Interview Extract: Mine Contracting at BHP

In this interview extract, Mining IQ talks to John Howarth, Manager of Contracts and Procurement, Uranium Division of BHP Billiton about the strategies BHP is using to improve contract management and the lessons BHP has learnt to far in relation to contract management and how these lessons have influenced their current approach to contracting.

John: I currently head up the contracts and procurement team in the uranium customer sector projects group.  We’re based in Adelaide, and primarily look after the Olympic Dam operation, and there’s potentially the largest mining expansion project underway there at the moment.  I have responsibility for overseeing all of the project related contracts and procurement activity.  So that ranges through study phased work at the moment, and we have a lot of studies going on to assess the viability of the expansion, which is an open pit expansion from a current underground operation.
 
The press has estimated it at around the 30 billion mark, but we haven’t had a final approval from our board yet, which comes later in the year.  We’ve got a contracts and procurement team that’s running at around 40 people, the contracts range from purchase of high value capital equipment, mining equipment, and infrastructure, a lot of engineering related contracts and consulting, obviously, associated with mining studies, mining analysis, engineering, and design for miscellaneous infrastructure associated with building a new mine.   We have started spending quite a bit of money associated with that.
 
Other contracts include technology work - we’re doing a lot of technology studies as well, associated with mining.  Our particular operation has a significant processing plant.  We process uranium, copper, gold and silver, and obviously there are a lot of technology studies to assess how to best attract a greater yield associated with the ore body that we, that we get from Olympic Dam.
 
The way that BHP Billiton is set up, just for information, is we have different customer sector groups (CSG’s) across the globe.  Those sector groups focus on different ore bodies.  So, for example, we have the uranium as I spoke about, the iron ore group in the west, we have coal in the east as well.  We also have operations in Chile and Houston associated with petroleum, and in Chile we have a large copper asset called Escondida.  We, as a group, get together fairly regularly to share our experiences, but we are very focused as an individual business unit supporting our individual customer sector groups.

 

John: That’s an interesting question, because, as I said, although there’s a number of different sector groups across the globe, as is often the case with large global organisations, communication around the organisation is hard.  We’ve all got our individual challenges in terms of supporting individual business.  There are a couple of things. One is we have our localised contract management training and development and work with external consultants to ensure that locally we’re being as effective as we can.
 
But when you enter into large projects, you need to ensure that you benchmark yourselves in a number of different areas, and contract management is one of them.

We benchmark ourselves to ensure that what we’re doing at a project level is valid, and viable, against other mega-projects around the globe and we work with independent organisations and one of those called IPA.
 
They come and look at our organisation and make sure that we both have a robust contracting organisation, that the contracting and procurement team are involved within the projects at the right level and at the right time.  As you know, one of the challenges we always have as a discipline is to get involved very early in the piece, so we can influence the strategic direction of some of the business decisions, and therefore some of the contracting and procurement strategies that follow on from that.
 
So the IPA organisation looks across the whole of the project, and contracts and procurement is a discipline they have high regard for.  They effectively assess how the project organisation is set up, and how well contract and procurement is utilised.  We have a lot of support through that organisation, and that’s an independent body that’s looked upon by the whole of BHP Billiton and other organisations as well, as adding a lot of value in terms of project effectiveness.
 
We also work quite hard and we’ve done a lot of work in the last couple of years to ensure that we are having good dialogue with our partners. So I regularly talk to my counterparts in Iron Ore and BMA (Coal), who look at coal, also overseas as well, with some of the other assets, which is good. I guess another example is I’ve recently been involved in a global sourcing project which requires a number of my peers to catch up every couple of months around the world in different venues, looking at some category sourcing and specific sourcing of a particular product we buy a lot of.  That’s happening more often, so we’re leveraging off each other.  Those initiatives effectively drive us individually to improve the way we undertake contract management. 
 

John: One of the lessons is you’re never really on top of it, nor can you do it perfectly.  That really means that each major contract you enter into has its own unique and particular challenges and issues that you need to be very conscious of.  You can go through a routine of assessing what those might be, the risk assessments etc., to try and ensure that you have the most robust contracts in place to effectively deliver the outcomes you’re after, and to effectively mitigate the risks that you anticipate.
 
But one of the biggest lessons that we’ve learned, and maybe many different people have, is across different disciplines is that the effectiveness of a contract in so many cases comes down to individuals who are delivering the contract - people.  In the marketplace right now, especially in Australia, people are a resource that’s in high demand, and therefore it’s a very limited resource.  So you’ve got to then try and ensure that both parties are collective in terms of successful delivery of contract.  Both parties have the right people in the right place to deliver a successful contract outcome.  We spend more and more time now, when we assess projects and contracts at the very, early stages and ensuring that we have not only the right processes in place, but the right people driving those processes.
 
An absolute recognition, I’m not saying it’s always executed correctly, but an absolute recognition is that it’s a collective approach to successful delivery.  So I think if we look back five years, and I’ve been within BHP Billiton in this role in similar project environments, for over six years now.  If I look back five years, I could probably say that the relationship with many of the contracts within our organisation, were sort of master and servant, so very much of the old style adversarial contract delivery model where we relied very heavily on the contractor to deliver, and if they didn’t, we came down on them with a ton of bricks and quite often ended contracts.
 
But in this day and age, that’s, A, not the right way to do it, and B, the transition costs from an old contractor to a new contractor is significant and the risks associated with that are significant too.  So we put a lot more emphasis into ensuring that collectively, we succeed in delivery, delivery of contracts.  That requires a lot more work and a lot more time and a lot more effort, so it’s more of an integrated team, from what we call the owner’s team, our organisation, to support the contractor in being successful.

So that’s probably the biggest lesson, and we’re still learning it, and the biggest change that we’ve had in contract management.

 
John Howarth is presenting at IACCM APAC Forum taking place from 1 - 3 August 2012. For more information visit www.iaccmforumapac.com.au.