Home' MHD Supply Chain Solutions : MHD Mar-Apl 2016 Contents Investigate, for example, if your lease
requires the landlord’s permission be obtained
e.g . before the internal layout can be changed
or before heavy equipment can be installed on
Does the remaining lease term gives you
enough years for the payback period needed
for your capital investment? Perform a risk
assessment of the lease, identifying under what
circumstances the lease could be terminated
and what this would mean for the investment.
Where the landlord is responsible for key
inputs for the system, such as electricity,
consider if the lease gives you enough
protection in the event of a disruption. What are
your rights if you are not able to get access to
Does the building need to be adapted?
Depending on the type of automation, this
might involve, for example: extending the
premises, elevating the ceiling, reinforcing the
flooring slab, upgrading the electricity supply
or installing back-up generators. Any of these
could trigger a need for landlord permission or a
re-negotiation of the lease terms.
Are planning approvals required? These might
impact on project timing. Any restrictions might
also be relevant for project design, so need to
be identified before any commitments are made
for a particular solution.
Are there any building interface issues to
consider, such as where the system is integrated
with existing sprinkler or lighting systems?
If a separate construction project is to be
undertaken, the project manager will need
to ensure that there is adequate interface
in each of the contracts with the system
designer, the landlord and the construction
company. The building design may need
to take into account specific system
requirements and it is important that all
responsibilities are clearly delineated.
Engaging with a supplier:
the project contract
Once the best technical equipment for the
automation project has been identified and
a suitable supplier found, the parties will
normally look to enter into a contract setting
out their responsibilities.
The type of contract will generally depend on
whether the system is being purchased (a supply
or sale contract), or whether a third party will
build and operate the system as an out-sourced
service (in which case, a service level agreement).
Unfortunately, research shows that, time
after time, a high proportion of contracts fail to
realise the full value originally anticipated by the
parties. With careful planning and management
of the important issues that arise, that risk can
For the remainder of this article, we look at some
key of the key issues to discuss with a supplier and
to consider including in a system contract.
Ideally the contract will include a detailed scope
of work. This will be determined by what the
supplier is going to do – is it simply supplying
a standard system, or does the project involve
the supplier designing and manufacturing a
bespoke system or undertaking installation?
Within this work scope, the parties can set
out the specifications relevant to the system
being supplied. The specification might be
made up of an agreed description of the system,
design drawings and performance criteria.
For more complicated systems, the design
may need to continue to evolve, even after the
contract is signed and a commitment to purchase
has been made. If so, it is sensible to agree
beforehand which of the design elements are
fixed and which are variable. The contract might
include design options that can be added to the
project later. If it is contemplated that changes
will be made to the design after the contract is
signed, you may wish to discuss a process of
when and how these changes are to be managed
and how this will impact on the cost.
The contract should set out the system price
and when payment is required to be made. For
longer projects, payment might be linked to
certain key milestones being met.
Consider whether the price should be fixed
or variable. If variable, how will it be calculated?
Who is responsible for any foreign currency
exchange risk or changes in raw material costs?
A supplier might request a large proportion
of the cost of a system to be paid up-front, so
that they can secure the necessary materials
and manufacturing capacity. This may leave the
customer with a degree of ‘non-performance risk’:
if the supplier fails to perform, or, for example,
becomes insolvent during the project, there might
be a risk of losing your advance payments. To
reduce this risk, a supplier might agree to give a
bank guarantee to secure their performance.
Milestones, project deadlines
Often, the return on the project investment
depends on the system going live on schedule.
For these cases, a supplier can be incentivised
“What are the key stakeholder and contract issues to
take into account in planning an automation project,
so that risks to the project can be minimised?”
“Consider whether there are any project requirements
that, if not satisfied, may mean you need an ability to
suspend or end the project.”
MHD SUPPLY CHAIN SOLUTIONS — MARCH / APRIL 2016
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