Cost overruns are not new to engineering projects. It is a problem when the scale and frequency is high. Unfortunately, the mining industry has a reputation for cost overruns during project construction. Different people have estimated mining cost overruns to nearly 40%. This is significant because all the CRIRSCO standards require capital and operating cost accuracy of ±25% and ±15% for prefeasibility and final feasibility studies, respectively. The US Securities and Exchange Commission’s (SEC’s) Regulation S-K 1300, in addition to this, asks qualified persons (QPs) to state the accuracy of their cost estimates in technical report summaries filed with the Commission. In this post, I am going to share my thoughts on the causes of these cost overruns and the implications for QP liability in public reports.
Cost overruns in construction projects have been well studied. A search in any database using the keywords “cost overrun construction” would yield thousands of results. Two such papers that I recommend are papers by Georgy et al. (2005) and Habibi & Kermanshachi (2018). The construction literature shows that the causes of cost overruns are many including schedule delays, change in scope, field rework, design errors during the design phase, and cost escalation. The construction industry has an advantage of the mining industry because of the large trove of public data (because of the many public works) that researchers can use to understand this issue. Compared to construction, there is not as much written about cost overruns in mining. However, the few examples tell a similar story.
A good example of the few studies on mining cost overruns is a study by Export Development Canada (EDC), which has a good porforlio of mining projects. EDC’s presentation reported on a smaller 2012 study of 12 projects and a larger 2015 study of 78 projects with capital expenditures (CAPEX) in excess of $50 million. The 2015 study of capital cost overruns in mining found that:
- The average capital cost overrun was 37% for the 78 projects they studied;
- The significant variables that impact cost overruns are project size (larger projects had higher cost overruns), location, location of sponsor’s headquarters, type of commodity (iron ore had the lowest cost overruns while nickel projects had the highest cost overruns), and debt to equity structure of the project; and
- The sponsor size, mining method (surface or underground), and product type (concentrate, cathode etc.) were not good predictors of project cost overrun.
The EDC study noted that these cost overruns were so even though all the projects had cost estimates done to the prefeasibility or feasibility study level.
This is where QPs can have some liability. If you prepare a study for public disclosure that you are on record to have said should have a maximum error of 25% (assuming you use the maximum allowed for a prefeasibility study) and the project ends up overrunning its cost by 37% (the average cost overrun for the seven nickel projects was over 45%), then investors might take issue with your cost estimates. Whether cost overruns can legally be traced back to the QP is a case by case discussion that is not always clear because so much changes between when the prefeasibility or feasibility study is complete and project completion. However, depending on how big the cost overrun is and its impact project success and the stock price of the mining company, investors might want to hold someone accountable through a class action lawsuit. Remember that S-K 1300 imposes Section 11 expert liability on QPs.
My recommendation is that, as a QP, you should carefully estimate costs, use sensitivity and uncertainty assessment to understand the risks to project success from the cost estimates, use contingency carefully to mitigate uncertainty in cost estimates, and disclose all material assumptions and their basis in the public report. If you need more education on S-K 1300 and QP liability, check out our upcoming course on S-K 1300.