Sunday, September 9, 2012

How would you deal with this?

An individual asked me how I would deal with a situation and I thought readers might like the thought process.

The facts were that a governmental authority loaned a piece of equipment to a supplier. There was a verbal, but unwritten understanding that the supplier could use that equipment for other customers. The government group was audited and came back to the supplier wanting the supplier to pay rent for the non-governmental use of the equipment retroactive to the original loan date. If you were the contract’s person for the supplier how would you manage this?

The first step in any claim or dispute is to always go back to read what the agreement said. In this case it would require reviewing both the purchase agreement and any separate agreement for the loan of the equipment to see if there is anything that either restricted the use of the equipment to the government or whether there is a requirement to pay for any non-governmental use. As this was a government procurement you would need to check and regulations that were incorporated by reference. If there was nothing that either restricted use or required payment you could say no. Before saying no you need to remember they have a problem (an audit write up) that they are trying to solve. So you may need to work with them as part of maintaining a good relationship.

The second thing that I would do is focus on the equity of their request. You should not be punished for their mistakes. That is exactly what a retroactive payment would be. In commercial contracting you don’t get “do overs”, so you would not be able to retroactively recover anything from those other customers.

A third thing I might do is to make an argument that they already had received value for the loan of the equipment without restrictions as the price you charged them for their work took into account the fact that you would be able to use it for other customers. Following that line I would then highlight the fact that if they need a retroactive payment, you would need to retroactively adjust your pricing to them as they are changing the underlying deal upon which the pricing was based. To them what that would do is only solve one problem at the expense of creating another problem.

That could lead you to a point where you can propose a solution. If they give up on the retroactive aspect of the claim, you will be willing to give up any retroactive price adjustment claim. Going forward you will agree to pay a fee on any new customer use. I would suggest that if their goal is to recover a portion of the cost of the loaned equipment the rate needs to be competitive.There has been use and depreciation of the asset. What has already occurred is the proverbial water over the dam for which there is no going back. If they price it too high there is no incentive for the supplier to have their other customers use it. If there is no other customer use, the government recovers nothing.

If they still insisted that it be retroactive based on the acquisition cost you would then need to have management make the business decision on what to do. What they would consider is:
1. What the cost impact is of having to pay it?
2. How strong of a position do you have to just say no, to avoid paying it?
3. Is there additional value to the relationship you can get if you were to pay it?
4. What would be the impact to the relationship if you said no and stood behind that?
5. What is the leverage position of the parties in the relationship?