Equipment Supply Contracts Don’t Need to be this Difficult
Contracting practices in the water and wastewater industry present a number of challenges for equipment suppliers, the most difficult of which is the prevalent use of construction contracts for the purchase of equipment.
Contracting practices in the water and wastewater industry present a number of challenges for equipment suppliers, the most difficult of which is the prevalent use of construction contracts for the purchase of equipment. Contractors and owners often fail to recognize that there are vast differences in scope between a contractor and equipment supplier and these differences need to be reflected in the terms of agreement.
Part of the general contractor’s scope of work is to provide specified equipment purchased from a qualified supplier. This equipment is often a component in a large construction project. Contracting challenges arise when the owner and general contractor impose their construction-related requirements on the equipment supplier.
Oftentimes the general contractor’s agreement with the owner requires them to “flow-down” or incorporate some or all of the provisions of their contract in any contract(s) entered into with subcontractors or suppliers. The difficulty this presents an equipment supplier is that many, if not most, of the provisions of the owner’s contract are not applicable to equipment sales and start-up services. Further, the contract between general contractor and owner is usually not readily accessible to the equipment supplier for review prior to submitting a project bid.
Regardless of whether flow-down of contract provisions are required by the owner, the general contractor will often present the equipment supplier with a construction contract, either in the form of a standard industry contract, such as the EJCDC or AIA, or one in their own forms. The terms and conditions of a construction contract are designed for services performed onsite, rather than the purchase of equipment and ancillary start-up assistance. As a result, many contract provisions are not applicable to the equipment supplier’s scope and those provisions typically found in a supply contract may be missing from the proposed terms and conditions. Thus, a longer response time is required for review forcing the equipment supplier to take on increased costs to review and negotiate contracts that are largely not applicable to the supplier’s scope of work.
These situations can be further complicated when bid specifications require a successful bidder to sign the contract form without exception and without an opportunity to negotiate reasonable terms. In some cases, contractual language will indicate that the equipment supplier’s bid bonds are at risk if the stated contract terms are not wholly accepted. Even when contractors are willing to negotiate terms, the process has started from a construction contract rather than a supply contract making it much more difficult to quickly reach agreement.
Other contractual issues commonly encountered when writing equipment supply agreements include:
- Clauses subjecting the equipment supplier to unlimited consequential damages and other unrealistic risks.
- Clauses that tie the equipment supplier to onsite activities or construction when the scope of the supplier’s work never requires them to be onsite.
- Failure to protect a supplier’s intellectual property and trade secrets that may be disclosed during the course of supply.
The ultimate goal in any contracting process should be to arrive at a fair agreement that clearly reflects the scope of work and respective obligations of the parties. This can be accomplished by:
- Eliminating flow-down provisions to equipment suppliers, or limiting them to relevant provisions of the contract and the relative scope of supply.
- Providing equipment suppliers with a purchase order rather than a construction contract.
- Accepting the negotiation of contract terms to arrive at a fair allocation of risk.
By beginning the process with a standard agreement appropriate for the supply of equipment, a balanced view of the relative scope of work expected of the supplier, and an interest in terms and conditions that are fair to all the stakeholders, we can expect to remove most of the angst, much of the cost, and half of the time associated with the contract process; and that’s just good business.
About the authors:
Tom Mills is Vice President of Marketing and Business Development at Seven Trent Services, a provider of water and wastewater purification products and services headquartered in Fort Washington, PA. He currently Chairman of WWEMA. Marcia Reuben is also with Severn Trent Services, serving as Director of Contracts and Risk Assessment.