The Universal Mining Company is engaged in deep mining of precious metals in man
ID: 433266 • Letter: T
Question
The Universal Mining Company is engaged in deep mining of precious metals in many countries. There is a decentralised engineering and procurement function located in each country of operation. One of the countries is in Southern Africa. A need has been identified for the design, preparation of detailed drawings, manufacture, supply, delivery to site, installation and commissioning of a vacuum ice pilot plant with a capacity of 350 tonnes/day. This will be a pilot plant, offering the design potential to increase the capacity to
700 tonnes/day.
The engineering function has been in discussion with UBV, a German company, for more than eight months. A decision has been made to invite a single tender from UBV. Procurement issued the tender, was engaged in its evaluation and with the necessary approach placed a contract four weeks ago. The agreed completion date is 14 months from the date of the contract. The internal audit department (a centralised unit) selected the UBV contract for audit and requested the relevant documents. The audit was conducted by Irene Philips.
Some key extracts from her report are:
1. Only lump sum prices were obtained in the tender (see detail below) Description of work Total Price
1.
Design and detail drawings
Included
2.
Manufacture and supply plant
$5,000,000
3.
C.I.F and port charges (estimated)
$ 195,000
4.
In country delivery
$ 87,500
5.
Site establishment charges
Included
6.
Installation charges
Included
7.
Commissioning charges
Included
8.
Initial spares
$1,250,000
9.
Special insurance charges
$ 100,000
Total =
$6,632,500
Audit extract from report. [I regret to conclude that this is an unsatisfactory situation. There is inadequate detail and there is no guarantee that the tendered figure will be the final invoiced figure.]
2. Payment terms have been agreed at 30% with the contract (and this has already been paid but without a bank guarantee); 15% of contract value eight weeks after contract placement; 25% of contract value prior to shipment; 10% of contract value when plant is on site; 15% when installation is completed; 5% when commissioning and engineer’s acceptance are completed.
[This is unacceptable practice in that payments should be made against milestones and retrospectively. There should be a retention of 10% of contract value for at least six months]
3. The supplier’s technical commentary includes the following (accepted and mentioned in our contract):
• Since this is a pilot plant we are unable to offer a plant guarantee, but will use our reasonable endeavours to deal with plant failures.
• The initial list of spares is provided in good faith. In the event that other parts are required, we will advise the lead time.
• All parts supplied by our subcontractors shall be repaired or replaced at their option.
• We reserve the right to collect data and operating experience and use it in future plant design. The resultant output will be our intellectual property.
[No negotiations have taken place, no risk assessment has been undertaken and the impact of the above on our standard contract terms has not been assessed.]
4. It is evident that many meetings have been held with UBV. All the minutes of the meetings on file were written and issued by UBV. One meeting’s minutes included the following notes:
• The tendered price was accepted and no technical problems were identified.
• UBV confirmed that the planned capacity of 350 tonnes/day would be an objective but not a contractual obligation.
• UBV confirmed that the extent of subcontracting is a commercial confidentiality and could not be released. This also applies to the names of subcontractors.
[Notes should be written and issued by UMC and the points above should have been challenged.]
5. The first invoice carries the following comment on foreign currency. ‘The above-quoted exchange rate is indicative only as per today’s rates and will be adjusted according to actual rates obtained on date of completion of transaction.’
[This is unacceptable financial practice and leaves currency risk entirely with UMC.]
The report concludes, ‘This is a disastrous contract for which the relevant internal specialists should be disciplined. Despite a contract having been issued, urgent negotiations should be conducted with UBV to deal with the identified issues.’
Tasks
1. Based on the information provided, if you were representing procurement in any negotiations with UBV, how would you deal with the above issues?
2. Using only the points in this case study, produce a checklist that could be used on future capital asset procurements.
3. How would you deal with the future relationship with UBV?
1.
Design and detail drawings
Included
2.
Manufacture and supply plant
$5,000,000
3.
C.I.F and port charges (estimated)
$ 195,000
4.
In country delivery
$ 87,500
5.
Site establishment charges
Included
6.
Installation charges
Included
7.
Commissioning charges
Included
8.
Initial spares
$1,250,000
9.
Special insurance charges
$ 100,000
Total =
$6,632,500
Explanation / Answer
1. Based on the information provided there are five main points where we need to address issues.
2. Based on the points above, the checklist should include the following definition and points in the contract
3. In the future relationship with UBV, we need to make sure that the ambiguity of the terms and conditions provided in the tender and in the contract is reduced. The best practice here will be to implement a companywide policy of required clauses in the contract. This way it will not only help with dealing with UBV but also any other future tender and contract that may be presented.
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