Electric cooperatives are constantly in need of additional equipment, supplies, software, and services. For that reason, procurement contracts play a vital role in electric cooperative operations. Negotiating such contracts can be complex, especially in light of concerns unique to cooperatives, such as compliance with regulatory requirements and cyber security concerns. Based on our work for electric cooperatives in negotiating contracts with a wide variety of vendors and suppliers, this blog outlines the top ten things to watch out for when negotiating procurement contracts.
- Clearly Defined Scope of Work
The scope of work (SOW) is the backbone of any procurement contract, and should specify:
• Deliverables: Clearly describe the goods or services to be provided.
• Timelines: Include realistic deadlines for delivery and performance milestones.
• Quality Standards: Outline expectations for quality, including relevant industry standards, regulatory requirements, and specifications.
Pitfall to Avoid: Vague or overly broad scopes of work can lead to misunderstandings and disputes during the contract’s performance. Ensure clarity and specificity in the SOW to avoid potential conflicts.
- Pricing Structure and Cost Transparency
Electric cooperatives typically operate on tight budgets, making cost control essential. Pricing structures should be carefully reviewed to avoid hidden fees or unexpected costs. Based on the goods or services being purchased, the cooperative will need to consider
• Fixed vs. variable pricing.
• Cost escalation clauses tied to measurements such as CPI or PPI.
• Detailed cost breakdowns for labor, materials, and overheads as opposed to general clauses requirement payment of all associated costs.
Pitfall to Avoid: Ambiguous pricing terms can lead to unexpected budget overruns. Negotiate for fixed pricing, or if variable pricing must be used, caps on cost increases, and require documentation to support any price increases from changed conditions.
- Contract Term and Termination Clauses
The contract’s term and termination provisions should align with the cooperative’s operational needs and strategic goals. Key considerations include:
• Renewal Terms: Ensure that the cooperative has control over renewal and can opt out of renewals without additional cost.
• Termination for Convenience: If possible, include termination for convenience clauses that allow the cooperative to terminate the contract early.
• Early termination fees. Carefully review and limit or eliminate any fees for termination the contract before the end of the term.
Pitfall to Avoid: Vendors may ask for lengthy initial terms that lock the cooperative into a service or supply contract. This may not be in the cooperative’s best interest, as it may be beneficial to periodically compare pricing and consider using different vendors.
- Regulatory and Compliance Requirements
Electric cooperatives are subject to various federal, state, and local regulations, such as those enforced by the Federal Energy Regulatory Commission (FERC) and Rural Utilities Service (RUS). Ensure the contract complies with:
• Environmental regulations.
• Energy efficiency standards.
• Safety and labor laws.
Pitfall to Avoid: Non-compliance can result in fines, legal challenges, and reputational damage. Engage legal counsel familiar with energy regulations to review contract terms.
- Risk Allocation and Indemnification
Clearly define the responsibilities and liabilities of each party in the contract with regard to liability to each other and to third parties. Key areas include:
• Insurance Requirements: Specify minimum insurance coverage for contractors and their subcontractors, require that their coverage be the primary coverage, and require notice of any lapses or changes in insurance.
• Indemnification Clauses: Protect the cooperative from third-party claims due to contractor actions, including intellectual property infringement if applicable. Ensure that the cooperative is indemnified for any regulatory penalties resulting from contractor acts and omissions.
• Risk of Loss: Define who bears the risk for damaged or lost goods during transportation and installation (including transportation to and from the vendor for warranty work).
Pitfall to Avoid: If the cooperative is using the vendor’s form of contract, the contract may include a broad indemnity clause that exposes the cooperative to risks in excess of its insurance coverage.
- Performance Guarantees and Penalties
Performance metrics and guarantees ensure the vendor meets the cooperative’s expectations and any require specifications. Include provisions for:
• Service level agreements (SLAs) specifying minimum performance standards.
• Liquidated damages for delays or underperformance.
• Incentives for exceeding performance benchmarks.
Pitfall to Avoid: If timely performance or meeting required specifications is critical for the goods or services being provided, failing to include performance guarantees and associated damages could leave the cooperative without legal recourse and give the vendor less incentive to meet required contract conditions.
- Dispute Resolution Mechanisms and Venue
Disputes can arise even with well-drafted contracts. Include clear mechanisms and venue requirements for resolving disagreements, such as:
• Negotiation and mediation procedures to provide a less costly alternative to litigation.
• Arbitration clauses that ensure any dispute will be resolved by arbitrators experienced in the industry.
• Jurisdiction and governing law provisions that require suit to be brought in the cooperative’s jurisdiction.
Pitfall to Avoid: Allowing the vendor to specify the venue for dispute resolution can place the cooperative in a difficult position if a dispute arises. If any claim must be resolved in the vendor’s jurisdiction, this could cause the cooperative to avoid raising disputes and pursuing claims in light of the expense involved.
- Intellectual Property and Confidentiality
Procurement contracts involving software or deliverables including data and documentation require robust IP and confidentiality provisions. Address:
• Ownership of intellectual property created during the contract
• Usage rights for proprietary tools or software or deliverables
• Confidentiality clauses to protect trade secrets and member data.
Pitfall to Avoid: Overbroad IP clauses could prohibit the cooperative from continued use of deliverables (such as plans and specifications) after the contract term, or prohibit the cooperative from allowing use of deliverables or software by its consultants and contractors.
- Supplier or Contractor Vetting
Before finalizing a procurement contract, thoroughly vet potential vendors or contractors. Evaluate:
• Financial stability and creditworthiness.
• Past performance and references.
• Capacity to meet the cooperative’s needs.
Pitfall to Avoid: Engaging unreliable or inexperienced vendors and contractors could jeopardize the cooperative’s operations and result in added time and expense in locating a replacement contract. Include contract provisions for regular performance audits and reviews.
- Change Orders and Flexibility
Procurement contracts should provide a process to account for changes in scope and timelines. Include:
• Change order procedures to amend the contract.
• Flexibility for the cooperative to scale services up or down, change delivery dates, or change quantities
Pitfall to Avoid: If the contractor’s form of contract is used, watch out for change order provisions that require the cooperative to pay a broad range of costs to the contractor, such as overhead costs or amorphous delay costs.
For more information about the information contained in this post, please contact Roland Hall at [email protected].