising returns for all concerned.
The following briefly outlines some of the many models which exist - all of which have certain advantages and disadvantages.
1. The most basic of models is the cost plus approach, where project costs and subcontractor selection are visible to both parties, with the Contractor receiving an agreed mark-up percentage. If speed is essential, this relatively simple model is quickly and easily implemented. However, one of the downsides includes lack of protection from escalating sub-contractor prices (very topical in today’s mining boom). A certain level of trust is also a prerequisite, as the Customer must be confident the Contractor has found the optimal supplier and pricing.
2. The next level to the cost Plus approach is the cost plus guaranteed maximum model. All the basic elements remain the same, however, a maximum fixed price is agreed from the outset, allowing the customer to budget accordingly. Again, there is a risk of exposure to higher prices, although the exposure would be limited to the maximum price. Potentially, also, there would perhaps less ‘shopping around’ by the more unscrupulous contractors.
3. In the open/closed book model, the customer has the benefit of complete cost transparency in the contractor’s pricing structure and can negotiate on the forecast profit margin. Once the book is closed, the contractor can negotiate with subcontractors and suppliers to increase his profits with the proviso that minimum specifications are adhered to. The customer has the right to veto the final selection of subcontractors, if these differ from those utilised in the open book phase. This model provides the customer with benefits similar to the traditional fixed price contract.
4. The cost plus with incentives model can be added to all of the above methods. The contractor receives an incentive for on-time completion or even an added bonus for early completion. While this appears to be an attractive option, if it is established early in the project that the “bonus” timing is unlikely to be achieved, the incentive (and commitment of the Contractor in some cases) disappears.
To address this, a variation of this model which combines both an incentive for on-time/early completion and a disincentive for late completion can be employed. In the latter case, the contractor is driven to maintain momentum, despite the fact that his labour costs may exceed his budget costs. Both options open the door to claims for time extensions by the contractor to protect his position.
The current trend towards excessive definition, specification and litigation is unhealthy for the Industry. It sometimes results in the parties constructing an agreement which does not necessarily mean a project will run smoothly, on time and to budget. To overcome this, what is needed is a high degree of alignment between all parties and agreement on a sensible working model – ultimately, it’s a matter of common sense and trust.