Wednesday, May 14, 2014

Limited Performance Windows

A reader asked me for suggestions on how to protect against investments that they need to make in the purchase of goods and equipment that needed to be in storage for extended term. She was dealing with a construction project in a location there would be a limited performance window per year of maybe four months out of the year due to weather and extreme cold. This meant that they would need to buy things in advance and either store them at the site or a staging area until they could be used within that window. This also meant that they had to pay the suppliers well in advance of when they may be used and was concerned about protecting that investment. She had already used several tools to protect her company. She selected only highly reputable companies to provide the materials and equipment. She also used bonding and retention of monies as another tool. She was looking for other tools to help protect her company’s investment.

Once the goods or equipment are delivered to the staging site title and risk of loss transferred to her company. Loss or damage caused by normal perils would normally be covered by the company’s insurance policy. One concern that I had was loss or damage to equipment or materials
caused by being subjected extreme temperatures may not be an insurable risk. The first suggestion I made is to protect against storage in extreme environments, I would want the supplier and their equipment manufacturers to specify storage requirements needed to protect the materials or equipment in that environment. The second suggestion I made was to require them to pack, package and crate equipment in a manner that meets those requirements. My assumption was that there no plans of doing and test or acceptance at a consolidation site. Next I suggested adding contract commitment that if her company followed those storage requirements, it is their supplier or equipment manufacturers responsibility to repair or replace any materials or equipment that are damaged in storage other than by normal perils such as fire or flood. If you didn't do that I could see equipment manufacturers arguing that any warranty is voided. I also thought those requirements would help if you need to call upon the performance bond as you were showing that your acts were reasonable and you followed their instructions.

The other major issue with limited performance windows is warranties. You need to ensure that the warranty in place as they provide another protection against the investment in the equipment. A warranty would require the supplier to repair or replace any defective product. If you were let the warranty lapse because of the limited performance window, when you go to start up the equipment and it doesn’t work, it would be your cost to correct or replace the defective item.

The most preferable warranty to protect the investment would start upon installation and acceptance of the equipment at the site so no warranty time is lost because of the limited performance windows. Alternatively you could have the warranty period that is long enough so you will still have the warranty in place after all the delays because of the limited performance windows so it is still in place after start up of the facility and for any period you have to warrant to the customer.

Most warranties include warranty exclusions such as abuse to the product that would void the warranty. You want to avoid the argument that the product or equipment has been abused. Having the supplier specify the storage requirements, and having them pack, package and create products to meet those requirement will help do that. How can you have abused it if you followed their instruction?