An Important Part of Any Equipment Purchase Agreement

When trying to select between a number of possible equipment suppliers, one of the most important things to consider is a performance guarantee. While suppliers will make all sorts of claims during the sales process, it’s when you ask them to put it in writing and attach tangible penalties for non-conformance that you’ll see the better suppliers start to differentiate themselves.
There is often confusion about the difference between a performance guarantee and an equipment warranty. A warranty is standard with all equipment purchases and covers workmanship, typically lasting for one or two years for most machinery suppliers (anything less than one year should not be accepted these days). If you buy a car and the door handle falls off, that is covered by the warranty. If you had it written into the contract that the car will go from 0 to 60 in under eight seconds, that is a performance guarantee. It describes how the machine will actually perform, and while it may have a time component attached (the performance levels must be reached within 60 days, or be continuous over six months, for example), it typically expires once the criteria are met.
While a warranty is a standard clause in an equipment contract, a performance guarantee is not and should be negotiated either as a separate contract or as an integral part of the equipment quotation/contract. In our car example above, mentioning the 0 to 60 time in a brochure Roles In A Consulting Team is not enough, the performance expectations must be put into writing with specific remedies or penalties listed for not meeting the expectations. You definitely want to finalize the performance guarantee before you place the order to retain your negotiating position.
Should you ask for a performance guarantee on all machinery orders? Absolutely! Quotations are generic and may not reflect your particular needs and conditions, a performance guarantee will be written to suit your specific requirements. Some suppliers are not keen on them and try to avoid them, but any reputable supplier will recognize that Siemens Management Consulting Ranking a well written guarantee works in their favour as well since it gives them a design target, it gives the customer a realistic expectation of what the equipment will do and it also sets a final approval point for the customer. Once the performance guarantee is fulfilled, the customer should have no excuse to delay their final payment.
Unlike a warranty, there is no standard form for a performance guarantee and they can be different for each project depending on the customer’s requirements for speed versus quality and other factors. Going back to our car example, if the 0 to 60 time is not crucial, there could be staged penalties for 8, 10 or 12 seconds, or it could be all or nothing for an 8 second time if that is the only reason for selecting a particular supplier. Each side would add conditions to clarify the guarantee, such as requiring a trained driver operating the car on a specific road surface with a particular fuel, trials to be done within 30 days of shipment, etc to make sure that the trials are done to both sides satisfaction.
This assumes you are buying a complete machine from one supplier – what if you are assembling a line using a number of suppliers? In this case no one supplier would guarantee the 0 to 60 time of our example, but each sub-supplier could provide a guarantee on their portion of the project. The engine supplier could guarantee x horsepower at a specific rpm, the transmission supplier could guarantee that he can handle the speed and horsepower requirements, and so on down the line.
The amount of detail and the penalties for non-performance should be proportionate to the cost and risk of the project, as well as giving the supplier a reasonable opportunity to correct shortcomings. Suppliers have been known to just walk away from projects if they decide that the cost of correcting a project that doesn’t meet the guarantee is greater than the rewards of compliance, which is certainly not in the buyer’s best interests. Also watch out for the supplier who requests a “bonus” for exceeding the guarantee. Since they are fully aware of the capabilities of their equipment, this tactic indicates bad faith bargaining or worse!
There are many other factors that go into a good guarantee, but you can see how performance guarantees can be an important tool for differentiating between suppliers and making sure that you get equipment that meets your requirements. With all the possible permutations and variables involved in a major project it can be challenging to negotiate a guarantee that protects your interests and is acceptable to your supplier. Contact the Procurement Management Group if you would like to get our assistance with negotiating your next project.

READ  What Can Boost Your Online Sales?