February  7, 2003



Bulletin #63, The Pitfalls of Owner Purchases of Equipment or Materials (February 7, 2003)

Contractors are often asked to bid on jobs where materials or equipment are purchased directly by the owner. A contractor will likely experience additional costs, and (more importantly) may be exposed to potential liability when an owner buys equipment or material.

Contractors should consider the following issues when an owner/customer provides equipment or materials:

  1. Control. The contractor will not have control over the exact equipment that will be selected. Nor will the contractor be able to deal with any contingencies, which may arise during installation of the equipment.

    For example, what if the equipment provided does not work in the space provided? In a typical situation, a contractor can go back to its supplier (presumably with whom it has a long-term relationship), and return the equipment. An owner may not have that option.

  2. Installation of Equipment/Materials.
    • Installation Cost. If the owner is supplying the materials/equipment, is the contractor still being paid for the installation? This issue needs to be addressed in the contract or bid.
    • Extras. The contractor will have to assist the owner in selecting the proper equipment; including providing specifications (see 3(a) below). Nevertheless, it is still possible that additional equipment, adaptors, or other hook-ups will be required in order to complete the installation. The contractor may also incur the additional costs of unpacking or moving equipment or materials (see 3(e) below). Normally, these extras would be built into the contractor’s bid. The owner and the contractor will need to discuss who will pay for these costs.

  3. Time/Coordination. The contractor will need to spend additional time working with the owner to coordinate the selection of the equipment or materials. In a normal situation, the contractor works directly with its employees and suppliers to select materials and equipment for the installation. When an owner supplies equipment, the contractor must coordinate with either the owner (whose availability may be limited) or the owner’s chosen suppliers. Coordination issues include:
    • Purchase of Proper Equipment. The contractor must provide clear specifications of equipment to the owners. Normally, the contractor will have a good idea of the equipment to be installed, but it can also discuss the installation with its suppliers to determine which materials or equipment are best suited to that installation. Moreover, a contractor, as a frequent purchaser from suppliers, will have leverage to address problems if they occur. In contrast, the owner may lack the contractor’s expertise or leverage to avoid or solve problems.
    • Construction Schedules. Construction schedules often vary. The contractor will need to coordinate with the owner (and, in turn, the owner’s supplier) to make sure the equipment or materials are delivered to the site on time, and at the proper location. If the construction schedules change, the contractor will need to coordinate with the owner and/or the owner’s supplier and shipper to insure that proper delivery occurs.
    • Shipping Charges. Payment of shipping charges will need to be addressed. Who will be responsible for shipping, and when will those costs be paid are questions the contractor needs to resolve with the owner. The contractor does not want the materials delivered C.O.D. to the site, potentially delaying the installation.
    • Written Instructions. The contractor will need to obtain from the owner or its supplier copies of all written materials, including instructions, associated with the materials or equipment provided.
    • Proper Packaging. The materials or equipment to be installed need to be properly packaged and unloaded. Cranes or lifting devices also may need to be scheduled.

  4. Local Building Codes. The contractor is most familiar with the requirements of the local building codes. If the equipment ultimately supplied by the owner does not meet building code requirements, the contractor will either inadvertently install non-conforming materials, or be forced to cancel or postpone the installation because of improper equipment or material. This could lead to conflict with the owner, because the owner could assert that the contractor did not provide proper specifications. Once again, the owner may be unable to return the equipment.
  5. Warranty Claims. Often, one of the advantages touted by having owners supply materials is that the owner will be responsible for enforcing warranties. However, a defense often asserted by manufacturers is that the product was improperly handled or installed. Because the contractor was not involved in the shipping, and the owner was not involved in the installation, a conflict can arise. The result is parties pointing at each other. The simpler situation is when the contractor installs the product, and is responsible for enforcing the warranty.

    Likewise, owners often do not write purchase orders with proper terms and conditions to protect the contractor or owner. Suppliers’ invoices may disclaim liability to the owner unless purchase orders are properly drafted.

  6. Insurance. The contractor needs to work with the owner to make sure that insurance has been clearly defined. That is, who is insuring the materials in transit to the site, and who is responsible for insurance at the site prior to installation.
  7. Liability for Payment. There have been lawsuits where an owner has purchased materials or equipment directly from a supplier, and the supplier has not been paid. The supplier then sues both the contractor and the owner, because the supplier was under the impression that the materials (while ordered by the owner) were still being underwritten by the contractor’s credit. While it is unlikely the contractor will be liable to the supplier, bad feelings may develop between the contractor and the supplier.

    Additionally, as a practical matter, if the supplier is not paid, and the contractor regularly does business with the supplier, non-payment could hurt the relationship between the contractor and the supplier.

  8. Cost. As the list above indicates, there are costs and risks associated with allowing an owner to purchase materials or equipment directly. At the very least, the owner should be made aware of the increased costs to the contractor, and an adjustment in the contractor’s price may be appropriate.

A contractor is required to make a business decision when owners want to purchase equipment or materials. If the cost of materials is small, in comparison to the overall job, the contractor may decide to accommodate the owner. On the other hand, if the owner’s materials or equipment are more substantial, then the contractor will need to make a very careful decision - and potentially modify its bid to reflect this price change.

Steve Yoch is a partner at the law firm of Felhaber, Larson, Fenlon & Vogt, P.A. in St. Paul, Minnesota. Steve is an experienced contract and construction lawyer, and a frequent seminar speaker. Steve will be drafting the Contracts Bulletin series in the future, and welcomes your suggestions for potential topics at syoch@felhaber.com.

 

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