Feb Newsletter
VOLUME 27 NO. 2
Contract administration is becoming a more critical function for this company. It is not unusual to encounter proposed contracts that include provisions that present a very high risk for the supplier. This Memo will discuss a few of these. Gem manufactures custom equipment. Almost all equipment manufactured by this company is designed for each specific application. If the customer who placed the order does not accept the finished product, no one else is likely to want it. For that reason this company is not likely to accept an order with a cancellation clause. Along the same lines, a penalty clause for late delivery will normally be challenged. Having stated that, it should be noted that recently, without complaint, this company accepted a penalty clause for late delivery. The amount was a very reasonable charge for each week’s delay and the penalty did not start until 4 weeks after the designated completion date. Insurance requirements are often barriers to reaching agreements. This company has normally resisted the requirement that the customer be listed as co-insured on Gem Equipment’s insurance policy. For a price, Gem is now in a position to comply with this requirement. The cost to the customer for being listed as co-insured is 1% of the contract price, or $10,000 for a $1 million contract.
The requirement that Gem Equipment indemnify the customer for costs incurred when he is at fault for an injury to an employee of this company is a deal breaker. Some contracts even require that the contractor (Gem Equipment) relinquish any protection provided by workers compensation laws. Some background on this is in order. Workers Compensation Insurance is an agreement between the employer and each employee. This agreement is enforced by State Law. The employer, through workers compensation insurance, agrees to furnish medical care, compensation for lost wages and any necessary retraining required for the injured employee, without regard to fault. In return the employee agrees not to sue his employer in regard to the injury. If a third party (customer) is at fault, in addition to the benefits provided by workers compensation insurance, the injured employee may be eligible for compensation for pain and suffering, loss of activities and anything else an enterprising trial attorney can claim. Not only are these additional benefits not covered by workers compensation insurance, no other insurance is available to cover the employer for his employee’s pain and suffering, etc. caused by injuries to his employees. The employer agreeing to indemnify the customer for injuries to the employer’s employees is assuming a large uninsurable risk.
In 2006, Gem Equipment went through a protracted negotiation with a customer over contract language. After successful negotiations were completed, Gem Equipment was thanked by the customer for helping them improve contract language. Then he dropped a bombshell. Gem was the only supplier who had complained about the contract. This brings up a final point: Contract provisions, representing the biggest risk to suppliers, are rarely exercised. However, if a cancellation clause or an indemnification provision not covered by the supplier’s insurance is exercised, the financial hit may put a small company out of business.