Let the Buyer Beware

Understand common dangers when developing specifications and evaluating bids.

By Andrew Sloley, Contributing Editor

A plant intending to buy equipment usually sends a purchase specification to prospective vendors. In principle this can range from an oral description to an e-mail to a multiple-hundred-page document. After evaluating the resulting bids to choose a vendor, the plant often must engage in follow-up discussions — negotiations covering both technical and commercial points — before signing a contract for supply and acceptance of the equipment.

Don't expect vendors to correct your mistakes.

The contract is a legal agreement tailored to the particular jurisdiction involved. Most contracts, though, assume a common legal doctrine — the sophisticated seller and sophisticated buyer. So, here we'll examine some of the consequences of that doctrine — without offering legal advice, of course.

As engineers, we are expected to know what we are doing in developing a specification. We summarize operating conditions, performance requirements, design criteria and other technical factors. These specifications reflect experience with what works, what hasn't worked, and what we understand of the process conditions. Many companies have thousands of pages of specifications designed to cover everything from minor piping components to major machinery.

So, we routinely are considered a sophisticated buyer. Unless a contract contains something illegal, unconscionable or very unusual, it usually holds up. Therefore, if the technical specification has an error or omits something, it's our problem.

The more complete the specification is, the greater the supposition is that you know what you are doing. This, in turn, spurs efforts to further enhance completeness. That's how we end up with hundred-page specifications for orifice plates or other apparently simple items.

If you haven't included something in your specification, you might not get it. Years ago, an engineer at a distillation packing vendor didn't include a distributor for putting liquid onto the packing inside a 15-ft-diameter tower. Somehow the liquid was supposed to magically distribute itself from the nozzle onto the packing. His reason? "They didn't ask for one."

The equipment installer didn't make any comments about the lack of a distributor. He probably rationalized: "It's not in the work scope."

The tower failed to work properly, cutting into profits for years. Finally, during a turnaround, an inspection showed the vessel was missing the distributor. Plant personnel ruefully admitted there was no distributor because "we never ordered it" — in effect, agreeing they were a sophisticated buyer and accepting responsibility for the omission.

The obvious question is why didn't the vendor say something? This has legal, business and personnel aspects. First, from a legal standpoint, a sophisticated buyer is supposed to know what it is doing. The purchaser is responsible for asking for what it needs.

Why didn't the vendor propose a feed distributor as an add-on item? This relates to the business angle. Responding to bids costs money. As a rule-of-thumb, a firm proposal costs around 1% of the equipment price for a major engineered equipment item. Proposal preparation is a significant cost of business for many fabricators.

A plant's purchasing department usually gets multiple proposals. Then the bid-qualification process starts. The technical evaluation includes comparing what was asked for against what was proposed, and determining if they don't match, why not. Is the offered item insufficient, sufficient, or superior? Is any selection worth paying extra for? Questions go back to the vendors at this stage. Information from one vendor — such as a notation that something is missing — routinely will generate questions to the others. To quote one purchasing agent: "My job is to make the proposals as close to identical as possible."

If vendors believe your purchase is being competitively bid, they'll attempt to keep their proposal costs down. What's the incentive for Vendor A to do careful, and expensive, work to prepare a complete proposal if any questions generated get sent to Vendor B? In effect, Vendor B can save money on bid preparation by having its competitor analyze the bid and thus can gain a financial edge in winning the contract. So, don't count on thorough analysis from vendors. If you don't ask for something it's very likely you won't get it offered to you.

Vendors have another way to keep costs down — through personnel. Less-experienced and below-average performers are cheaper. Competitive bids usually get the lowest-cost staff assigned to them.

There's no simple way out of these problems. In the end, the sophisticated buyer assumption is accepted because everyone understands that it's true. So, the plant, contractor or consultant making the equipment decision has to get the specification right.

ANDREW SLOLEY is a Chemical Processing Contributing Editor. You can e-mail him at Asloley@putman.net

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