Scope adjustment control

McCullough Robertson Lawyers Partner Brad McCosker explores mechanisms to adjust the scope of work in a mining contract in the fourth part of this six-part series for Australian Mining.

McCullough Robertson Lawyers Partner Brad McCosker explores mechanisms to adjust the scope of work in a mining contract in the fourth part of this six-part series for Australian Mining.

In the mining environment there needs to be a clear mechanism to adjust the scope of work due to the occurrence of a number of events, such as geological change (e.g. faulting), changes in the owner’s requirements and mine plan and production changes.

The clauses from standard industry documents like AS2124 and the AS4000 series do not work.

There are three very fundamental yet often misunderstood concepts about variations in a mining contract.

The first is that every changed element of work is a variation.

If the scope is to mine, haul and dump overburden or ore, how is a need to do that a little differently (provided it is still in an accepted rise and run matrix) a variation?

The second misconception (related to the first), is that even if work is of a changed nature, why should that automatically mean that the rate or price for that work can be changed?

Thirdly, if the work changes, the contractor need not necessarily be (and in my view ought not be) reliant on payment by a procedure governed by the answer to the question of whether or not what has occurred is a variation.

Misunderstandings in this quite straightforward area can often later lead to hotly contested discussions.

This paper suggests some proactive ways to avoid that outcome.

Variations To vary work under a contract there must be an express power given to the owner to do so.

I recommend that this be unequivocally stated:

‘1 Power to Direct Change

(a) Without limiting any other provisions in this Contract, the Owner’s Representative may direct a change to the Works. Not every change is a Variation.

(b) The power to direct a change is exercisable in the sole discretion of the Owner’s Representative. The Owner’s Representative is not obliged to exercise the power, either in the circumstances herein described or otherwise.

This clause operates for the benefit of the Owner. The Owner’s Representative is not required to exercise its discretion under this clause for the benefit of the Contractor.

(c) The Contractor shall comply with any direction given by the Superintendent to change the Works and except for any change that is a Variation the Contractor shall have no other Claim.’

Further clauses are needed to enable the owner full flexibility over its long term mine plan and shorter outlook production plans.

The contractor should nonetheless be given some reasonable notice of a change.

I recommend that the contract contains a clear acknowledgement that the mine plan will change and a further promise by the contractor that it has allowed for such changes in its rates.

The effect of clauses like these includes that the owner retains the sole discretion to change the volumes for geological or safety reasons and it can adjust future volumes to take into account any short-fall in or excess production in previous months.

Change which does not amount to a variation gives rise to no adjustment to rates but some advance notice of changes to volumes are given so that the contractor can adjust its resources and also the project’s target volumes.

Unique features Each project will likely have unique features which should be risk considered and risk allocated e.g. remnant areas, faulting, water table/water ingress.

Further, there may also be specific methodology issues which can and should sensibly be considered in the drafting of a variation clause e.g. changes to dump locations, relocations between pits, new haul and access roads, ramps etc.

For reasons including these, there should be no such thing as a ‘standard’ variation clause.

With those caveats clearly expressed, I give the following example:

‘2 Nature of a Variation Despite any other clause in this Contract:

(a) unless otherwise agreed by the Owner’s Representative, the Contractor shall not be entitled to any claim for a Variation, if a change results from:

(i) any work under the Contract not being in accordance with the Contract;

(ii) the Contractor otherwise being in breach of the Contract; or

(iii) an act, omission, default or breach by the Contractor or its Subcontractors;

(b) not every change to the Works is a Variation [Note 1];

(c) a change directed by the Superintendent will only amount to a Variation if:

(i) there is a change to … which is unanticipated and which … [Note 2];

(ii) there is a suspension of the Work because of an act or omission of the Owner, or its employees or agents; or

(iii) an event occurs or circumstance arises which the Project Control Group has specifically agreed will give rise to a Variation;

(d) without limiting clause 2(a) to (c), the following changes … [Note 3] will not be a Variation, nor give rise to any other Claim.’

Note 1: The statement that ‘not every change is a Variation’ clarifies that an adjustment to the mine plan will not necessarily entitle the contractor to claim additional rates.

Note 2: Drafting to this clause seeks to provide certainty by providing some parameters (themselves to be negotiated) around what sort of a change could qualify as a variation.

This is important to the contractor for it to be able to factor the risk of adjustment into its equipment selection and rates.

It also gives some defined limits to the owner to take into account when considering making adjustments within the predetermined ranges.

Note 3: To add further clarity, it is also recommended that a project specific set of carve outs be added which expressly describe the negative i.e. what will not be a variation.

Like any contract, questions concerning variations often arise in an operational mining agreement.

Given that variation issues are historically a common area of disputation, I believe that the more robust the discussion in negotiation, the less likely is later disputation.

A properly considered variation clause, that reflects the peculiarities of the mining operation and of the operations concerned, is the starting point to managing the control of scope adjustment in the mining context.

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