ZZZ Sheet Metal had decided to update its approach to business. For decades, the principals of the company had been bidding jobs the same way, and ordering from the same suppliers. A consulting firm brought in by the new ZZZ president suggested that this approach had led to complacency at the company, and limited its potential for growth and profitability. The consultants recommended that ZZZ purchase from a wider variety of vendors in order to create greater price competition and drive down costs. As the consulting report summarized, “those procurement savings will drop directly to the bottom line.”
Company personnel responsible for equipment purchasing and project management were not so sure about this advice. Due to the long-term relationships ZZZ had established, its suppliers would often go the extra mile. This might mean giving a ZZZ order “priority,” even it meant processing the order before other customer’s orders. The suppliers might suggest an alternative piece of equipment or combination of components that would perform the required function at less cost or with greater reliability. The suppliers might even warn ZZZ about products or product lines that were generating complaints or showing signs of poor workmanship or other defects. It was hard to put a dollar figure on the relationships, but ZZZ middle management knew that the value was there. However, since it could not be listed as a line item on a profit and loss statement, it was assigned no value by the consultants. The order came down from the president to add at least five new suppliers, and to put all significant projects out for bid to all of the suppliers. Middle management had no choice but to follow this directive.
Within weeks, ZZZ received a bid package for a regional shopping mall project. The HVAC component of the project was to be installed on a “direct bid” basis with the owner under a design/build approach. The performance specifications for the large project were extraordinarily complex, and the equipment component of the project alone would run into seven figures. Following the mandate of top management, the ZZZ manager responsible for the bid forwarded the specifications, and other project requirements to all of the potential suppliers, including the new ones.
The responses from the suppliers varied widely, but one response stood out. One of the new suppliers had pricing almost ten percent lower than any of the other vendors. The proposal appeared to include all of the equipment necessary to fulfill the ZZZ design criteria, and the delivery schedule would allow the subcontractor to meet project timelines. Still nervous about working with a new supplier on such a large project, the manager contacted the ZZZ president. He indicated his concern about whether the pricing could be a “low ball” offer to get the business, and whether it might be safer to try out the new suppliers on smaller projects. He was told that this was precisely the kind of opportunity that had been identified by the consultants. He was to proceed with the new vendor. The project manager issued a purchase order for the equipment and the supplier sent back a confirmation of the order on a supplier form (with lots of small print on the back).
The shopping mall project turned out to be the challenge of a lifetime for the ZZZ staff. The company struggled to maintain required workforce levels and to keep up with the extremely aggressive schedule. The file of change orders and field directives filled an entire shelf. Equipment and other supplies were being delivered almost daily to the construction site and the company’s fabrication facility.
On a particularly busy day, four semi-trailer trucks arrived at the ZZZ facility with chillers, fan motors, diffusers, and other equipment. The equipment was unloaded and the subcontractor’s receiving office checked off the various items on the carrier’s bill of lading. The equipment was still crated, but the counts and equipment numbers were consistent with the ZZZ purchase order. The subcontractor would not be using the equipment for a number of weeks, but it was reassuring to know that it had arrived. The supplier invoice provided for a two percent discount on purchases paid within ten days of delivery, and ZZZ paid the discounted amount, intending to recoup the full invoice price from its next draw request. (This had also been recommended by the consultants.) Five weeks after the delivery of the equipment, it was shipped to the site and uncrated. Problems were immediately apparent. Control panels that were to be included were missing. Some fan motors showed signs of wear and tear and appeared to be used. Two of the chillers had large dents as if they had previously been dropped in a hoisting process. Concerned about the overall quality of the shipment, ZZZ project personnel tested each of the fan motors, and found that even several of the units that appeared new did not operate properly. A desperate call came from the project site to the ZZZ manager who had handled purchasing of the equipment. When he put down the phone, the manager realized that his worst nightmare had become a reality.
Within seconds, the ZZZ manager was on the phone to the equipment supplier (who had deposited its check immediately upon receipt). The calls went unreturned for an entire day. In a panic, the ZZZ manager drove to the supplier’s office. After almost an hour of waiting, he was brought into a meeting with the sales manager and the supplier’s attorney. The manager was told that the supplier would have to evaluate its legal position, but that its records indicated all of the equipment had been in good condition when shipped. The sales manager produced a copy of the bill of lading verifying that the equipment had been properly delivered. He finished by stating: “We believe that we have fulfilled the contract requirements. Your payment of the invoice confirms that fact.”
The attorney observed that the sale of the equipment was governed by the Uniform Commercial Code (the “UCC”), and that under the UCC, ZZZ was required to inspect the equipment upon delivery and to reject any items that were unsatisfactory. The attorney handed the ZZZ manager a section of the statute with highlighted language stating: “Acceptance of goods occurs when the buyer: (a) after a reasonable opportunity to inspect the goods signifies to the seller that the goods are conforming or that the buyer will take or retain them in spite of their non-conformity; or (b) fails to make an effective rejection . . .”
The attorney pointed out that the equipment had been at ZZZ for over five weeks, and that not one word had been heard from the subcontractor as to problems. The attorney also produced a copy of the order confirmation the supplier had sent in response to the ZZZ purchase order. He pointed to language on the back of the form that stated: “All sales are final unless notice of defects or nonconforming items is provided by the Customer to the Supplier within five (5) days of delivery.” The ZZZ manager left the supplier’s offices with no solution, and with the sinking feeling that the situation was going to get worse before it got better. The next call was to the company president, who advised the manager to simply “do what had to be done to solve the problem.” The last call was to the company attorney.
In the next Contracts Bulletin, there will be discussion as to how the Uniform Commercial Code presents both problems and some solutions for ZZZ in resolving its issues with the supplier, and how it also impacts every contractor in the course of its business.