Chapter 1.3 Flashcards
Compare types of contractual agreements made between customers and suppliers
What can one-off purchase contracts be used for? (3)
- Goods
- Services
- Works
What is the key element of a one-off purchase contract?
It relates to a single purchase (this is not the same as a single item)
What is a one-off purchase most likely to be when buying services
For a single engagement
In the purchasing of works, what will the one-off contract relate to?
A very specifically defined project
May simple one-off purchases not have a formal contract?
Yes
For complex one-off purchases how is the sourcing process competitive?
It happens through formal tenders or via parallel negotiation with potential suppliers
Name 2 things a one-off purchase contract can be
Simple or complex
In the case of simple items, what are the usual reasons for using a one-off contract? (3)
- Low-value spend
- Urgent need
- Lack of planning
In the case of complex items, what are the usual reasons for using a one-off contract? (2)
- Lack of fully developed strategy for the spend area
- The inability to predict the future funding
What does the complexity of the contract usually reflect?
The complexity of the purchase
Name 9 things you will still need to cover in the contract of a one-off purchase
- Warranties and guarantees
- Insurance requirements
- Licensing and updates of software
- Specification requirements
- Minimum quality standards
- Built-in change process
- Ability to extend the scope of the contract
- Ability to extend the duration of the contract
- Data security protocols
Name 3 benefits to the purchaser of a one-off purchase
- On simple, low value purchases, the potential for speedy delivery, particularly if purchased on standard terms from suppliers who are known, approved and possibly local
- The ability to tap into falling market prices and/or time-limited special offers
- On complex projects, the ability to narrow down the terms to one deliverable, which can simplify the contract, covering only the risks associated wth that one product, service or works package
Name 2 benefits to the supplier of a one-off purchase
- If the one-off contract is on a spot-purchase basis, there may not be any competition, enabling the supplier to set its own price
- If purchasers regularly use one-off contracts, the total spend may be significant even if individual order values are low
Name 4 risks for the purchaser of one-off contracts
- If the one off contract is tied into on-the-day pricing, it is not possible to demonstrate value for money because there is no market investigation and limited, if any, competition.
- The contract will not allow for extensions should the situation change such that ‘more of the same’ is required. This can create a situation where a supplier may become embedded and thereby gain additional leverage over price and/or contract terms
- There is only a limited ability to develop a relationship with the supplier, so opportunities for joint working and/or innovation will not be captured
- Where procurement is regulated, such as in the public sector, the use of one-off contracts may be viewed as a mechanism for avoiding the regulations by keeping values below financial thresholds. This is non-compliant and may lead to legal challenges, financial penalties and reputational damage
Name 2 risks for the supplier of one-off contracts
- low value add-hoc purchases make production planning difficult
- A failure to perform on this one contract could lose a potential client forever, as there is no readily available opportunity to demonstrate performance improvement
Ad-hoc purchases
An item bought for a single and non-recurring use or purpose
Framework arrangement
A rather loose set-up without any legal standing. It usually occurs when an organisation has decided for itself to limit the number of suppliers it is willing to work with and, through a purely internal process, sets up an approved list of such suppliers.
Are there any commonly agreed terms for working with suppliers in a framework arrangement?
No
What 3 things may a framework arrangement also be called?
- Approved supplier list
- Approved contractor list
- Approved panel
Does a framework arrangement have any legal standing?
No
Name 4 features of framework arrangements
- Quick access to a market of reliable and vetted suppliers for either direct purchasing or limited tendering among a small number of firms
- Familiarity - using a known client/supplier
- Keeping the list up to date with complete, current and accurate information on supplier status matters, changes in structure and ownership, licences and industry accreditations
- Open access to the list whereby suppliers can apply for inclusion at any time or at regular intervals, not just in response to a single advert (unlike formal framework agreement)
Name 3 advantages for purchasers of framework arrangements
- Reduces tender process costs and speed to supply
- Ability to build trust through regular work
- Ability to include newly discovered potential providers
Name 4 disadvantages for purchasers of framework arrangements
- limits the number of potential providers so could miss the best or most appropriate provider
- This can be resource intensive as all documentation needs to be checked
- Resource requirement for vetting new suppliers
- Risk of the lists becoming large and unmanageable
Name 4 advantages for suppliers on framework arrangements
- Better chance of winning tenders when low number able to bid
- Potential for high turnover of low-value orders for known client
- Ability to build trust through regular work
- Ability to target potential customers without constraints of tender timelines
Name 3 disadvantages for suppliers on framework arrangements
- No access if not on the list/framework
- It can be resource intensive as documentation may need to be provided separately for many databases
- Risks of lists becoming large and reducing likelihood of winning work
Does an informal framework arrangement have any legal standing?
No
How does a formal framework arrangement differ from an informal framework arrangement?
It does have some legal standing
Is a formal framework arrangement a contract?
No - because there is no consideration involved
What is a formal framework arrangement?
An overarching (or umbrella) agreement under which contracts can be created. It is intended to be legally binding on the parties from the point in time when the contract under the framework is created
How is a formal framework arrangement not itself a contract?
It does not commit either party to actually enter into a contract, but it does set out the terms and conditions which will apply if a contract is created
Should a framework agreement include a mechanism for determining price?
Yes - but it will not be as detailed or definitive as a schedule of rates in a contract
Name 7 things a formal framework agreement will set out
- How call offs can be made - whether a mini-competition is required or a direct call off can be made
- How price is calculated
- The specification
- The duration of the agreement
- Who can access the agreement - a true framework agreement is a closed system
- Any limitations
- The main terms to be included in the contract or the form of contract to be used, where this is intended to be a standard form
Mini-competition
A limited tender exercise, usually only on price, under the rules set out in a framework agreement; only suppliers appointed to the framework are able to take part
Direct call off
The act of placing an order under a framework agreement without having further competition
Closed system
A system or process that, once started, does not allow new entrants. A framework agreement might have multiple buyers and multiple suppliers, but once set up, no additional buyers or suppliers can be added to it
What will the purchaser do when wishing to use a framework agreement
It will issue a call off order or call off contract using the terms set out in the framework agreement. This might be a direct call off or may require a mini competition
Name 4 types of framework agreements
- One-to-one
- One-to-many
- Many-to-one
- Many-to-many
How should a direct call off work in regulated procurement?
The selection should be based on the supplier with the highest ranking when the original evaluations for appointment to the framework were made. That supplier should receive call offs until they reach capacity or unless they are not interested in a particular job. At that point the second ranked supplier should be approached
Under a formal framework agreement a direct call off is only permissable if…
the agreement itself says it is
Name 3 purposes of mini-competition
- To allow for price to be calculated on the basis of the precise requirements
- To allow contract-specific terms to be refined
- To maintain an element of competition among the framework suppliers
What is the advantage of mini competitions under frameworks as opposed to full tender processes
They are quicker and take fewer resources
What is the risk of mini competition under frameworks as opposed to full tender processes
If the framework itself is not managed properly, the due diligence checks may become out of date and purchasers may be relying on information that is no longer valid
What the only limitation on the nature of contracts that can be created under a framework agreement
What the agreement itself lays down
What are mini competitions used to clarify?
Contract-specific terms and encourage competition
What is a call off/term contract?
One which exists for a fixed period of time, rather than for a specific purchase
When are call offs/term contracts used?
Where the purchaser has a regular requirement for goods or services of similar-nature which they want to be provided by a single supplier
Name 3 examples of call offs/term contracts
- Servicing and maintaining equipment in buildings, like fire alarms or lifts
- Services which cannot be carried out on site
- Supply of goods which are regularly required but where the purchaser can only stock a limited amount
With call offs/term contracts, are all of the terms of the contract agreed at the outset, including price?
Yes
What is a call off
The actual order placed under the contract
Name 3 things a call off should state
- Item
- Quantity
- Place of delivery
Under term contracts are suppliers committed to meeting all orders placed?
Yes
Name 6 benefits of a call of/term contract for the purchaser
- Guaranteed delivery for the length of the contract
- Agreed prices, either fixed for the duration of the contract or with a pre-agreed mechanism for price adjustments
- Simple order mechanisms at the point of need
- Schedule of rates pricing enables electronic procure-to-pay systems, which gives greater control and visibility of spend
- The value of spend and the length of contract justify the costs of proper market engagement and tender or negotiation processes resulting in better value for money
6.The longer the contract, the greater the opportunities for aligning working practises to create joint efficiencies
Name 4 benefits of a call of/term contract for the supplier
- Reasonable certainty of future demand makes it easier to plan resources and production and to predict cash flow
- Simple order and payment systems reduce administration costs
- Agreed specifications can reduce the costs of short-order runs. This is particularly true if the supplier can influence the specification and can produce the same product for different customers
- The longer the contract, the greater the opportunities for aligning working practises to create joint efficiencies
Name 2 risks of a call of/term contract for the purchaser
- If prices generally fall, the purchaser may be locked in to a higher rate
- In sectors where technology changes rapidly, a term contract risks tying down the specification in a way that prevents innovation
Name 2 risks of a call of/term contract for the supplier
- If costs of raw materials are rising but the sale price is fixed, the contract may make a loss
- In long-term contracts, the ability to move production on to newer models or designs may be hampered by a need to continue serving a client with an older specification
How should you refer to contracts for a specified period?
Term contracts - avoids confusing them with call off contracts created under framework agreements
Other than contract type, how else can you classify contracts?
They can be split down by their subject matter into whether they are contracts for goods, services or works
What are goods
They are what would normally be thought of as products, things or stuff: tangible items or materials that can be touched, stored or moved
What are services
They are intangible. They cannot be touched or stored. A service is something done or provided by a person or a group of people
What are works
They can be thought of as a special type of services contract. Works contracts relate specifically to construction works, buildings, civil engineering and the like
Name 8 aspects of a contract for services
- Regulated procurement (public procurement)
- International trade
- Key personnel
- Local knowledge
- Data sharing
- Insurance
- Conflicts of interest
- Codes of conduct
GATT
General Agreement on Tariffs and Trade, an international agreement (now apart of the WTO) regulating barriers to international trade such as quotas and tarrifs (a payment on goods being imported). only applies to the trade in goods, with the purpose of encouraging international trade in goods
GATS
General Agreement on Trade in Services (now part of the WTO) an international agreement regulating barriers to the provision of services between different countries.
Developing economy
A national economy which is generally held to be still developing its industrial base, financial institutions and economic infrastructure
Transitional economy
A national economy which is moving from being state controlled economy to a full market economy
Command economy
An economy where a central body dictates levels of supply, prices, etc
Market economy
A national economy run on free market principles
When is the difference between goods, services and works important?
If the procurement is subject to regulation and/or trade agreements as different rules or financial thresholds may apply
Hire
A hire contract is a short term agreement to provide goods and services for a duration
Lease
A legal commitment with terms and conditions allowing the lessor (who owns the asset) to charge ‘rental’ fees to a lessee (who will be able to use the asset). The terms and conditions will detail the responsibilities for maintenance, insurance and end-of-contract rights and responsibilities
Is the process of forming a contract for hire the same as that for a contract for sale?
Yes
In order for the hire contract to be legally bound what 5 things must it have?
- Offer
- Acceptance
- Consideration
- Intention
- Capacity to contract
Name 8 aspects of a contract for hire or lease
- Why hire/lease rather than buy?
- Hire the asset or buy the service?
- Transfer of risk
- Maintenance
- Period of hire and arrangement at the end of the period
- Financial implications
- Extending the scope of the contract
- Reducing the scope of the contract
Where does a hire purchase agreement exist?
Where the asset is hired for a period of time but at the end of that period the intention is that there will be a transfer of ownership
When does a hire purchase agreement become a purchase contract?
The contract is a contract for hire for the full duration until the final payment or the option payment (whichever applies) is made. Only at that point does it become a purchase contract
