It is time for OEMs and Contractors to make a stand!
Ever since I have been involved in the capital supply business in North America, equipment procurement contracts in the water treatment industry have treated suppliers as banks for contractors and owners, with ridiculously long price validation periods, crippling liquidated damages for delays and uncapped liabilities. Well maybe the times are finally a-changin’!
In times of low inflation, stable government, no pandemics, reliable
supply chains, no conflicts in regions with critical raw materials and a
competitive contractor bidding market, perhaps the contracts of the past
presented less risk to OEMs. How long ago has it been since we were in that
situation??
Contracts that require the OEM to hold a bid price for 90
days before award and then when awarded, hold the price for 1-year before
delivery (and I have seen up to 3 years) can’t be accepted anymore. That is
being a bank for the contractor and owner where the OEM is financing the
project, having to pay material suppliers well in advance of shipping the
equipment (where delivery is often the major payment milestone) and absorb any
price increases from the original quote from a vendor (which could be provided weeks
before the bid) through submittal preparation and approval and notice to
commence manufacturing which is often at least 6 months and longer for major
process equipment. And that was a concern before the current supply chain
issues! Not to mention preselection or direct bids as is often used for membrane
systems, where following submittal approval the owner then goes to bid to
contractors to install the equipment – the lead time from original quotes to
actually getting the notice to commence manufacturing is often a year or
longer. Engineers and owners are in for a rude awakening to OEM responses to
contract terms for preselection or direct bids in the future…
Here are a few examples of how current market conditions
have brought OEMs to the tipping point of outright rejection of traditional
contract terms:
Following the concern with nickel supply because of the Ukrainian
war, suppliers of stainless steel are only holding quoted prices for 24 hours. How
can you bid a project with stainless vessels and piping without significant
risk of margin erosion or even losing money? After the pandemonium in the nickel
market a well-known manufacturer of stainless steel cartridge filter housings
voided all quotes given before March 4. So what about the bids you used their
pricing for prior to that date? Is that a case of Force Majeure?
Allen Bradley components, the predominantly specified
controls for water treatment systems, already had stretched lead times from 8
weeks to 24 weeks earlier this year. Then there was a Corona Virus outbreak in Shenzen,
China’s silicone valley, where some AB components are made – now AB is not committing
to any delivery schedule… How then can you sign a contract with LDs when you don’t
know when you can get a critical component required to operate the system? And what
about contracts you signed in 2020/21 before there were these delays – that is certainly
Force Majeure! I feel that controls components have become the toilet paper of
the water industry with end users and equipment manufacturers hoarding them
where they can, increasing leads times further...
Some may say that OEMs should just build in contingency to
prices when it is known how long the price is to be held for. So when we bid a
project in January where the price is to be held for 90 days before award, how
do we know there is to be a war between Ukraine and Russia that starts in late
February resulting in nickel prices skyrocketing in early March and stainless
steel prices doubling in days? And that is only 40 days after the bid? And then
ten vendors are listed on the bid, some you have never heard of, and you have to hope
all ten will have same concerns as you and object to the same contract terms or
put in the same contingency…
Some may say why not order materials as soon as submittals are approved to reduce the risk of price increases. This is the bank situation again.
Then the OEM must pay for these materials often well before they are delivered,
creating a cash flow problem, and what if the project is delayed? Will the
owner accept and store the equipment when built and pay for it? Most likely not,
but that is an option that should be seriously considered. Contractors on the
other hand keep time sheets for work conducted and are paid for labor and
materials received on site on a monthly basis. OEMs are not paid a penny for
factory labor used in building the equipment each month and rarely paid for
materials received in the factory.
Contractors and sometimes engineers often respond to OEM
exceptions to LDs and unreasonable liability limits saying they are passing
down what they have in their prime contract with the owner. Well, contractors
and engineers need to show some guts and take exception to the contracts being
passed to them by owners. In these times, nobody can guarantee meeting a
schedule. Owners have to face reality and think of a different way to ensure
contractors make their best effort to meet schedule and budget.
Currently, OEMs and contractors have a unique opportunity to
change the draconian contract terms they have begrudgingly accepted for decades
to terms that are fairer for all parties involved. If contractors and OEMs
unite and show some gumption in objecting to these traditional one-sided
contracts, OEMs may not need to be financing projects anymore and with better
cash flows on projects, prices may actually come down, where lower margins are
more feasible. That would be a win-win-win for OEMs, contractors and owners!
The comments and opinions in this post are my own and not those of my employer.
