Negotiating Service Contracts

Knowing standard contract language is crucial in securing favorable terms and conditions

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Securing the appropriate level of maintenance coverage is just as important as purchasing the right equipment in the first place. Once a service contract is signed, it’s a legally binding document, and knowing standard contract language can help negotiate favorable terms and conditions during the equipment purchase process.

Given the current state of the economy, laboratories have had to significantly change their equipment purchasing practices. Lab managers are running their labs more like businesses and are therefore tasked with greater financial and purchasing responsibilities. Controlling costs and buying wisely have become common practice throughout most labs across the country. In a typical situation, the lab manager enters into a service agreement with the original equipment manufacturer (OEM) at the time new laboratory equipment is purchased. It’s standard practice and has been done this way for years. Other labs, particularly clinical research/hospital, university/college, or government funded, may require bids solicited from multiple suppliers for the purchase of equipment, and oftentimes a service contract will be included as part of the solicitation. In either instance, a detailed purchase process is necessary in order to ensure that the lab’s equipment needs are fulfilled.

Securing the appropriate levels of maintenance coverage is just as important as purchasing the right equipment in the first place. It’s essential to determine the level of service that is required for each piece of equipment. One size does not fit all when it comes to maintaining various types of laboratory equipment. You will most likely be in a better position to determine what type of service plan is needed for your new equipment after you have owned it for a period of time. Unfortunately, most lab managers may feel pressured to buy the OEM’s service agreement at the same time the equipment is purchased. It’s important to remember that once a service contract is signed, it’s a legally binding document. So, due diligence is crucial! Knowing standard contract language will help you negotiate favorable terms and conditions during the equipment purchase process.

Below are five key areas of the OEM service contract that require special attention when you are considering the purchase of new laboratory equipment and the corresponding maintenance agreement.

    1. The Manufacturer’s Warranty
      Know the length of the manufacturer’s warranty, because it varies with equipment types. It is very important for the lab manager to know exactly when the warranty expires and what conditions may void coverage. Federal law requires that warranties be available for the consumer to read before the purchase of a product. If the equipment has a lengthy warranty, a service contract may not be necessary until the warranty expires. On a similar note, if the warranty is short-lived, it may be possible to negotiate an extended warranty.

    2. Effective and Expiration Dates
      Different terminology with the same meaning may be used, such as contract coverage term, agreement term, service start date/end date, service plan from/to, and contract duration. Before signing any contract, it’s important to fully understand when the service contract begins and when it ends. It is not unusual to see long-term contracts with five- or ten-year terms. It’s in the best interest of the service provider to keep lab managers under a service contract for as long as possible because this is their most profitable revenue stream. It is also important to mention again that the service contract is legally binding upon signature. Here, the contract duration can be negotiated to what will work best for the particular lab.

    3. Early Cancellation/Termination
      Don’t ever presume that a service contract can be cancelled or terminated before the expiration date. If it is allowed at all, early cancellation or termination fees can be very costly. Lab managers can be penalized anywhere from 25 percent to 50 percent of the remaining contract charges owed. Quite often, long-term contracts will not provide an “opt out” clause for the consumer but do allow the manufacturer to terminate the contract before the expiration date for any number of reasons. However, some government entities and public universities may be exempt from any penalty fees, depending on their standard terms and conditions. Especially with long-term contracts, it’s important to negotiate an opt-out clause with minimal penalties.

    4. Auto-Renewal Clause
      The automatic renewal clause in a service contract does just that—as the expiration date approaches, if written notification from the lab manager requesting termination hasn’t been received by the contract holder within 30, 60, or 90 days, then the contract will be automatically renewed for another year. If the contract is autorenewed, the early cancellation/termination fee goes into effect as well. To avoid this, request that the auto-renewal clause be removed altogether from the service contract before signing.

    5. Other Terms and Conditions to Consider
      Depending on the manufacturer, make, and model, there are other elements of the service contract to consider when purchasing new laboratory equipment:
  • What is the availability of replacement parts, and are they new or refurbished?
  • Consider the payment terms as well. Is the contract price broken down monthly or quarterly, is payment in advance or arrears, are there late charges?
  • What is covered during a service call? Will you be responsible for travel charges, overtime, or holiday hours?

It’s important to seek clarification of any terms and conditions that are difficult to interpret and to get it in writing. Be sure to always question confusing or ambiguous phrases before signing the contract. As you are the lab manager, it’s up to you to seek favorable changes to the terms and conditions of any service contract in question.

Categories: Business Management

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