Maintenance and Service contracts in the Railway Industry

Recently I had the chance to go through a whole bunch of maintenance and service contracts in particular for the transport industry. As a non-lawyer, you spend quite some significant time reading these kind of papers even though they are most of the time not very exciting and the content even less surprising. Funnily, I am recognizing more and more repetition between these contracts, which appear to become also longer and more complex as time goes on.

I am often surprised how much effort many customers of large scale maintenance and service contracts put into the development of these agreement in very high level of detail in some aspects while other aspects are much more open to interpretation. I think this development is in most cases not beneficial for the customer, often a public authority/organization, as well as the service provider. Not surprisingly, these contracts often do not reflect any developments in business models and new technology such as condition based maintenance. In my opinion, it might be good that the next generation of maintenance and service contracts is redrawn from scratch and in a principle based way. This can create more clarity about the responsibility for the relevant parties and allowing more for innovation while increasing the flexibility to adapt to an ever changing environment. There are a few key topics that I think are essential for any maintenance and service contract which I listed below.

Blog_MaintenanceServiceContracts

1. Parties and dates

It should be clearly defined who are the parties in the contract and who are other relevant stakeholders that need to be considered during the performance of the services.

As most railway assets have a long lifetime, most maintenance and service contracts consider only a fraction of the time the asset will be in operation. Therefore timing is an essential factor. This also includes a clear definition when the services start, when mobilization starts, when hand-over at the end of the contract and how it is performed.

2. Scope of Services

The scope of services should be in a functional way defined. Therefore it is for the customer more clear what to expect from the service provider. In case of potentially different interpretations, a more detailed scope of services should be included as an appendix. Key of drafting a good scope of work is to align the interests of the customer and the provider of the services. For the case of railroads, any customer should probably consider to require full-service contracts, including running maintenance, corrective maintenance and overhaul activities.

3. Process for Scope of Services

A few processes are essential for providing the scope of services. As in most times, the services around any asset are provided by multiple parties, the initial inspection but also the continuous hand-over of the asset needs to be clearly defined. Other processes that can benefit from a definition as they have many interfaces with other organizations are for instance documentation, management of materials and handling of customer feedback.

4. Asset ownership

There are two types of assets that are critical and directly linked to the relevant insurance and responsibility topics: The asset on which the maintenance and services are performed and the assets which are required to perform these services. While the first one should always remain in the hand of the customer, the latter should during the term be in the ownership and responsibility of the service provider. This might include for instance an underfloor wheel lathe or a drilling machine which will require immediate action to repair or replace when damaged to provide the scope of services.

5. Liabilities

Liabilities in service contracts often have one challenge that should be avoided: Unlimited or very high liabilities. At the end, this increased the uncertainty, the insurance premium and thus the risk premium on the costs. Liabilities like these should be limited on a certain amount and tied to negligence or gross negligence of the parties.

6. Payment procedure

The payment procedure is an aspect that is in my opinion often underdeveloped. A payment procedure should reflect the needs and availability of funds from a customer’s perspective. As these are often government owned entities, they have specific requirements for planning and payment for services. On the other hand, a payment procedure should also incentivize to innovate and become more efficient over time. Procedures that require a calculation during bid phase, an annual budget and a clear description of actual costs are in my opinion ideal. The differences, positive and negative should be split between the parties to reflect optimization potential but also technical and organizational challenges.

7. Performance measurement

Performance measurement is the essential topic to reflect how the scope of work is performed. The measurement should be a mixture of hard and soft factors but always be linkable to the scope of work. When the scope of work changes, so should the performance measurement.

Key factors should in my opinion include: Passenger satisfaction, i.e. survey results; Asset performance, i.e. MTBF, availability, etc; Material management, i.e. material turnover, disposal handling, etc;  Staff management, i.e. employee turnover, etc; Financial performance, i.e. budget deviation

All measurements should reflect either the long term quality of service and asset or short term optimization potential and need also to reflect the goals and objectives of the customer.

8. Change procedure

Most of the maintenance and service contract reflect only a fraction of the lifetime of the asset, but still very long terms well beyond 5 years. The digitalization and automatization of maintenance will create significant optimization potential over the next year. At the same time, public transport is becoming more popular, requiring more train paths, higher mileage and more assets utilized. Thus, each long term contract should clearly define a change procedure that is acceptable for the parties and allow ample time and funding to adapt to a changing environment.

Remarks

Finally, I think that every maintenance and service contract should be written in a way that a non-lawyer can read the contract and perform the services accordingly. I believe, that a good lawyer is able to write a contract together with an experienced technician in such a way. Unfortunately, most customers still need to embrace such a “team” approach when drafting a contract even though it could be very beneficial on the long run.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s