Did you know that more than four out of five mining projects come in late and over budget by an average of 43%?
In the megaprojects space the figures are even worse – 98% of mining megaprojects suffer cost overruns of more than 30%.
How on earth have figures like these become acceptable?
Clearly, something needs to change. However, capital projects is not an area I know much about. In fact, it seems to operate quite separate from the rest of the mining industry.
I needed an expert to guide me through the subject. Step forward, Jason Fearnow, principle at Prime Contract Solutions and leader of the Mining Mavericks group of thought leaders.
Fearnow supports mining companies with execution strategies for large to mega-scale projects and has negotiated over $40 billion in capital development projects worldwide over the course of his career.
But before we get started, let’s get some basic terminology down: in mining a ‘megaproject’ is typically defined as a greenfield development costing upwards of US$1 billion. $500 million would be a large project, and $250 million or below would be a small project. Anything smaller than $100-150 million is usually treated by operations in a brownfield environment.
A $5-7 billion dollar project would be comparable to delivering a mine like Quellaveco or Yanacocha in Peru, or Batu Hijau in Indonesia. Olympic Dam, one of the largest mines developed in recent times, is rumoured to have come in at around $20 billion.
“Where do you even start with a project of that scale?” I asked Fearnow.
“There are so many complexities when you’re dealing with a project that’s worth five billion or seven billion,” he explained. “You’re basically building a new city, in a remote location with poor infrastructure. It’s hard, and the logistics are very challenging.”
How do mining projects work?
Every mining project starts with an exploration drilling campaign that can last anywhere from 2-5 years. Once a deposit has been identified, the project transitions into the concept phase where geologists examine data to characterise the deposit and determine whether there is a business case for developing it.
After the concept phase, comes prefeasibility which involves trade off studies to see which of several viable business solutions would be the most beneficial. i.e., which mining method would work best, would the operation use trucks or conveyors etc.?
Once there’s a business case, the project can move to the second phase of prefeasibility where a single plan is defined and refined.
“When a project transitions into feasibility, a single option has been developed and design and basic engineering begins,” said Fearnow. “You might also order some long-lead procurement items. Projects usually transition out of feasibility and into the field when the designs are 30-50% complete.”
“That sounds very early,” I said.
“It’s too early,” Fearnow replied. “When a project heads into execution with full funding approval from the board, the inclination is to get to the field as fast as possible, with the aim of getting through construction faster. But unfortunately, that’s not usually the case.
“Often, we mobilise too early and when we get to the field and start moving dirt around, we’re spending money and we don’t know what exactly what we’re building.
“The reason most projects blow out is because it costs a lot of money to move through construction in an inefficient way. It’s much better to develop a plan, work the plan, and then manage deviations. The alternative to that is really expensive.”
There are a handful of factors that tie into that behaviour. Mining companies usually outsource the engineering and construction, engineering procurement construction (EPC), or engineering procurement construction management (EPCM) elements of these projects.
“The majority of large contractors – let’s call them EPCMs – that have historically operated in mining are now very engineering led,” Fearnow explained. “There’s a lot of focus on the design of the processing facility, getting it as accurate as possible to maximise recovery, reduce power draw and water consumption…
“All of those things are important, but they only represent 35 or 40% of the total cost of a typical project and that’s not where we tend to see issues. The other 60-65% of the scope is construction.
“If projects were more construction-led instead of engineering-led, I think we would be a bit smarter about how we mobilise to the field and build projects.”
After construction (the execution phase), projects then move through pre-commissioning, commissioning, start-up and ramp up at which point they are classed as a mine.
Delivery models: EPCM, EPC… and more
EPC and EPCM are the models commonly used to handle these types of projects, but there are many more emerging that could help to finesse delivery.
“The most common in my experience is the cost reimbursable EPCM model,” Fearnow explained. “Then EPC. And there are two types of EPC.
“First, is the lump-sum turnkey approach where the contractor has full autonomy over the project. They deliver the project for a lump-sum price and if they underrun on their budget then that money goes into their pocket. If they overrun then they eat that cost and that’s a risk that they take unless there’s a change to the nameplate [capacity] of the facility or something.
“But sometimes people say EPC and mean direct hire, where the contractor hires their own construction and craft labour, runs their own gear with their own operators, does their own maintenance that kind of stuff. Some people prefer that, it depends on what the scope is.
“And there are variations of that as well. One project I’m involved with right now is a hybrid where the contractor has a specialty area. They’re doing some construction themselves and the other part of the project is construction managed.”
There are other models too. Relational contracting, which is typically used for longer-term relationships, is garnering more interest.
With an EPC or EPCM contract, the engineering firm is typically engaged for a period of 24-48 months, or whatever the window is depending upon the scale of the project. With relational contracting, the engineer might be engaged for 10-15 years. An equal partnership is created between the owner and contractor whether for construction or mining purposes.
“There’s another model which the Aussie’s have coined an ‘alliance’ which is really an integration between the owner and the contractor,” Fearnow explained. “The intent is that the contractor brings the people, the systems, and the know-how, and they integrate into a team of individuals within the owner to create a joint alliance team.
“There is a group of executives that sit above the contractor and owner who dictate what the integrated project team does in the field. That approach allows more risk sharing.”
Is EPCM really the problem?
Despite believing wholeheartedly that the EPCM model can and does work in specific circumstances, Fearnow also believes that there will be greater diversification in the types of models used to deliver mining projects going forward.
“The EPCM model gets a bad rap because it’s the most commonly used,” he explained. “If 98% of megaprojects overrun by 30% or more, and four out of five projects overrun by 43% or more, and most of them are built on the EPCM model, then of course people will say it’s the model’s fault.
“Not only the contract, but because the industry classifies the contractors as EPCMs as well, they end up being the scapegoat 99 out of 100 times.
“The real trick lies in getting the owner and contractor aligned on the relationship that they’re going to have from the start. Often, owners treat the contractor badly and the contractor is expected to assume all the risk.
“But when a miner and contractor come together and share the risks, as a team with a common goal, then regardless of the model, the project will be a success.
“With that mentality the EPCM model works great. It’s flexible, you can pivot, make changes… It’s really the mentality and the behaviour around the model that’s wrong.”
Out with the old ways, in with the new
“How have we ended up with this culture of finger pointing?” I asked.
Mining companies usually have a pipeline of projects. It’s a small industry, and there’s a limited number of contractors that can deliver projects of this scale. Surely it’s better to maintain a good relationship with a handful of contractors rather than continually victimising them?
“It’s just legacy thinking that has been passed down through generations,” said Fearnow, with frustration. “Megaprojects are hard and because the statistics are so bad people want a scapegoat. They want somebody to blame. That has snowballed to the point where there are many in the industry who look at contractors as inferior to owners. That’s just a culture, flat out.
“The other thing I’ve noticed, is that our industry does not focus on projects. If you look at the agenda for any conference, for example, they’re usually very technically focused.
“There’s not a lot of discussion or conversation on projects which blows my mind because when I look at a balance sheet of a mining company or at their cash flow, most spend as much money per year on projects as they do on operations. Yet the limelight is completely on operations which is bizarre.”
Education is just one way to improve the status quo. Applying more focus to systems thinking and on optimising the human element of projects is another.
Fearnow has written a couple of papers based on the Mining Maverick’s thinking in this area.
“In my mind, integrated teams and collaborative models are our best bet,” he told me. “We also need to understand the psychology behind how people make decisions, why people do what they do and how they behave so that we can build better teams.
“The evolution of projects requires a more focused look at the composition of teams, determining what is the outcome that we want to achieve and then backing into it. What are the actions that we need to take to get the result that we want? That is driven by human behaviour.
“If I step back and look at the 20 years I’ve spent in mining, and the projects that came in on time, on budget and safely, it’s easy to see that everybody was working well together.”
Putting people in the spotlight
I strongly agree. The mining industry needs to take a more people-centric approach to address many of the issues that lie on the horizon.
Recruitment and retention, for instance. If you’ve got the right team, people are going to want to stay, they’re going to want to learn and be invested in.
This is also what puts the ‘inclusion’ into diversity and inclusion. Better structured, more diverse teams will deliver projects of any kind more successfully. And everybody likes to succeed and feel fulfilled by their work.
“If you look at the soccer teams that win world cups, they’re the ones that play together as a team,” said Fearnow. “Not the ones that have one or two superstars and the rest of the players are sitting on the bench. You need all hands-on deck and everyone in the correct roles.”
“That’s where the concept of the ‘dream team’ comes from, right?” I said.
“Has anybody come back to you after a project has been successful, after they’ve put more emphasis on the human element, and said ‘you were right’?”
“Absolutely, and it’s always the project directors,” said Fearnow. “We need more progressive leaders who are willing to take a step back, look at the circumstances and say, ‘Let’s not do that again. What can we do differently?’
“And there are people rising within the ranks of mining companies who are thinking like that. There are mining companies that are willing to work differently with contractors, to analyse the composition of project teams and personalities so that they can get the right characteristics.
“And I think it’s those companies that are willing to put the effort and time upfront into getting the right group of individuals together, knowing what they’re trying to accomplish. They will be the most successful.”
A more holistic view for future projects
“Given all the challenges that the industry is facing, how do you see megaprojects being handled in say 10, 20 or 30-years’ time?” I asked.
“I’d like to see them handled like a high-quality soccer team,” said Fearnow with a grin. “And have organisations behind the team give that them the latitude to do what they need to do to be successful and to properly support them.
“I hope that in 20 years, when we’re sitting around in toolbox meetings, people are talking about what we’re doing, what we’re trying to accomplish, who it’s going to benefit, and selflessly look at how it’s going to benefit people that are bigger than us.
“I want people to talk about why getting enough sleep and water is important. How food is fuel and medicine. I want a more holistic approach to mining and team members who have a more balanced lifestyle… a more balanced industry in fact.
“Mining is super focused on technology and innovation but, to me, that’s only 5% of the puzzle.
“I would like to see us evolve as an industry, as individuals and as teams in a more positive way. Your IQ matters, your emotional intelligence matters, how you treat your body, engage in relationships, what you put into your body… all that stuff matters.
“And I would love it if more people that accepted that reality and used it to their advantage.”
“I think more leaders are coming through who understand all of these points and can who deliver on that vision,” I told Fearnow. “I’m excited to see what we’re going to be talking about in 2031.”
“I’m going to set a reminder in my calendar for 10 years from today, and you and I can have a conversation about it,” said Fearnow decisively.
“I will hold you to that,” I smiled, and accepted the meeting invite.