Annual maintenance contracts are not my favourite part of procurement. They are complicated, technical with a limited number of vendors. Negotiations are very tough and very often you indeed do not have an option.
So, here is a piece of advice on how to handle them.
But, to start from the beginning, let us see some main characteristics of AMCs:
- Long-term; the contract is rarely below a year in duration. It is not uncommon to have an AMC for the life span of the equipment, which can be 10-15 years
- Specialized service, requiring special tools, knowledge and experienced staff
- Compliance requirement. To provide some services, the government mandates certificates or gives a special approval
- They are high-value contracts; I had a single AMC that is 1% of the company’s total annual spend
- High risk. Failure of equipment like fire fighting systems, chillers, elevators. This can result in loss of life or significant monetary loss.
- The required Service Level influences the cost significantly. For example, if the response time in the case of failure is 4 hours, the vendor will use his response team. If the time comes down to 10 minutes, he will assign 4 people who will be there 24/7. And you will pay for them.
First of all, we need to figure out whom to invite to bid for this service. And, in the case of AMC, this requires deep digging.
Check the government web pages to see if there is special approval required
In some cases, the government has a list of approved vendors for certain services. For example to work on the high-voltage grid. Or approved brands of road paint, even if you are applying it within your company premises.
Make sure you have as many as possible technical details. It will save you hours of discussions later.
Go to the manufacturer’s website or contact their representative. They will give you the authorised service provider.
Know the market. So often companies represent themself as “the only authorized company”. However, in reality, multiple companies got the certificate that allows them to service this equipment.
So, we have AMCs that are of high value and we are not sure about the vendors that can do the service. We should first do a prequalification.
Here we are mainly looking into:
- Do they have all the required approval and certification?
- Are they authorized by the manufacturer to maintain the equipment?
- Is the staff trained?
- Can they obtain security clearances required in certain areas (airports, power plants, government)?
- Can they confirm they have all tools and equipment required to perform the service?
- Do they have sufficient staff to handle the volume of the work?
If we have done the prequalification correctly, the tendering itself boils down to the Comercial terms. You have brought in vendors that are comparative technically. Now it is time to negotiate. The case where we need to go back and bring the technical team to the table is if the cost is way above the budget. In this case, we need to work on different Service levels. And this can become extremely technical and complicated. Since the reduced level of maintenance increases the risk of equipment failure, we need to be very careful. The cheapest option can easily become a very costly one.
During the contract
These contracts are not “set and forget”. As the service is going on procurement will get dragged in now and then
- There is a spare part that needs to be procured outside the contract
- Some changes need to be done, either due to change in operation or legislation
- The underperformance of vendors. Here we need to get involved and bring things back on track or impose penalties.
Hence, you need to be in occasional contact with both parties. And make sure everything goes smooth.
I hope you understand now why I do not like them. But they are important and need to be looked into. After all, the last thing you want is to be stuck in an elevator that has not been maintained for the past two years.