(https://www.aimaccountingservices.

com/)

Home (https://www.aimaccountingservices.com/) Our Services  (https://www.aimaccountingservices.com/about-us/)

Contact Us (https://www.aimaccountingservices.com/contact-us/) About Us (https://www.aimaccountingservices.com/about-us/)

Our Content (https://www.aimaccountingservices.com/downloadable-content/)

Follow the Conversation (https://www.aimaccountingservices.com/follow-the-conversation/) 

RECENT POSTS
Long Term Service Agreements –
The dirty little secret that will affect

What’s Under The Hood power generation for decades to come.

(https://www.aimaccountingservices.co
m/the-dirty-little-secret-that-will-affect-
 craig_nich (https://www.aimaccountingservices.com/author/craig_nich/) -  February 8, 2019 - power-generation-for-decades-to-
 Long Term Service Agreements Series (https://www.aimaccountingservices.com/category/long-term-service-
agreements-series/) - come/)
 0 Comments (https://www.aimaccountingservices.com/looking-under-the-hood/#respond)
Renewables future is here now – how do
gas technologies cope?
(https://www.aimaccountingservices.co
m/renewables-future-is-here-now-how-
do-gas-technologies-cope/)

The hidden creators of unreliable plants

(https://www.aimaccountingservices.co
 m/the-hidden-creators-of-unreliable-
plants/)

(https://www.linkedin.com/company/aim- Selecting a Maintenance Provider:

power-consulting/) Focusing on the Right Things
(https://www.aimaccountingservices.co
m/selecting-a-maintenance-provider/)

This is Part 2 in a four-part series of mini blogs concerning The cost of reliability
Long Term Service Agreements in the power industry. (https://www.aimaccountingservices.co
m/the-cost-of-reliability/)

RECENT COMMENTS

CATEGORI ES

Forming Contracts
(https://www.aimaccountingservices.co
m/category/forming-contracts/)

Industrial Control Systems

(https://www.aimaccountingservices.co
m/category/industrial-control-systems/)

Long Term Service Agreements Series

(https://www.aimaccountingservices.co
m/category/long-term-service-
agreements-series/)

News
(https://www.aimaccountingservices.co
m/category/news/)
 By Bill Ray and Craig Nicholson
Projects
(https://www.aimaccountingservices.co
m/category/projects/)

The typical long-term service agreement (LTSA) of a power turbine is

composed of two elements: the scope and the commercial terms.
 Commercial terms can be further subdivided into those supporting the
scope and those supporting the contract. For the purpose of discussion,
this paper will focus on the scope and their supporting commercial terms.
 The contract terms — such as limit of liability, insurance, indemni cation
and intellectual property — while material are not part of this discussion.

Simply stated, an LTSA is a multi-year agreement with scope, price and

terms.  The spectrum of an LTSA can range from a price list agreement in
which the asset owner selects when and what scope is applied from a
preset list of prices to a full scope agreement in which the LTSA provider is
responsible for determining when and what scope is required.  The
agreements carry many names and differ in nomenclature by provider.
Typically speaking, the most common names for asset owner-controlled
LTSAs are long term maintenance agreement (LTMA), major maintenance
program (MMP), master service agreement (MSA) or parts agreements,
while an LTSA provider-controlled agreement keeps the LTSA designation.
 This paper will focus on the provider-controlled agreements or LTSA.

LTSAs are customizable but they all have a basic structure:

1. A clear scope boundary and de nition of applicable equipment
2. A means to e ciently conduct business over the term
3. A framework for commercial treatment of parts and services performed
in the contract
4. The ability to add signi cant scope and life extension
5. Risk sharing and continuous improvement
6. A division of responsibility between the asset owner and LTSA provider
7. An escalation provision

This discussion will focus on items 1-5.

“The typical long-term service agreement (LTSA) of a power

turbine is composed of two elements: the scope and the
commercial terms”

The scope development for an LTSA begins with de ning the covered
equipment.  The covered equipment becomes the scope boundary of the
contract. The LTSA provider, unless by exception in the agreement, is given
exclusive rights to provide parts and services to the covered equipment.
 The provision of parts and services is addressed through a combination
of xed scope, de ned and priced into the contract, and additional billing
valued and paid at the time of service. The price basis for additional billing
for the non- xed price scope is de ned in the agreement and can be
derived from a variety of methods such as discount to list price or rate
sheet, set price de ned in the agreement or rm priced at time of need.

 The xed scope portion of the agreement comprises the commitment of

the contract. If no additional scope arose during the term of the
agreement, this would be the full value of the contract. Within the covered
equipment, the xed scope work can be broad or narrow. For example, the
covered equipment can be the gas turbine, steam turbine and associated
generators, with the xed scope only applied to the (1) gas turbine plus
inspection services on the steam turbine and generators (2) all the covered
equipment or (3) any coverage agreeable between the parties.  Similarly,
the covered equipment may vary. For example, the covered equipment may
be the gas turbine and its associated generator, with the steam turbine and
its generator being excluded from the agreement. For both steam turbines
and generators, the parts and repair needs vary; and it is common to
address these needs through the additional billing component in the
agreement.

The commercial simplicity of an LTSA contract allows the parties to

eliminate repetitive bidding, negotiation and award, and to proceed
straight to project execution.  Increasing the amount of equipment in the
LTSA eliminates much of the need to qualify vendors, create bid
speci cations, negotiate terms, mobilize suppliers, project manage
multiple suppliers working in adjacent spaces or prioritize resources (such
as cranes or lay down space).  If the asset owner does not have the
resources or capability for commercial and project management,
increasing the amount of equipment in the LTSA is a great alternative.
However, the LTSA provider may not be the best-in-class or low-cost
provider for all the scope within covered equipment exclusivity.  

In summary, the asset owner must select his contracting strategy: either to
minimize the covered equipment and maintain the in-house ability to self-
perform (or bid and source) the required scope; or to increase the amount
of covered equipment but create a request for proposal incorporating
additional billing work for comparison among bidders.  Once the contract
is in place, the ability of the asset owner to shop is severely diminished.
Another key element in an LTSA is the framework for the division of
services between those form priced in the contract and those paid
separately at the time occurrence.  The division of “work” is typically
categorized as planned, unplanned and extra work. Planned work is
typically the de ned and expected maintenance sequence of the covered
equipment and is in the xed scope (price) portion of the agreement.  Both
unplanned and extra work require additional payment outside of the xed
price of the agreement. Unplanned work may be identi ed through
discovery during an outage or by an event requiring unscheduled
maintenance ranging from premature wear of a component requiring early
replacement to a catastrophic, in-operation failure with associated
equipment damage.  

Asset owners can protect themselves from the additional contract

expense of unplanned work by requiring extended coverage or warranties
to speci c parts or services beyond standard warranty terms.  The degree,
coverage de nition and remedy for unplanned work is complex, to say the
least. On one extreme, there is the rm scope of the LTSA with all
unplanned work being additional billing (no unplanned coverage).  The
other extreme is that all unplanned work is covered at no additional cost to
the asset owner (full unplanned coverage). In between is a de ned list of
services and parts that are subject to unplanned work coverage.  The
degree of coverage is also variable and can be full value, applicable after a
deductible or applicable up to cap. A thorough knowledge and balance of
technical risks coupled with asset owner cash ow risk is required to
select the optimal unplanned work coverage.  

 In summary, unplanned coverage greatly mitigates additional contract

cost and holds the LTSA provider accountable for work product beyond
traditional warranties, but is highly variable based on which parts and
services are covered, the degree of the remedy and commercial
aggressiveness during the negotiation.  Extra work is most often de ned
as elective or beyond the scope of the agreement such as enhancements,
upgrades or scope outside of the contract. Extra work is typically
performed from predetermined prices with escalation, discounts from
current published price or at a quoted price based on the scope.

“Unplanned work may be identified through discovery during an

outage or by an event requiring unscheduled maintenance “

Given the term of the contract and age of the asset, it is possible that
major components may reach obsolescence, need replacement due to
unexpected technical issues or desirable enhancements may be
developed.  With proper planning and forethought, many of these items
can be addressed in the contract through inclusion in the xed scope, extra
or unplanned work. For example, a control or excitation system nearing
end of life when the agreement is put to bid should have provisions to
replace the control system as an extra work item should it become
inoperable.
Once again, including these items during the competitive bid process
assures a competitive price when they are required in the future.  Likewise,
accounting for unknown technical issues through a form of unplanned
coverage can help mitigate risk. Alternatively, if the desire is to source
anticipated scope items from a best-in-class provider, this option needs to
be explicitly identi ed in the agreement.  For example, if the generator
rotor will reach its anticipated end of life during the agreement term and
the asset owner wishes to bid the scope competitively when required, this
option must be declared in the agreement, or the scope will fall to the
LTSA provider under the exclusivity of provision of covered equipment.  

As a long-term agreement, the LTSA should encourage and promote

teaming.  The asset owner has selected an LTSA provider to work
exclusively over the next decade through good times and bad.  The LTSA
provider is expected not only to perform the contracted service, but to
improve year over year. In addition, the LTSA maintenance and technical
support teams must work in tandem with plant operations personnel as if
they were one company.

Team behavior is typically measured and graded with nancial bonuses

and penalties tied to plant or maintenance performance indicators, or in
extreme cases, contract termination.  Selection of the performance
indicators should be both near term as well as the future. A lot can change
over 10-plus years, so it’s critical to build performance indicators that will
remain relevant over the term.  There are limits on the size of bonuses or
penalties parties are willing to share, so be selective and strategic. Typical
metrics are outage duration, heat rate, parts delivery to schedule and
reliability/availability, but could include metrics such as saves (technical
advice that avoided shutdowns), maximum asset performance during
periods of high grid demand or peak pro tability, turbine/generator
auxiliary reliability, upgrades or enhancements, or return of outage
personnel/leadership.

The scope and structure of an LTSA has many variables.  In the end, there
is a limited amount of price that can be paid by the asset owner or
concessions made by the LTSA provider.  Asset owner capabilities, risk
tolerance, budget, strategic objectives and a sound technical asset
assessment need to be mapped and prioritized to establish a bid
speci cation.  LTSA providers should be evaluated based on their ability to
conform to the speci cation, willingness to team and demonstrated past
performance.

Part 3 in the mini-blog series addresses LTSA viability.

For additional discussion

bill.ray@aimpowerconsulting.com
(mailto:bill.ray@aimpowerconsulting.com)
craig.nicholson@aimpowerconsuting.com
(mailto:craig.nicholson@aimpowerconsuting.com)
www.aimpowerconsulting.com
 Connect via Linkedin


(https://www.linkedin.com/in/williambillray/)


(https://www.linkedin.com/in/jonathancraignicholson/)


(https://www.linkedin.com/company/aim-power-consulting/?
viewAsMember=true)

TAGS: #AIMPOWERCONSULTING (HTTPS://WWW.AIMACCOUNTINGSERVICES.COM/TAG/AIMPOWERCONSULTING/)

 Previous Post Next Post 

Why Long Term Service Agreements Build Long Term Service Agreements – past
Profits for Power Industry Partners performance and future viability
(https://www.aimaccountingservices.com/ltsas (https://www.aimaccountingservices.com/do-
-and-their-role-in-power-generation/) they-have-a-future/)

 YOU MIGH T AL S O L IKE

The dirty little secret Top 10 LTSA Tips Long Term Service
that will affect power (https://www.aimaccou Agreements – breaking
generation for decades ntingservices.com/ltsa- the mold for your next
 to come.
(https://www.aimaccou
ntingservices.com/the-
dirty-little-secret-that-
will-affect-power-
generation-for-decades-
to-come/)
 January 30, 2020
top-10-tips/) LTSA
 March 13, 2019 (https://www.aimaccou
ntingservices.com/brea
king-the-mold-of-ltsas/)
 February 26, 2019

Leave a Reply

Your Comment Here...

Name (required) Email (required) Website

POS T C OMME NT

FOLLOW US
(https:

//www.

linkedi

n.com/

compa

ny/aim

power-

consul

ting/)

Copyright - OceanWP Theme by Nick