Software—How to Negotiate Successful Contracts with CMMS Vendors
Author - David
- February 25, 2004
When negotiating a contract with a computer maintenance management system (CMMS) vendor the guiding principals and definition of the project must first be determined. Deliverables, pricing options, payment terms, continuance, product and service quality, and liabilities are additional areas that must be considered in negotiations.
people find negotiating contracts intimidating, regardless of which side of
the table you happen to be on. This is understandable given what's at stake—a
price, quality of product and service to be provided, and a long-term relationship.
As a result, some companies prefer to retain a lawyer, accountant or consultant
to help them through the process.
The following are some key elements found in a typical contract with a CMMS vendor. This by no means, however, constitutes a legal opinion. Rather, it provides a basic understanding of what might go into the contract from a technical perspective.
Mutual gain: Building a true partnership with your CMMS vendor requires a solid contractual foundation that's fair to both parties. It's too easy to draft terms that favor one party over the other, especially when there are major differences in the size of the companies entering into the contract. A contract, therefore, should allow either party to back out of the relationship at any time and remain whole (value for the customer in exchange for reasonable profit for the vendor).
Single contract: As much as possible, strive for a single contract, even if multiple vendors are involved. This avoids vendors pointing fingers at each other, while you get caught in the middle lacking satisfactory service.
Clear roles and responsibilities: What are the expected deliverables from the vendor? What's the timing and at what cost? In turn, make sure the expectations of the vendor are well understood, such as what needs to be completed ahead of implementation.
Keep it simple: The document should be easy to read and understand. Maintainers are frustrated having to wade through pages and pages of complex legalese.
contract should begin by defining common terms used throughout the document.
For example, "software materials" might be defined as "the XYZ company software
in object code and source-code format, and all documents—including
but not limited to—specifications,
flow charts, diagrams, and user manuals, provided by XYZ company to the supplier
under the terms of this contract." The document can then define some of the
terms within the first definition.
The contract must specify what goods and services are being purchased. A detailed software specification is usually attached as an appendix. Other deliverables include documentation, hardware, data conversion services, implementation assistance, training, and ongoing support.
It's essential to be as clear as possible in terms of what you've purchased. For example, how many copies of the software did you buy? Which sites within your company can use the software? Can you sell access to the software by suppliers and customers? What type of training comes with the package, for what audience, at which location, for how long, at whose expense?
Price is fundamental to any contract. Some of the more common pricing options include the following:
module, per concurrent user: Some CMMS vendors have adopted this scheme
for larger installations. It's the closest thing to paying only for what
you use. For example, suppose the vendor charges from $100 to $200 per concurrent
user per module. If a maximum of forty users will be logged into the maintenance
module at any given time, twenty people working on the inventory control
module and four people maximum for the purchasing module—your
cost would be 40x$200 + 20x$150 + 4x$100 = $11,400.
When the twenty-first user tries to log into the inventory control module,
access is denied and a polite message explains that you've reached the maximum
number of users for that module. Some systems will automatically log out
a user, if the activity level drops to zero for a pre-determined period
concurrent user: One of the most popular pricing options is based on the
maximum number of users expected to be logged onto the CMMS application
at any given time, regardless of which module they're currently using.
seat: Many CMMS vendors still insist on a per seat charge, regardless of
how many users may be running the application concurrently. There may be
a volume discount available for companies with a large user base. One difficulty
is how much to charge remote users with limited access to the software via
the Internet, for example to submit work requests).
license: Although there are many variations on the theme, a site license
provides a ceiling on what you have to pay, regardless of how many users
you have. The price may be based on the expected average number of users
annually. Large multinational companies should obtain unlimited use and
Other: Hourly rates should be agreed to for consulting, training, software
customization, implementation, etc. Out-of-pocket expenses are usually extra.
Maintenance charges are typically 10 to 25 percent of base software costs,
including minor upgrades.
There aren't any rules governing how a CMMS is paid but one approach might be to have four payments. The first is a small amount given as a deposit while you conduct user-acceptance testing or a small pilot. Five to ten percent of the base software cost might be a fair amount. The next payment of approximately 30 percent covers shipment of the software. A further 30 percent covers a successful install. The final 30 percent comes after a reasonable "warranty" period of 90 days.
Some companies successfully negotiate an incremental per seat fee, for example, as the number of users increases, the CMMS vendor is paid more, to a maximum of the site license ceiling. An expiration date or back-out clause for the license fee is handy, in case you don't grow to the number of users originally anticipated.
In today's dynamic environment, it's essential to cover the possibility of vendor or customer mergers, acquisitions and divestitures. The contract should protect both parties from rendering the license and warranty void, if either party grows, shrinks or changes ownership.
In the case of vendor bankruptcy, make sure the source code is at least held in escrow. Some CMMS vendors ship source code with the application, or make it available at additional cost. In this case, make sure you always have source code for your current version.
Product and service quality
Regarding the quality of products shipped and services rendered, ensure that expectations are well articulated, whether buried in detailed specifications or described in the body of the contract. Examples are hours of operation for on-line support, response time for on-site support, hardware uptime guarantees and acceptable sub-contractors to be used by the vendor.
An effective way to promote a long-term relationship with vendors is to provide both a performance incentive and penalty for non-performance. This should cover delivery promises, service levels agreed to, and product quality guarantees. Remember, this is a two-way relationship. Any performance clauses, therefore, should be subject to customers fulfilling his or her end of the deal, such as proper back-up and recovery procedures, preparation of facilities for implementation, adequate documentation of errors, timely notification of problems, and other requirements.
Any legal contract should deal with liability issues. From a technical perspective, make sure that use rights and limitations of the software license are well understood.
About the author
David Berger is with Western Management Consultants and is the founding
president of the Plant Engineering and Maintenance Association of Canada. For
more information call (416) 362-6863 ext. 237; email:
email@example.com or visit
Reprinted with permission from Plant Engineering and Maintenance magazine.