Negotiating maintenance contracts is a temporary job not a part time job and here’s why….
By Bill Ray and Craig Nicholson
Complex maintenance contracts, such as Long Term Service Agreements (LTSAs), are commonly used in the power generation community and will continue to be a common commercial strategy for power plant owners to i) lower the overall cost of maintenance, and ii) minimize operational risk. These are complex contracts that represent the plant maintenance needs and budget for the next ten to twenty years. Bluntly, there is a lot at stake for both the buyer and seller with each of these contracts.
Negotiation is a process of give and take, where each party compromises on some issues in order to get what they want. It’s a balance of risk and reward. This will ultimately lend itself to a contract that will be afforded some semblance of balance between the two. The balance or contract bias achieved during the negotiation is a function of the business climate (buyers or sellers market) and the effectiveness and preparation of the negotiation teams.
Seller’s Upper Hand
A service provider normally brings in a dedicated, professional team specializing in complex contract negotiations. The commercial machine behind the deal includes the experience of multiple past contracts, account managers, commercial operations, application engineering, contract modelers, contract law specialists and risk and operations teams all providing expertise, inputs and feedback. Indeed, the future of their business depends on it.
“Contract bias achieved during negotiation is a function of the effectiveness and preparation of the negotiation teams“
Framework For Preparation
How does an owner think through the same commercial process? What steps need to be taken and what resources should be utilized? What are the priorities of a negotiation team with a full time day job doing something other than complex maintenance contracts?
For an owner, the infrequent nature of LTSA renewals, does not lend itself to keeping up with the latest industry commercial trends or staffing full time expert personnel. In deploying a negotiation team with a part time job strategy, the deck is stacked in the service provider’s favor.
Level The Playing Field
The commercial process is not a part time job, at a minimum, it is a temporary job, with 100% effort and the ability to requisition team members as required. Securing LTSA consulting expertise at project initiation serves as a bridge to accelerate the owner’s knowledge of current market conditions and competitive landscape.
The consultant matches the same full time expertise as the service provider and works on the owner’s behalf providing a commercial framework that asks the right questions, prioritizes contract needs and develops a negotiation strategy consistent with owner priorities. The infusion of specialized consultants into the owner’s team greatly levels the playing field and enhances the chance of a more balanced and favorable negotiation.