50% Cost Reduction in Contract Mining Services with Optimized Commercial Models
Client Challenge:
A long-standing client was facing escalating costs in their contract mining services. Over a 10-year period, despite multiple retendering processes and negotiations with the existing contractor, the anticipated 10% cost improvement remained elusive. The client had repeatedly attempted to renegotiate the contract and adjust the scope of work, yet significant cost savings were not realized.
Key Insights:
A thorough analysis of the contract’s history revealed that frequent personnel changes on the client side led to a lack of continuity in contract management. Each new tender was assumed to reset costs efficiently, but a deeper historical review showed a staggering 300% increase in costs, which far outpaced inflation. This cost escalation was largely attributed to the increasing complexity of the work package after each tendering cycle, leading to higher costs without corresponding value.
Optimized Commercial Model Implemented:
To tackle these challenges, a hybrid commercial model combining fixed and variable cost elements was introduced. This approach allowed the client to manage costs more effectively by clearly separating essential services from areas where complexity could be reduced. This model also provided the flexibility to align contractor incentives with cost-efficiency goals.
Alternative Models Considered:
Various commercial models were evaluated, including fully variable cost structures and fixed-price contracts. However, the chosen hybrid model was found to be the most effective in aligning both parties’ interests while simplifying the scope of work and maintaining service quality.
Results Achieved:
The implementation of the new commercial model resulted in a dramatic 50% reduction in contract mining costs. By benchmarking historical data and identifying unnecessary complexities, the client and contractor were able to streamline operations and eliminate inefficiencies. Notably, the existing contractor was retained, benefiting from a clearer, more manageable scope of work that facilitated improved performance and cost control.
Contact:
