The most essential module in any ERP system that is focused on mining is the Job Costing module. It is arguable that most ERP systems have generic efficiency built into most of the common modules like General Ledger or Fixed Assets, but there is a significant variation into Job Costing functionality across the board and this is one of the primary elements that should be investigated when selecting a mining proven ERP system. The primary requirement is that the job costing system would be able to handle multiple types of projects at the same time allowing a company to explore, construct and operate at the same time if required.
The common perception of job costing is that it simply provides the ability to track cost for a specific job or project. While this may be the case in a limited ERP, job costing must have a select list of features to truly benefit a mining organization;
Budgets develop from a number of sources, and the most efficient and accurate way to develop budgets for specific projects is to involve all required sources of knowledge and compile a budget form this information that can evolve and be accessible to all interested members of the project.
Typically this can be simplified into Labor, Material and Other Costs.
- Labor costing can be directly attributed to the project by specifying resources in the HR system and when exploding the hours the associated direct costs can be applied at accurate rates immediately.
- Material costs should primarily come from the inventory module which would track average buy price, average costs, last costs and accurate lead times and supplier information to help build an appropriate material cost into the budget. The integration to inventory also allows for the budget to form a buying plan for the purchasing team to ensure anything entered into the budget can be verified as accurate as required inventory is committed to the project and inventory is ordered. Instead of a user specifying a blanketed number for cost categories relating to inventory, the inventory could be specifically selected from the stock catalogue and once quantity is applied the value would automatically populate.
- Other costs can come from a number of sources, and allow the user to appropriate generalized costs based upon experience and user intervention. Quotes from contractors can be included here even prior to the quotation being converted from a quote within the system to a valid PO.
Once a budget has been formed it is essential that the original budget is locked into the project and any subsequent variations or edits are stored separately so that it is possible to report the actuals of the project against all estimates.
AFE (Approval for Expenditure) and Capital Projects
Prior to the commencement of cost tracking a capital project there is a budgeting and approval process that should occur first. Within a job costing system that is designed for mining, users should have the ability to set up a project with a unique identifier that would then allow for multiple revisions of budgets as discussed above, and then an approval process that could escalate through management as per the organizations approval hierarchy.
The approval process typically involves the development of the estimated budget to completion and then electronically attaching all documentation to the project in a way that allows any approving member of the organization to review all of the relevant approval information prior to committing to the project. Given that projects vary significantly in budget amounts, the most efficient ERP solution for approval would be to allow a tiered hierarchy to approve projects based upon the budgeted costs. As the project is created, it would escalate to each level of management by an automated email and workflow process which would eventually arrive in the queue of a manager with the appropriate approval levels to then initiate the approval of the project.
It is common within the ERP market that project approval is not sophisticated enough to handle this process so many mining companies look to external software and integrate back to handle this requirement.
Exploration and Tenement Management provides a different challenge to managing operations within an ERP system. Statutory information such as dates, project types, royalties and analysis codes should be available to ensure that tenements can be dissected rapidly to provide timely information in a structured manner that makes sense and improves visibility.
Integrating exploration projects to the GL allows for any costs sent to a tenement to be cost tracked in the general ledger in the P&L in a way that removes any manual intervention from accounting staff to appropriately represent exploration costing. The automated integration effectively removes exploration staff from coding anything directly to the general ledger and automatically applies costing to the correct location so that information within the project itself or the GL is accurate as soon as it is posted.
Given that mine exploration may have its own costing methodology within the GL, the job costing system should allow each of its exploration projects to be directed to whichever section of the P&L makes sense for the type of exploration being conducted, otherwise it would be necessary to report on the different forms of exploration and split these costs out manually to the GL which adds significant effort to month end closure and removes the ability to report timely.
Cost Tracking & Work Breakdown Structure
Once any form of project is active costs will start to flow through the project and the tracking of these costs and the integration of these costs to the general ledger will provide the users with the required information to measure the success of the project as it operates and also will help determine the impact upon the financials of the project.
Cost tracking is generally done through taking a project and adding a variety of cost categories to the project to assist with the classification of costs that accumulate. These cost categories would be derived from how the project was initially budgeted, and any cost applied to the project should comply to the structured budget. Controlling these costs should be possible on a number of levels and this is dependent on the organizations budget vs actual methodology.
There is no one right way to develop a cost tracking structure for projects but the ERP should allow for this flexibility. For instance, some organizations prefer to classify their project costs in the exact same manner as the General Ledger, so any natural account for Fuel which may be code 5660 in the GL, would also be code 5600 in the project system. This allows for complete consistency between the modules and is very effectively. However, in some organizations the GL is structure in a way that makes sense for financial and management reporting but does not translate well to users of the project costing system or operational staff. In this case it should be possible that the ERP would use a Work Breakdown Structure (WBS) instead of the GL classified categorization of costs, so effectively the job costing system can have its own cost category schema based upon a WBS.
Regardless of how the organization wants to classify its costs and track them within the project costing system, the ERP system should be flexible enough to handle these requirements. This is commonly overlooked when selecting an ERP and can force the structure of the GL to be adapted to the poorly functioning project costing system.
Variation and Sub-Contract Management
It would be foolish to consider that projects always run to the exact budget and the project wouldn’t variate from its initial scope. There is enough evidence in everybody’s experience within the mining industry to realize that the industry is complex and projects cannot always be accurately measured and unique challenges can arise rapidly. In the event an unexpected change were to evolve a variations system allows the organization to effectively measure any supplemental costs associated with the project in a way that the variation can be approved much like within the AFE section that was discussed earlier.
Sub-contract management is another concept on its own that allows for the management of endless subcontracts on each project to help in tracking the progress as well as financial commitments a project has based upon an agreed quotation at the start of the project. To work efficiently the sub-contract management should be completely integrated into the project in a way that allows for project costs to be accumulated like any internal cost and measured against budget. Building out a sub contract on the project assists in building out the initial budget of the project but also allows the project management to continually analyze what costs are expected and update accumulated costs in a timely manner.
Each of these functions come with complex functionality requirements, and should certainly exist within any job costing system offered within an ERP system. It is only logical that this functionality is embedded into project costing given its reliance on the project information and its impact on the project information.
Without these elements it is inevitable that 3rd party software would be required, which provides a number of challenges to the organization that can be easily avoided. Being forced to commit to an additional software package because the existing ERP does not sufficiently deal with the requirements of the mining company is not an efficient or cost effective solution for the modern organization and the selection of an all-round mining ERP is the solution for avoiding such unnecessary variation from managing data. Given that so much information flows through the job costing module in a mining environment, the flexibility and completeness of this module have a direct relationship with how successful the organization would be able to use their ERP.
Manager, Business Development & Advisory
Jarrad is a Pronto Xi ERP software expert with over 10 years of experience in providing ERP implementation and support services to mining, distribution, field service and manufacturing industries.