31.01.20

Are contracts for AV projects too weighted in the client’s favour?

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Pic credit: Shutterstock/Amnaj Khetsamtip

Contracts are there to protect both sides, but are contracts for AV projects too weighted in the client’s favour? Paul Milligan spoke to those in the AV world unhappy with the status quo.

Relationships have always been the glue holding the AV world together, but even the most harmonious integrator/client relationships will have their ups and downs. For those inevitable times when disagreements happen or expectations aren’t met, then we have contracts to make sure (hopefully) both sides are protected.  However, many in the AV industry have expressed concerns about the current state of contracts drawn up for AV projects. Integrators and consultants are always going to be at the service/delivery end of matters and as such will always be slightly at the behest of their clients when negotiating contracts. But the feeling is that it has gone too far, and AV companies are putting themselves at risk by agreeing to contracts designed only with the client in mind. Has this situation always been this bad, or is it getting worse?

We began by asking integrators and consultants to sum up the current state of AV contracts. “We work in specialist areas and for the current situation, the general level and quality and fairness of contracts is extremely poor,” says Kevin Murphy, director of sales and marketing from Austrian systems integrator Kraftwerk Living Technologies. It was Murphy’s impassioned Guest Column in the Dec 2019 issue of Inavate that really highlighted this area was a particularly problematic one for integrators/consultants.  “With many of the enlightened clients we work with, who understand the nature of the work, we have developed some very reasonable contracts that deal with the supply of equipment and services in a fair way. However generally in the market, contracts for AV systems do not work well, are heavily sided with the client and frankly are hard to administer or control,” he adds.

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“They haven't evolved at the same rate as our industry and technology has, so they aren't necessarily as flexible as they should be by now,” says Andy Hook, technical solutions director, from UK-based AV and lighting integrator White Light. “The contracts are quite often the bottleneck, in terms of how they're structured, how much time you spend trying to negotiate them, and how they don't necessarily suit the project or the client.” Is there such a thing as a standard AV project contract? “If it’s come via a tender process route then there is an element of copy & paste about it,” says Simon Needle, special projects director, White Light. “The bottom line is it becomes very difficult to not only win the project but also deliver it because of the way that the packages and commercial contracts are put together.”

So it seems that project contracts are often not fit for purpose, because they are too often weighted against AV companies in favour of the client. “The vast majority of contracts that we see are based on construction models such as JCT, FIDIC or NEC contracts, designed for civil engineering or construction. These are just wholly unsuitable for AV systems,” says Murphy. “The measures, the specifications and the penalties for any contract are more to do with constructing a complete site or a building and take nothing into account for the requirements of a specialist and we know other specialist trades suffer in the same way. The focus of too many contracts is on the equipment list. A system is so much more.”

This lack of understanding is at the very heart of this issue, as Hook explains. “Contracts are still very much written with the mindset of the builder and the main contractor, not with the technology partner. An AV project isn't just a supply thing under a main contract anymore, you are a technical partner with the client. The design process is a big part of it, but when the main contract is finished, and they want to get their retention payment and hand the keys over and get away as quickly as possible, we still need to be on site because there are a lot of its software-based elements which need to evolve with the building. Our contract needs to last a lot longer than the main contract and build phase, and I don't think that's really been addressed.”

It’s a situation which often leaves all sides dissatisfied says Needle. “There has been plenty of situations where a project has been delivered and the client says ‘we wish we'd gone down a different route’, in terms of the procurement or they wish they hadn’t packaged the AV part underneath the main contractor, because of the difficulties then they faced.  Because of the pressure of delivering the AV under the main contract the client loses out because they don't get exactly what they needed, because of the pressures they are under, because everybody's up against a timeline that is very difficult to manage.”

One element of contracts that is universally despised is the ‘paid when paid’ principle.  Murphy explains how it is so hated; “The unfair factor for AV integrators is the paid when paid clause or payment terms that means the supplier finances the projects. We are great at the technology implementation bit, if we were so good at financing our business would be a bank. Being paid when a main contractor is paid is very dangerous and should be illegal.”

Another major fact causing dissatisfaction is the time the contract process takes says Hook. “You have to go out and negotiate with 10 different main contractors.  By the time that somebody is appointed they then have to start appointing the subcontractors, by that time the technology has changed 10 times. The current framework just doesn't allow for those changes to happen, to get the value for the client and the solution they need. There are countless times you hand over a project when you know you would have done it very differently, but your hands are tied because you either aren't allowed to work directly with the client and would have chosen those ideas or the project was designed and signed off two years ago and you're locked into installing all technology.”

Peter Hunt doesn’t feel that contracts are weighted too much against AV companies, but does acknowledge there is a problem. “When a poorly specified tender is released, there’s only one way that an AV company can win, and that’s to be the lowest figure.  Clients that have no true AV knowledge are none the wiser when it comes to purchasing, and if an AV company highlights any errors they’re potentially waving goodbye to the opportunity.  Thus, any engagement is very likely to have variations.  It’s one example of how the race to the bottom is damaging.”  

If contracts are too weighted against the AV world, should integrators/consultants be turning projects down, or does it feel like shooting yourself in the foot because you know a competitor will simply take the job if you won’t? “We have got to the contract stage and seen the terms and said there is no one we can work with this, and they won't shift with those contracts then then you walk away,” says Needle. “It does happen quite a lot, especially in the Middle East. With so much risk attached to something you're just going to look elsewhere to something that doesn't have so much risk attached to it.” Kevin Murphy is another who has walked away when the terms weren’t right, “Sadly after sometimes years of chasing a project, (and providing) concept and early design work for free, the contract is often the ‘killer’ but not pulled out by the client and discussed until it is too late. Unfair contracts are usually there to protect a client who is uncertain of what they are doing and the end result, and to protect themselves commercially.” It’s often a matter of survival says Hunt, as there’s always someone who will take on a job to turn a profit.  “The way to stop this is to regulate the industry, establish compulsory accreditation, force AV to be sold through accredited channels but I doubt that’s going to happen any time soon,” he adds.

Given the picture looks fairly bleak, do integrators and consultant actually have any recourse to change this situation, is the power out of their hands completely? “Currently it is totally outside of our control unless a client asks for a contract sample and does not rely on the construction standards,” says Murphy. “The industry could help – whilst it would be extremely difficult to do because of various languages and laws in our international business world, AVIXA, for example, could help to draw together contract samples and notes that could help.” Simon Needles agrees there needs to be change, “I think if everybody is part of a process or an organisation or a voice that can try and change that then the client will sit up and listen, but until that happens, they'll just keep on going the way they are.”

The general agreement is that contracts are weighted against integrators/consultants, so what advice would they pass on to others before you sign on the dotted line? “Read the contract but more importantly, understand it,” says Murphy. “Always get more than one person to read the contract – there will be differences in views and with complex contract, discrepancies on the meaning of a specific clause – two sets of eyes is better than one. If a smaller company is reviewing a complex contract for a large project, seek legal help – a small investment can save considerable time and expense. Lastly, make sure you have the whole contract – it is easy to skip the detailed appendices until negotiations are over and they are added at signing.” Peter Hunt’s advice echoes that of Murphy’s; “Major contracts have penalties for missing deadlines and all contractors are advised to read these clauses carefully and lean on quality project management processes to ensure there’s no opportunity to load performance related matters onto the AV company.  Good, mature project management is key to this being handled correctly.”

Finally is there any advice they could give on how minimise the risk of non-payment/late payment? It’s often a mix of experience, gut feeling, and luck says Needle. “You look at a customer, you do your due diligence, you weigh up your outgoings for that particular project versus your profitability and you make a judgement call.” Many contracts will have bonds, retentions and other securities built in, but sometimes the client wants them all warns Murphy. “Look for fair clauses and (ask) why have a retention and a bond? Argue to reduce the risk at the end of a project and if the client has a fully working system they are happy with, a small retention and guaranteed support – they really should be delighted.”

Relationships are key says Hunt, but when push comes to shove, “most major players hide behind their ‘systems’.  Guidelines, ‘best practice’, even contracts with penalties have very little meaning when the AV company (or consultant) is late in being paid and tussles with the dilemma whether to rattle cages or go with the flow for the sake of the relationship and future work – we’ve all been there.  99% of the time people go with the flow, and one is always made to feel like they are not a team player when they exercise their right to hold people to account.” Hunts highlights a sensible scheme in Australia where some states have adopted a law whereby main contractors on government projects have to set up a separate bank account to ringfence payments to contractors, and they can only be paid themselves when they have paid all the contractors.  “It’s a good scheme as many small businesses and individuals have lost millions through the lack of regulation,” he adds.