February 2018

Setting reasonable fees for consultancy services to the mining industry

  • By Stephen Hancock FAusIMM

An overview of some of the important factors to consider when setting consulting fee rates

Consulting is a service that involves the participants, be they individuals or larger consultancy enterprises, being available on-call with appropriate skills of value to the mining industry. Consulting is a demanding, challenging and competitive work area and participants deserve to be financially well-rewarded for their involvement.

This article sets out how fee rates for consultants can be developed with flexibility so that financial rewards can remain fair and viable despite the cyclical nature of the industry.

Consultants in the mining industry

The mining industry uses consultants extensively in areas including:

  • evaluating, financing and initiating new projects or project expansions
  • gaining statutory approvals
  • problem solving during operations and mine closure and rehabilitation
  • as sources of short-term expertise or support.

In some cases, the use of independent consultants is statutorily mandated (eg environmental impact statements, some stock exchange announcements, JORC evaluations and finance approval assessments), but most commonly because industry operators lack the specific experience that the consultants have, or find it uneconomic to employ the necessary expertise in-house when the requirement is intermittent.

Companies employing consultants expect that the services and advice received will add value to their enterprise. However, this can only be achieved if the brief is objective, flexible in its terms and has been agreed as being appropriate for the task by both the consultant(s) and the client.

The cyclical nature of the mining industry means the demand for consulting services will suffer extremes in both high demand and paucity of opportunities. Consulting fees need to allow for these consequences in terms of staff rewards, redundancy costs and the ability to provide for re-employment.

Consulting agreements

The best consultancy agreements arise through consultant/client relationships based on trust and mutual respect. Trust develops through working together. Trusting relationships are less commonly subject to disputes about fee rates, as the consulting team is recognised as ‘value for money’; however, this level of trust seldom develops from short-term engagements.

Competitive tendering is common with large mining companies and is mostly mandatory for regulators. Preparing tenders against prescriptive briefs can be expensive, especially where prequalification and shortlisting of tenderers has not been undertaken. In these circumstances, both reviewing and critiquing briefs involves a great deal of effort against a low probability of success. As a minimum, consultants should interact early with the client to ensure a good understanding of their brief to decide whether the brief is worth pursuing.

Some mining entities conduct competitive tendering as online fee rate auctions in order to select a panel of consultants for specific services for a period on request without further tendering. However, it does not necessarily mean that significant work will flow for the consultant, as other bidders may already have established relationships of trust with the client.

It is clear that consulting fees must be flexible to reflect market conditions and level of demand, as well as reflecting the perceived and actual competence of the consultants to provide ‘value for money’ services.

This article provides a listing of, and ranges for, fee building blocks that can be accumulated as a basis for informed flexibility while also ensuring acceptable reward.

It is ultimately up to consultants to determine what their fees should be for any brief or client. These may then vary depending on whether the consulting entities are small or large and are providing niche skills or a broader, more inclusive focus. The fees should always be set with a view to the level of responsibility and risk perception of the services requested.

The modern mining industry closely evaluates competitive consulting bids. Frequently, these are based against the benchmark cost of internal provision but, depending on the experience of the mining company, internal estimates may be accurate or seriously inadequate as to time, cost and the inherent difficulties likely to be encountered in meeting key objectives.

Despite the above, clients tend to assume that the work program sought will be addressed by the consultant efficiently and will be completed on time and on budget with limited input from the company. These assumptions are not unreasonable, but project failure can lead to loss of reputation for the consultant and the client.

Any consultant requested to provide estimates for work, be it via competitive bidding or not, needs to not only review the brief for its technical issues, but also have a good understanding of consequential issues – both corporate and personal – that may arise through the inherent uncertainties of the required work. They should then provide allowances in their fee rate or bid construction to cover these uncertainties.

Fundamentals in fee setting

Irrespective of the way in which consulting services are sought, cost estimates are based on time and quantum evaluations with direct expenses evaluated separately.

Suggested fee rate elemental blocks involve allowances for the following:

  • base salary
  • operational overheads
  • non-chargeable time
  • integrated marketing costs
  • risk mitigation
  • skills margin protection
  • growth
  • industry support
  • unforeseen events
  • profit.

These are discussed in detail below.

Base salary

Base salary allowances should be derived from the equivalent salary of in-house staff who have comparable experience and skills to the consultant.

Data on this element is available from industry networks, through industry survey data (eg AusIMM’s Professional Employment Survey; IE Aust, Consulting Engineers Australia, Rawlinson’s Construction Cost Guide and the Australian Bureau of Statistics).

Clearly, the level of experience and skill of consulting staff dictates the value placed upon individuals. Most senior consultants will classify near the upper levels of Level 3 into Level 4 and 5 as defined in the 2017 AusIMM Professional Employment Survey.

The base salary fee element should then include all the employment benefits that usually apply (superannuation, motor vehicle provision, salary protection and workers’ compensation insurances, sick leave and holiday provisions) plus any KPI reward issues and salary margins or bonuses paid to specific individuals.

This then is the base fee multiplier of 1.0 to which all other allowance multipliers are added to determine the fee rate for work on any brief (Table 1).

The base salary is generally used as an hourly rate assuming eight hours per day for 200 working days per year. This fee increment needs to be closely monitored for variations that may occur.

Operational overhead

Operational overhead costs include all the fixed and variable elements to be met from invested capital. These include the costs in engaging, paying and accommodating staff; providing for administration; costs in financing cash flow and operation, research and ongoing professional education; and to meet statutory requirements including OH&S insurance (if not already included in base salary), legal support, accountancy and auditing costs. This should also cover any directors’ fees and board costs.

Non-chargeable time

Non-chargeable time is incurred by all consulting staff as they learn and hone the skill necessary to be a consultant; as well as in pursuing marketing goals, developing client trust networks and advancing their professional capabilities. This includes meeting chartered professional requirements and ensuring client invoice payment and satisfaction.

Consulting groups commonly mandate non-chargeable time allowances for these functions as they are intrinsic to the success of marketing and of consultancy as a business.

Integrated marketing

Integrated marketing costs are non-salary costs necessary for obtaining revenue though consulting. They include financing and purchase/leasing of specialised equipment and services (eg royalties and licence fees); non-rechargeable travel costs, advertising and technical presentation cost financing, and costs involved in staff turnover and replacement. As a rule of thumb, a good consultant employer should average around six years for staff turnover, but the rate is higher for younger (25-35 year old) staff, being commonly about three years.

Risk mitigation

Risk mitigation costs arise from the need to provide professional indemnity insurance, staff and key staff salary continuity, technical staff OH&S insurances for specific work areas (eg underground and/or remote area mine work and flying) and ex-gratia payments to staff to compensate for work-related social and family disruption.

Some briefs cover some of the above under client site insurances or by having alliance contracts that preclude the parties from legal action against each other. However, alliance contracts do not protect the consultant from being joined in professional indemnity actions by others.

Skills margin protection

Skills margin protection is essential to maintaining the inherent value of any consultancy. Consultants are constantly at risk of staff being ‘pirated’ by clients, especially where individuals exhibit skills that are highly valued in the industry. The costs of protection involve significant increased salary compensation for such staff, and/or the inclusion of cost penalties in contracts to discourage direct client engagement of nominated consulting staff for a nominated period (including beyond the contract duration).

The true value of staff losses includes finding, inducting and marketing for replacement staff, as well as the impact of staff loss on staff morale.

Growth

Growth allowance must be provided for in any business to ensure that in-house capital and cash flow is maintained to expand with the mining industry, or opportunistically at a greater rate by expanding services and market share.

Industry support

Industry support is essential for the mining industry to maintain its pivotal role as a significant economic contributor to national GDP (both in Australia and elsewhere). Organisations such as AusIMM, IE Aust and IMMM, to name but a few, are active and well-respected in promoting excellence in practice and project governance internationally through meetings and publications
through multiple outlets. These entities need and deserve industry involvement.

Unforeseen events

Unforeseen events can occur outside the coverage provided by prudent insurance. Examples include the cost of management time in contractual disputes, staff claim issues and staff retrenchment payments (in order to maintain business viability during serious revenue reversals).

Profit/dividends

The owners of any consultancy are investors in a risky industry. Profits need to be provided in fee rates, irrespective of salaries paid to owners. This should happen in order to provide for increases in capital investment and to pay dividends on that investment. Salaries paid to entity owners are for worked time as a consultant and/or in ongoing management.

The allowance in fees for profit and dividends should reflect the magnitude of capital at risk in the business, with dividends determined annually by the directors.

Fee rate variation

Table 1 sets out the fee rate elements and their ranges. It is up to consultancy management to determine which elements apply and the range they should set for all personnel within the consultant team for each project brief. How these decisions are made will depend upon the risk tolerance of the individual or of the consultancy management team in relation to the market, the client and/or the project challenges.

Preferred clients may get lower fee rates, because less marketing is involved and other risk fundamentals are lower. Less well-known clients may represent higher risks, but may offer briefs that have longer duration or are desirable for the skills recognition that a successful
outcome represents.

Fee rate decisions are subjective but should focus on recovering all costs, plus compensation for the value the consultant brings to the client.

The use of teams to undertake briefs can also be valuable. It can lower project costs where lower fee rate staff undertake tasks that match their skills, while at the same time allow them exposure to more senior staff who can expand their skills and experience.

Justification for consulting fee rates

Some consulting clients will argue that the fee rate elements presented in Table 1 are unjustifiable. This is because they seem so much above the perceived cost of similarly skilled in-house employees. This perception may arise because industry personnel seldom recognise all the financial inputs incurred in engaging and maintaining their own staff. Their staff are paid out of the margin the commodity market allows after all the other production costs are paid. Thus, staff costs become a serious issue when commodity prices decline, and often these costs become one area where production costs can be reduced quickly.

The process of retrenchment and re-employment due to the market cycles is a significant factor that affects the salaries of in-house professionals. Inevitably, these costs flow through to consulting fee rates as the next most competitive employer of skilled staff.

The fee rate multipliers set out in Table 1 are based on experience and are justifiable against the real costs of running, maintaining and growing a consulting business. It remains vital for consultants to select rates that can ensure the commercial viability of their enterprise as they choose to run it, while still providing value to their clients.

Feature image: Serge Bertasius/Shutterstock.com.

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