Businesses are using logistics to gain competitive advantage in the movement of resources and product availability. The logistics chain needs to efficiently manage the process from manufacturing to freight forwarding, to warehousing, to customers.
The direct impact that logistics systems have on operating costs, and thus profitability, means that the purchase, installation and maintenance of logistics equipment is a key focus for many businesses.
An effective procurement strategy goes beyond just managing the acquisition of physical assets. It includes procuring and managing new technology (such as RFIDs replacing UPCs) to support the logistics system and crucially, the integration of the physical equipment with the IT as well as with other data management systems. Poor integration will quickly wipe out any expected cost and efficiency benefits of new or updated equipment.
Equipment is generally procured using either (i) a single contract for the supply and installation of the equipment followed by maintenance for a defined period (that is, a "design, construct and maintain" structure, or (ii) a contract for the supply and installation of the equipment, and a separate contract for maintenance of the equipment (that is, separate contracts for the "design and construct" and "maintenance" components).
Increasingly, owners are taking a whole-of-life-cycle costing approach in managing the procurement and operation of equipment (whether in the form of cranes, baggage handling systems, parcel sorting systems or distribution centre equipment). The focus is on the total ownership cost, rather than just the procurement price.
Such an approach allows owners to negotiate a more sensible maintenance package, by taking into account not only the pricing but also the performance framework such as equipment availability and meeting pre-agreed key performance indicators.
Equipment procurement contracts should be carefully structured: they require skillful negotiation and must be flexible enough to allow businesses to adapt to changing market conditions but still adhere to industry standards and best practice, manufacturers’ guidelines and service performance frameworks.
The following is our checklist of the key contractual elements that businesses should consider when entering into procurement and logistics contracts:
Fitness for purpose warranties: Clearly establish the standards, specifications and/or warranties to be provided for the works and services. Both express and statutory warranties are generally required, although contractual rights can override common law warranties.
Performance based contracting: Performance-based contracting can encourage greater contractor productivity (for example through service payments subject to abatement regimes for poor performance or bonus payments for improved performance), but careful drafting is needed in the use of abatement structures. (See our article ‘The Effect of Andrews v. ANZ: Going Beyond Bank fees – It’s about Performance Too!’)
Intellectual property: Be clear about who owns the intellectual property rights and the IP rights of other parties.
Industry best practice: Clearly establish the standards to which the works and services must be performed. The key to this is the technical specifications, which must be of sufficient clarity to ensure that the equipment is able to meet the owner’s operational needs.
Avoiding claims for misleading or deceptive conduct: Consider the implications of what information is, or is not, shared with tenderers.
Limitations and exclusions of liability: Equipment providers usually require a limitation of liability clause as part of their risk governance and management policies. Owners need to consider how best to manage this, for example through appropriate insurance policies such as business interruption insurance.
Dealing with international companies: If a foreign contractor is involved, consider requiring a guarantee from the contractor’s ultimate parent company, legal confirmation that the guarantee can be enforced in the origin country, and whether the project should be covered by global or country-specific insurance and arbitration.
Workplace health and safety requirements: On a multi-contractor site, both the owner and the equipment supplier must understand the workplace health and safety obligations of a “person conducting a business or undertaking”, a “designer” and a “principal contractor”.
Security interests and the PPSA: Recent case law has shown the implications of not registering security interests. It is important to clearly identify when the title and risk of equipment passes to the owner.
Customs duty and tariffs: If equipment needs to be imported into Australia, the parties will need to consider customs procedures and customs duty.
For a more detailed discussion, click download at the top of the page to see an article on Equipment Procurement Contracts – Managing the Key Drivers published in the International Construction Law Review article by Andrew Chew and Georgina Crouch.
The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.