Long Term Service Agreement Example
A long term service agreement example is a typical document that you will encounter if you own industrial-scale power generation equipment.3 min read
Long Term Service Agreement Overview
A long term service agreement example is a typical document that you will encounter if you own industrial-scale power generation equipment. Long term service agreements, or LTSAs, require that the original equipment manufacturer, or OEM, provide maintenance services for their equipment on a more or less fixed-price basis. Having guaranteed support and a steady pricing plan can be very advantageous to the equipment owner, although the complex nature of LTSAs can lead to costly, time-consuming disputes with the manufacturer.
LTSA Work Scope
A typical LTSA should define the scope of the maintenance work in terms that are clear and easy to understand. To do this, the LTSA should:
- Include a detailed list of the equipment and components that the OEM is obligated to maintain.
- Describe the OEM’s maintenance obligations as they relate to each component and piece of equipment.
- Describe the activities to be undertaken for all scheduled maintenance outages and the OEM’s obligations related thereto.
Additionally, the LTSA should define the overall goals of the maintenance program and require the OEM’s maintenance work meet these goals. This should be done to act as a catch-all to cover anything that was not covered by the above three items.
A typical LTSA should also cover a concept referred to as “extra work.” Extra work allows equipment owners to request services of the OEM that are not covered by the work scope. For instance, under “extra work” an owner may request the repair or replacement of equipment components that may normally be considered “inspect only.”
“Extra work” does not have to be performed by the OEM, but if it is, it will be subject to the same obligation as pertain to any other work stipulated in the contract. Compensation for “extra work” is usually based on a pre-arranged pricing schedule. All details pertaining to this should be clearly stated so as to avoid confusion and contract disputes.
Start Up Costs
A well-written LTSA will also account for start-up costs, which are costs associated with bringing the equipment on-line. Heavy duty power generation equipment may require much testing and troubleshooting to get it ready for operation, which may include running the equipment and powering it down multiple times to test its functionality, and an OEM may bill its client for the costs associated with this. A good LTSA will account for this by stipulating that these start-up efforts be paid for by the OEM and that the OEM will not raise its regular business price to cover this cost.
Performance guarantee provisions are also something a good LTSA will have, as they provide monetary incentives for the OEM to respond to operational outages in a timely manner. What constitutes a [timely manner]https://www.upcounsel.com/time-is-of-the-essence-clause-in-construction-contracts) and what level of care one receives should be stipulated in the guarantee, as well as what will happen if continued care to the OEM’s products is necessary. Usually, if enough problems continue to occur, the LTSA will be set up so that this constitutes a breach of contract.
Unscheduled Maintenance and Warranty Obligations
A good LTSA will also be clear on which party is to pay for unscheduled maintenance under the warranty. A common problem amongst poorly written LTSAs is that one reading of them can obligate the equipment owner to pay for unscheduled maintenance, while another interpretation can require the OEM to pay for it. When essential equipment goes down unexpectedly, jeopardizing the efficiency of your business, the last thing you want to worry about is who is going to pay for it. All it takes is one clearly stated sentence to avoid this problem.
A typical, well-written LTSA should allow the equipment owner to terminate their contract should it no longer make business sense to be in it. OEMs will often desire that a long term agreement should be truly long term, but the equipment owner should be wary of binding themselves to paying more than what is normal for the market in years down the road. If the OEM is resistant to this, one possibility is to give the OEM beneficial terms in some other aspect of the contract. Another is setting up a liquidated damages fee that, once paid, would allow for early cancellation of the contract. This give and take is the essence of negotiations.
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