Engineering procurement: In search of better terms & conditions for the water industry

Jan. 21, 2009
The Water & Wastewater Equipment Manufacturers Association (WWEMA) was approached two years ago by the Engineers Joint Contract Documents Committee (EJCDC), which had become aware that many WWEMA members weren't bidding jobs that utilized the EJCDC procurement documents due to the onerous terms and conditions contained therein...

• Two WWEMA members offer a status report on their work over two years with the EJCDC on improving water and wastewater treatment procurement contracts.

By James E. Brown and Susan Button

The Water & Wastewater Equipment Manufacturers Association (WWEMA) was approached two years ago by the Engineers Joint Contract Documents Committee (EJCDC), which had become aware that many WWEMA members weren't bidding jobs that utilized the EJCDC procurement documents due to the onerous terms and conditions contained therein.

The procurement documents in question, the "P" documents, were a family of documents that included terms and conditions, forms of agreement, and bond forms that the EJCDC had formulated for use by owners (typically municipalities) when bidding projects for a direct purchase from a manufacturer.

The concern of the EJCDC was clear; if the larger, well-established industry leaders wouldn't bid the projects that utilized these documents, they could potentially be left with smaller, less-established companies that may or may not be able to show a sufficient track record and/or meet the performance requirements of the project specifications.

In an attempt to rectify the situation, the EJCDC requested that WWEMA meet with them to work through the issues with the goal of coming up with a revised family of "P" documents that WWEMA could live with and potentially endorse.

To that end, WWEMA established a task force to generate comments and selected two delegates to negotiate on WWEMA's behalf before the EJCDC -- a representative of Infilco Degremont and ITT Sanitaire, i.e., the authors of this article.

Working diligently to get modifications incorporated into the new version of the "P" documents, they participated in five face-to-face meetings with the EJCDC Procurement Subcommittee as well as took part in numerous conference calls.

At the most recent meeting held in Philadelphia, it was the intent of the Procurement Subcommittee to obtain approval by the EJCDC Full Committee of P-700 (standard terms and conditions), P-520 (procurement agreement), as well as a few less substantive "P" documents. This took WWEMA's negotiators by surprise as they did not feel they had reached an agreement on the proposed final drafts of either document.

Upon voicing WWEMA's objections before the Full Committee, it was agreed that approval for publication was "premature" and that these documents would need to go back to the Procurement Subcommittee for further discussion and possible revision.

While there remain several hurdles still to be crossed, positive strides have been made in getting these documents to be more equitable in the sharing of risk in proportion to each party's role and responsibility on a project.

The Procurement Subcommittee will meet again in February 2009 to review and finalize its recommendations on modifications to these documents. It's anticipated this will be the last opportunity to secure needed reforms as these revised documents are scheduled to be published in the second quarter of 2009.

While there are several items that WWEMA's delegation would like to see addressed, the major issues can be divided into five main categories.

Liability Limits
First, WWEMA is asking for insertion of a limitation of liability in the General Conditions. The proposed limitation includes an overall cap on contractual liability of 100% of the contract value and a mutual waiver of consequential-type damages. These two items are critical to equipment suppliers, who may be the "deep pocket" on the job site.

The overall cap is important because, if the worst case happens and the equipment doesn't work, the most an equipment supplier should ever be liable for is returning the client's purchase price. No other seller of goods gives its customers more than their money back; WWEMA's customers shouldn't expect anything different.

The waiver of consequential-type damages is important because these damages are so attenuated that they're impossible to quantify or value into a bid. Without the mutual waiver, suppliers -- for whom such damages could be catastrophic -- would have to put an inordinately large contingency into their bid. Such damages, however, are also very unlikely. As a result, customers, who are in a better position to mitigate these damages, would be forced to pay far more for their equipment than the risk to them would justify. Additionally, these damages tend to be contractual in nature, further reducing a buyer's exposure.

Finally, WWEMA believes the limitation of liability should be in the General Conditions, rather than in one of the other "P" documents because WWEMA members report that the General Conditions are the only EJCDC documents that are almost always seen in an unaltered form.

Liquidated Damages
The second category of issues centers on liquidated damages. WWEMA seeks to modify the current language of the "P" documents to include a "no harm/no foul" clause -- which would allow for assessment of liquidated damages only if the delay affects the buyer's critical path; a statement that assessment of liquidated damages is the buyer's only remedy for delay -- as opposed to collection of both liquidated and actual damages; and a cap on liquidated damages of 10% of the contract value.

The 10% cap is probably the biggest source of contention, yet it actually benefits both parties. For suppliers, it limits their exposure for delays to an amount that consumes all, or most all, of their profit margin. For buyers, it gives them a concrete point at which they can terminate the contract for default; otherwise the seller could argue that it couldn't be terminated as long as it was paying liquidated damages.

The third major category is indemnity. Indemnity is a concept that isn't well understood, is outdated in today's legal climate, and has far-reaching effects if not applied properly. As a general legal principal, one person isn't liable for the negligent actions of another person. Indemnity changes this. At its most basic, indemnity comes into play when a third party is injured due to one person's negligence (such as the seller), but the injured party sues another party (such as the buyer). The injured party wins its suit against the buyer, and the buyer looks to the seller to pay it back. This sounds reasonable on the surface, but it requires that the injured party (and his lawyer) fails to name the seller in his lawsuit. While this may happen, the buyer will certainly not fail to name the seller as a co-defendant. In reality, the appropriate parties will nearly always be named as defendants in the lawsuit, and the court (or arbitrator) will apportion fault. Therefore, indemnity will never come into play.

So if indemnity is seldom a reality, why do WWEMA members care? Because if not worded properly, an indemnity clause could subject the seller to indemnify for another party's negligence.

WWEMA has proposed language that would limit the current indemnity clause by: 1) limiting the number of people indemnified -- the seller shouldn't have to indemnify "the world," and indemnities should be named, not broad categories; 2) limiting indemnity to claims asserted by third parties -- contractual claims between the parties shouldn't be subject to indemnity because such claims are more appropriately raised in a direct breach of contract action; 3) limiting indemnity to claims asserted for bodily injury, including death, and damage to tangible property; and 4) deleting the clause that requires the seller to waive its statutory Worker's Compensation immunity.

The fourth category deals with continuing performance in the event of a change order dispute. The current provision in the "P" documents requires the seller to perform change order work as directed by the buyer, even if there's no agreement on an equitable adjustment. This is unacceptable for an equipment supplier, especially a supplier of custom-made goods, because it requires the seller to finance the change. More importantly, such goods generally cannot be used for any other project. This leaves the seller without the normal recourse of repossession.

WWEMA has proposed that disputed change order work should proceed on a time and material basis, with pre-negotiated labor rates. This way, the work proceeds without delay, and the seller is guaranteed a minimum payment. For reasons the WWEMA delegation cannot understand, the EJCDC subcommittee has consistently rejected this approach.

Dispute Resolution
The final major category requiring resolution is the dispute resolution process. The General Conditions currently require that any dispute is resolved initially by the consulting engineer. The engineer's decision becomes final unless the losing party files a legal action within 60 days. As a result, every dispute must be taken to court piecemeal as it occurs. Obviously, the cost of litigation would prevent most, if not all, disputes from going forward. This could deprive the seller of just compensation for its real costs. WWEMA has proposed a system in which the losing party gives notice of its intent to appeal the engineer's decision within 60 days, but all disputes are reserved until the end of the project, where they can be consolidated or abandoned.

Despite the major challenges remaining, two very positive things have come out of WWEMA's participation in this process. First, knowledge is power. As WWEMA members understand the importance of terms and conditions, and what those terms mean, more will take exception to terms that are inappropriate for equipment supply contracts. If more members take exception, the fear of being the only one evaporates, and the sales process returns to what it should be: price, equipment applicability, and relationships. In addition, contract managers have a ready comeback when customers use the common line that the competition isn't taking any exceptions.

Second, we have succeeded in getting the general contractors to agree in principal with our positions. Of course, their agreement is contingent on getting the EJCDC to provide them the same relief in the "C" (Construction series) documents. For contracts that don't use the EJCDC documents, however, having the general contractors understand suppliers' positions will make contract negotiations easier. General contractors benefit because knowing what the suppliers are looking for will help the general contractors in negotiating their prime agreements.

Once the new "P" documents have been published, it's WWEMA's intention to provide its members with a suggested user's guide addressing substantive items that may not have been adequately modified to protect its members' interest.

About the Authors:
Jim Brown is corporate counsel for Degremont North America. In this capacity, he provides commercial legal services for five Degremont entities: Infilco Degremont, in Richmond, VA; Ozonia North America, in Elmwood Park, NJ, Water & Power Technologies Inc., in Salt Lake City, Anderson Water Systems in Toronto, and Degrémont Ltée. in Montreal.

Susan Button is manager of contracts for ITT Sanitaire and is responsible for negotiating terms and conditions with potential customers worldwide. She has over 30 years in the water & wastewater equipment manufacturing industry.

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In existence since 1975, the Engineers Joint Contract Documents Committee (EJCDC) produces and promotes use of administrative documents for constructed facilities involving professional engineering services. It's a joint venture of the Associated General Contractors of America (AGC), National Society of Professional Engineers/Professional Engineers in Private Practice (NSPE/PEPP), American Council of Engineering Companies (ACEC), and American Society of Civil Engineers (ASCE).