Getting the Right Price for Your Computer System.

For many businesses the computer system is the central nervous system.

The system goes down, business comes to a halt. The complexity and rapid development of computer technology frequently causes systems not to perform as the business - or computer consultant - expects. Accordingly, for the benefit of both the buyer and the vendor, the purchase of a valuable computer system should be clearly documented in a contract.

Computer Contracting - Generally

A well planned computer purchase will decrease the likelihood of computer failure. Such a purchase should be approached as a team effort synthesizing the knowledge and expertise of the client, accountant/consultant, attorney and vendor. However, all too often, the only parties involved are the client and vendor. Other times only the client's accountant will be contacted. In such cases, the accountant is expected not only to evaluate the client's technical requirements, but also to review and assist in negotiating the purchase contracts.

This article discusses selected important issues and techniques to consider when negotiating the purchase of a computer system. However, there are other issues that might be the subject of negotiation. Of course, the relative importance of particular issues will vary with the circumstances of the transaction.

A WORD TO THE WISE: A vendor's contract is designed solely to serve the vendor's purposes, which include limiting the vendor's liability and ensuring cash flow. This is proper from the vendor's perspective.

However, the client will have opposing concerns focusing on making sure that the client gets a system that performs the desired tasks, in a proper manner, and all within the agreed-upon price. In a computer system purchase, vendor contracts should be viewed as a starting point for negotiation, and only under rare circumstances should they be accepted as is.

Request for Proposal

A Request for Proposal (RFP), though not a legal document, can play a critical role in enhancing the effectiveness of other documents. The RFP sets forth the client's needs and requirements (i.e., the size of the inventory, frequency of mailing invoices, required response time) and is prepared by a consultant for the purpose, of eliciting bids from vendors.

A client should insist that the vendor warrant in the contract that the system will operate in accordance with the specifications set forth in the RFP. If the warranty does not specifically refer to the RFP, then the vendor will usually have no legal responsibility to comply with such specifications.

When referring to the RFP in the warranty, some adjustments to the RFP may have to be made because often during the implementation of the system the vendor and the client agree to alter some of the specifications. These alterations need to be reflected if the warranty is going to be effective.

Preparation of an RFP can be quite expensive, and therefore clients will often choose not to hire a consultant to prepare one. If there is no RFP, an effort should nevertheless be made to develop useful specifications that can be included in the warranty.

Selecting a Vendor

Beyond what the vendor says he will do and the price he offers to do it for, there are additional issues regarding vendors that need to be considered. First, computer companies are failing left and right. Therefore, the financial stability of a vendor must be investigated. Ask for financial statements or run credit reports.

Second, request a complete list of local customers and call them to see if they are satisfied with the performance and service of the vendor.

Third, buying individual components from multiple vendors might be less expensive in the short run, but it can cause great aggravation and needless expense when problems arise. For example, experience shows that a software vendor will often determine that the client's problem is in the hardware, while the hardware vendor will say the problem is in the software. However, if one vendor is selected to supply both the hardware and software, then he can be contractually required to find a solution without being able to escape by finger pointing.

Locking in the Cost

There are many "hidden" costs associated with a computer installation. If the client does not identify these costs before signing the contract, the client might be shocked to find out later that the cost of the system is 50 percent above the original purchase price.

The price listed in the contract might be only the cost of the components, and therefore will not reflect the entire expense to the client of purchasing, installing, learning how to use and maintaining the system. Some of these extra costs include data conversion, training, cabling, site preparation, installation, and hardware and software maintenance and support.

Software Licenses 

Software is licensed, not purchased. If license restrictions are not obeyed, the client runs the risk of losing use of the software. Many licenses require clients to use software on a single machine, or at a single site. Network licenses are available that limit the number of users that can access the software at a single time. The client may be prohibited from modifying the software or interfacing the software with other software without the vendor's approval.

License restrictions should be reviewed carefully to make sure that they are reasonable and practical in light of the client's intended use.

Acceptance Testing 

Acceptance testing provisions place into the client's hands the ability to verify whether the system conforms to the warranty representations. Do not look too hard for acceptance testing provisions in vendors' contracts.

An acceptance test is where the client defines certain tests that the system must pass. If the system fails, the vendor has to fix the problems until the system passes the test. If the system continues to fail the test, then the deal is off.

Obviously, it is crucial that the test be thorough and test all aspects of the system. Once the system passes the acceptance test designed by the client, it is difficult to argue that the system does not comply with the contract specifications. Therefore, acceptance tests must be designed carefully.

One of the best acceptance tests, which is difficult to get a vendor to agree to, is running the system live for a specified amount of time, say three months. To pass the acceptance test, the system has to operate to the client's satisfaction during this time period.

Implementation Schedule

A number of different tasks have to occur before the system is successfully installed and operating at the client's premises. Some of these tasks are the responsibility of the vendor and others are the responsibility of the client. An Implementation Schedule should be incorporated into the contract which assigns responsibilities for the various tasks, assigns dates for completion and provides remedies if tasks are not timely completed.

Tasks to be performed include delivery of equipment, installation of hardware and software and modification of software. If certain hardware components and software modules are to be installed at different times, then this should be specified. If delays are excessive, then the contract might provide a remedy such as free training time, a decrease in the maintenance fee, or putting increased personnel on the job.

Payment Schedule

The Payment Schedule is near and dear to both the hearts of the client and vendor. The vendor wants as much up front as possible and the balance soon thereafter. The client wants the opposite. The parties have to reach a realistic compromise taking into account the other's concerns and requirements.

The vendor needs to meet his cash flow requirements, such as his cost for components delivered, overhead expenses and salaries. The client, on the other hand, wants to make sure that he is holding back enough money to keep the vendor interested in continuing diligent efforts if the installation encounters problems. Furthermore, the more money paid up front, the more risk to the client if the vendor goes bankrupt or otherwise fails to perform.