Sunday, June 8, 2014

Capital Equipment Purchase Contracts


In another forum someone asked me what I would look for in major capital equipment purchases.
Since major capital equipment purchases involve contracts I thought I would share my responses.

Before deciding to purchase I would want to evaluate the total life cycle cost of the equipment. The total life cycle cost of the equipment would include the warranties provided, and the cost of after warranty service, maintenance, spare parts, and repairs. Further it would include the cost of energy consumed, set up and tear down time for changes, number and type of operators required, operating manuals provided, cost to buy more manuals. It would include the availability and cost of training, the cost of required maintenance, service and calibration and the frequency and cost of those.

First you would start with a standard purchase of goods agreement that would standard legal terms and business terms such as identifying the purchase period, delivery, performance, quality, inspection and acceptance warranty and service. I would also want contract terms that manage the cost of all the elements that the supplier controls by establishing either an agreed price to purchase them over the term at a fixed price subject to possible escalation per an agreed formula.

For things like available options I would want to include the option to purchase those in the future also at a pre-established price. I would want a good specification with acceptance and test requirements to ensure that the equipment meets their specifications. If it is something that can’t be fully tested upon delivery because it is not fully loaded or running at capacity, I would want that inspection, test and final acceptance to occur when those operating conditions are met. To ensure that I can get spare parts I would want a commitment that they will continue to produce and sell spare parts at the agreed pricing for the useful life of the equipment. If I can’t get that I might allow them to end of life spare part production if two conditions are met. First I would want the right to be able to make a last time buy. I would like any replacement include in new equipment to be backward compatible so substitution is possible withthe replacement part be sold at the same price as the original or less.

One other very important thing to consider is these days most capital equipment includes licensed software. Whether you are buying heavy equipment, process equipment and most other types of equipment you will find software is included and the seller will require a software license. To manage the cost I would want the contract to include software maintenance and control the cost of future software maintenance and any required upgrades. Another consideration is to protect the resale value of the equipment once it no longer is needed by your company. To do that I would want the right in the contract to assign the software licenses in conjunction with any re-sale of the equipment. You can sell the equipment without it, but the buyer can’t use the software unless they are licensed to use it. Including that right will ensure you get the highest value for it after your company no longer has a need to use it. If they won't agree with assignment of the license, I would want a fixed price option to license it so you can sell it and not leave the supplier open to charge whatever they want. What they probably want is to sell them a new piece of equipment.


What advice or terms (other than normal T&C’s) would you look for in a capital equipment purchase agreement?

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