Prototype Contract Technicalities

From early on the thought is to secure customers; otherwise, why go into business? When the first advanced prototype is approaching completion, the anticipation of putting a demo unit in the field builds. Sales or management go out with a list of prospects to secure a demonstration partner. The specifications that were developed with goals for the system are discussed and some considerations are made of the prototype’s capabilities, but sales, and management want to find a site, and the developers are

ready to show off what they have created. Then the day comes when the contract is signed.

When the system is being built, someone states that the contract includes a factory acceptance test and a site acceptance test, and reveals the specified demonstration period. It just happens that the demonstration period equals the system's expected operating life. Nobody saw that coming. Sales produces documentation showing that the system would run that long; engineering states that that operational lifetime specification is merely a goal, and that they have not reached it yet; and management states that the stakeholders will not allow a new contract negotiation. The additional operating time needed for the factory and site acceptance tests pushes the total operating time far beyond the specification’s time limit. The team decides to move forward with the demonstration.

Frequently, engineers and other developers are not included in the contract development process, only to find that they cannot deliver on the contract.

Including the key developers in the contract process and, preferably, limiting deliverables before the sales hunt begins reduces the risk of the demonstration’s failure. Customers often return with requests that they did not discuss previously with the technical departments. Take the time to return to the table to discuss what is actually possible. Another clause to consider adding to a contract regards exceptional learning. The goal of the entire process of putting an advanced prototype into the field is not to sell 1000 units; it is to learn from the experience. When the first system is moved out of the laboratory into the real world, expect the unexpected. Water conditions, air quality, climate, and other issues that disrupt the system at the demonstration site are easy to overlook. Along with the contract’s key obligations and the force majeure clause, add an exceptional learning clause that covers the demonstration in case the system is unrecoverable because of unexpected learning. This clause’s strength depends on the system’s cost, the amount of money available to the project, and the parties’ commitment. In many cases, the customer is most likely a potential future high-volume buyer who is willing to take some risk to prove the technology. Selling a contract that cannot reach even minimal expectations will definitely strain the relationship. Make it clear to the customer that the demonstration is a learning experience and do not lead him to believe that he is purchasing a product.

Talk to your attorney about your options.

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