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L4M3 Commercial Contracting - Chapter 1 > CIPS L4M3 Chapter 1 (1.1) > Flashcards

CIPS L4M3 Chapter 1 (1.1) Flashcards

1
Q

What is a contract?

A

The agreement between two parties as evidenced by the contract documents.

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2
Q

What is an estimate?

A

An estimate is a suppliers best guess at what the price will be. It has no legal standing and in commercial contracts it should be avoided

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3
Q

What is a quotation?

A

A firm price offer obtained via a formal or informal process;

Quotations should only be used in any of the following situations

  • for low-value, low-risk purchases
  • where the specification and delivery terms are fixed
  • where suppliers have been pre-qualified
  • where a framework or dynamic purchasing system has locked down the contract terms and price is the only variable
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4
Q

What is a Tender?

A

A bid obtained via a formal process;

Tenders should be used in the following situations

  • For complex projects
  • for high-value or high-risk purchases
  • for projects where quality and price need to be assessed.
  • where access to unknown suppliers is required and there is a need to either pre-qualify them as part of a two-stage process, or to assess their stability as part of a single-stage open tender process
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5
Q

What is a Framework agreement?

A

A formal agreement between two organisations that is intended to become legally binding in the event that a contract is created

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6
Q

What is a Request for quotation (RFQ)?

A

A type of procurement document used to request price quotations from prospective sellers of common or standard products or services. Sometimes used in place of request for proposal and, in some application areas, it may have a narrower or more specific meaning.

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7
Q

What are the main features of a Request for quotation (RFQ)?

List their advantages, risks and controls

A
  • Degree of formality

Risks - • done via phone, • lack of audit trail • lack of transprency •limited market engagemnt • small and known supplier pool

Advantages - •reduces adminstration costs •frees up professional resource • small and known supplier pool

Controls - •set maximum value limits • set minimum acceptable formality ‘quick quote’ e-tendering platforms •issue standard terms and conditions • monitor usage • train staff in possible risks.

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8
Q

What are the main features of Request for quotation (RFQ)?

List their advantages, risks and controls

A
  • Speed

Risks - • turnaround times can be short • quick implementation is sometimes unavoidable necessary

Disadvantages - • used in the wrong circustances • temptation to seek quick quotes • no understandingof the wider procurement landscape • no thought given to contract terms • no thought given to supplier vetting

Controls - • category management approaches to aggregate spend • framework agreements to ensure contract terms are fixed• only permit quotations to be sought from pre-qualified suppliers

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9
Q

What are the main features of Request for quotation (RFQ)?

List their advantages, risks and controls

A
  • Relationship to contract documents

Risks - • none

Disadvantage - • lack of clarity as to the contractual nature of the request •quotes ofen issued on supplier’s terms and conditions

Controls - • ensure terms and conditions are included in request and reiterate them at the point of order • cross-reference any information provided in the request with the order

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10
Q

What is an Invitation to tender?

A

A more formal sourcing exercise than RFQs, which means more thought is given to the selection of suppliers and the working up of contract documentation. Sometimes called requests for tender (RFTs)

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11
Q

What are the main features of Invitation to tender (ITT)?

List their advantages, risks and controls

A
  • Formality

Risks - •requires specific documentation •lack of project-specific thought •unnecessary adminstrative burdens •challenge by suppliers if rules are not followed

Advantages - •Full audit trail •reduction of bribery and corruption •wider market engagement

Control - •clear process, including options appraisals, reporting and accountablity •ensure process match legal requirements •Audit random sample for compliance •Train staff on formal processes

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12
Q

What are the main features of Invitation to tender (ITT)?

List their advantages, risks and controls

A
  • Lack of speed

Risks - •urgency can drive poor practice •lack of understanding in the appropriate use of tenders •poor documentation leading to prolonged clarification processes and/or poor results

Advantages - •proper understanding of the time needed to deliver a tender process can drive improvements in forward planning

Control - •ensure the forward plan is robust •clear authorisation process for urgency e.g. waiver •standardisation •Train staff in processes to ensure efficiency

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13
Q

What are the main features of Invitation to tender (ITT)?

List their advantages, risks and controls

A
  • Relationship to contract documents

Risks - •inconsistencies, especially where clarification exercises are necessary

Advantages - •clear and robust response schedules can be easily inserted

Control - •design the tender return and contract documents to ensure ease and clarity of use

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14
Q

What are?:

Public (or state) Sector

Utilities Sector

Joint Contracts Tribunal

A

Public Sector - Service organisations run by the government and usually funded by taxes

Utilities sector - normally includes energy supplies, water and sewage, and telecoms networks

Joint Contracts Tribunal - a body set up to include various stakeholder groups from both constructing and client sides of the industry

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15
Q

Define Tender returns (or submissions)

A

Tender returns (or submissions) include not only price but variables such as method statements, timescales or the quality aspects of the delivery

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16
Q

Define Bribery

A

Bribery is the promise, offer or giving of financial advantage to someone in the expectation that they will improperly perform their functions, or to reward them for having done so; also accepting such a promise, offer or advantage (whether or not the function is improperly performed)

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17
Q

Difine corruption

A

Corruption is any improper performance of function in return for some kind of advantage which may or may not be financial, e.g. facilitation payments, nepotism (favoring family members) or career promotion. Both the providing and receiving of the advantage are practice.

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18
Q

Define Collusion

A

Collusion is where two or more potential suppliers (or the purchaser and one or more suppliers) secretly co-operate to undermine the competitiveness of a tender process.

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19
Q

Explain what is an Audit trail and its importance

A

An Audit Trail is the written or electronic record of what was done, when and by whom.

Audit Trails are important because

  • they reduce bribery, corruption and collusion by increasing the likelihood of being caught.
  • they provide solid evidence in the event of such activity occuring.
  • they improve accountability even when there is no criminal or fraudulant intent.
  • they help trace errors.
  • they provide solid evidence of the facts of a situation when disputes arise.
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20
Q

Explain what is a Specification and its importance to commercial contracts

A

A Specification is the document which sets out the detailed requirements for the goods, services or works that you are procuring.

Any ambiguity, misunderstanding, lack of clarity or confusion about the specification will result in

-poor bids being received - either overpriced or underpriced, claims for extensions of time or additional payments, administration costs resulting from contract clarification orders , the potential for goods or services being delivered that do not serve the desired purpose, or being delivered in the wrong place, at the wrong time or in the wrong quantities, the potential for goods or services being delivered which do not meet the required standards, which may be written in law, putting the purchaser, end users or the general public at risk

Specifications describing exactly what you want in miniscule detail can make you miss out on opportunitites for change and innovation

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21
Q

What are the two (2) types of specification and list their traits

A
  • Performance specifications

Traits of performance specifications

  • focus on outputs
  • sets out result to be acheived
  • the ‘what’, not the ‘how’
  • gives supplier flexibility to present solutions that the buyer may not have considered
22
Q

What are the two (2) types of specifications and list their traits

A
  • Conformance specifications

Traits of Conformance specifications

  • focus on inputs
  • gives specific methods, processes and materials
  • may identify specific manufacturers or components
  • the ‘how’ as well as the ‘what’
  • ties supplier to set details
23
Q

List the ten (10) key things to think about when designing a specification

A
  • Purpose
  • Type
  • Perspective
  • Relevance
  • Scope
  • Performance
  • Improvement and Innovation
  • Clarity
  • Regulatory compliance and quality
  • Service conditions
24
Q

Explain the key points of designing a specification

A
  • Purpose

What are you trying to achieve?

  • current needs
  • future-proofing
  • the make or buy question
  • Type

Decide whether to use a conformance or performance specification, taking the following into account:

  • whether a specific technical interface or compatibility with other systems is required
  • interoperability between suppliers products including any risk of todays solution lockin
25
Q

Explain the key points of designing a specification

A
  • Perspective

Decide what the difference stake holders need

  • identify the stakeholders
  • consider what influence they have
  • decide what their needs are
  • remember to consider the perspective of the supplier
  • Relevance

Include everything you need, and nothing you do not.

  • what are the minimum and maximum standards? How would they differ in cost, and would extra cost be offset by greater benefit?
  • would higher investment bring indirect benefits? Eg, would investing in higher spec equipment allow the company to complete more work in-house?
26
Q

Explain the key points of designing a specification

A
  • Scope

Decide what should be included and excluded by answering the following:

  • are there geographical, business unit and value limits?
  • will the scope change during the contract and if so, how?
  • are there any test, implementation or user training needs?
  • is any internal input required?
  • Performance

Define an acceptable quality standard by doing the following:

  • set KPIs and targets
  • make complaint and remedy processes clear
  • clarify the coverage as well as the time period for warranties and/or defects liability periods
27
Q

Explain the key points of designing a specification

A
  • Improvement and Innovation

Never reuse an old specification. If revising an old or template specification, ask yourself the following

  • what has changed since it was first written?
  • what might change while the contract is in place?
  • Clarity

The specification must be clear and unambiguous

  • use plain language where possible, and technical language where necessary
  • are costs of delivery easy to assess and price?
  • can the contract manager easily check whether the delivery meets the contract specification?
28
Q

Explain the key points of designing a specification

A
  • Regularity compliance and quality

What standards must be met?

  • laws, codes of practice and regulations
  • national or international quality standards such as ISO
  • health and safety, the environment, equality and diversity
  • data protection and data security
  • Service conditions

Take into account any impact that is made by the point of delivery itself, including the following

  • operating and storage conditions
  • availability of energy, water and other resources
  • safety considerations
  • cultural issues
29
Q

What problems can occure if the specification is not fully incoroprated into the contract?

A
  • any total agreement clauses in the contract will invalidate anything not actually laid down in the contract documents, including anything included in the tender information
  • any clarification or amendments taken during the tender process are likely to be omitted. This could potentially undermine the whole contract, as the parties may be agreeing to something different to what they believe they are getting.
30
Q

What is a performance management framework

A

a series of standards and targets to be achieved by the supplier, definitions of how those standards will be measured, and actions to be taken on the basis of the measurement results.

Its aim is to promote the best control possible of the things that can be influenced, and to ensure the best possible outcomes against agreed measures.

31
Q

List the key components of a performance management framework

A
  • key performance indicators (KPIs): what you are measuring
  • targets: the performance level to be achieved
  • consequences: what happens if the measures are not achieved and/or if they are exceeded
32
Q

Define the three (3) Key components of performance management and their importantance

A

KPIs are indicators of a level of performance and should be an intrinsic part of the specification.

Whenever KPIs are set within a contract they must be linked to a Target

KPI targets can affect

  • a potential suppliers ability to actually perform the contract (eg they may not be able to resource next day delivery)
  • a potential suppliers interest in the contract (eg they may be able to resource it, but cannot do so cost effectively, or they have other more profitable opportunities, perhaps with lower targets)
  • the price at which the supplier is willing an able to perform the contract.

if there are no direct consequences set out in the contract for not meeting targets

There must be Consequences for meeting or not meeting the KPI targets although if there are no direct consequences there may still be incentives or disincentives embedded in the nature of KPIs themselves.

33
Q

List three (3) reasons to measure performance

A

To demonstrate if it is stable, improving or deteriorating.

34
Q

What are Contractual terms (or terms and conditions)

A

the ‘core contract’ which make up the main body of the contract document,

35
Q

Explain what are Formal contracts

A

Formal contracts are any contract or agreement which is ‘evidenced in writing’ and is intended to be legally binding and are formed under the following circumstances

  • the terms are set out in detail
  • the parties have agreed the terms and want to be able to enforce the agreement, with the power of the law if necessary
  • the evidence of this is that the parties have written down these terms, and signed, or signed and sealed, the document.

There are different names for ‘contracts’ such as an agreement, a commission, a letter of appointment, or a service level agreement (SLA) which means different things in different contexts and is an agreement between the provider and the user of a service that details what performance and quality will be provided; this agreement is legally enforceable if it is referred to in a contract

36
Q

Definition of Draft Contract

and

Contract Drafter

A

Draft (a contract)

the formal drawing up of a contract, formulating the words and clauses

Drafter (of a contract)

the person(s) who design(s) and develop(s) the contract wording

37
Q

List the advantages of using standard templates and bespoke contract forms when drafting contract terms

A
  • all of the key risk areas will be set out and therefore unlikely to be missed
  • standard clauses prompt drafters to think about relevance to current contract
  • the legal meaning of expressions and words will have been fully considered, possibly even tested in the courts, leaving less room for misunderstanding and misinterpretation
  • standard list of schedules to be attached prompts their inclusion
  • focuses thought on the precise needs of the procurement
  • avoids the risks of using standard forms
38
Q

List the disadvantages of using standard templates and bespoke contract forms when drafting contract terms

A
  • potential to use inappropriate template, e.g. supply of goods form for a service contract
  • can result in complacency on the part of drafters resulting in a tendency to only check the clauses which normally need amendment and not think about the specifics of the current procurement
  • failure to cross-check references between clauses and sections
  • references to legislation and standards may become obsolete or not updated
  • definitions used in schedules might differ from those in the standard contract, creating ambiguity and the potential for dispute
  • language may be inconsistent with established legal interpretation
  • potential to omit less obvious areas of risk
  • potential to identify risk and remedy but not consider wider consequences
39
Q

List the key sections in a standard contract

A
  1. The Articles - Summary
  2. The Recitals - The Context
  3. Contract Particulars - Specific Variables
  4. Terms and Conditions - Detail
  5. The Schedules -
40
Q

List the process for establishing the contract terms in a formal contract

A
  1. Purchaser designs contract
  2. Draft contract discussed with potential suppliers as part of pre-market engagement
  3. Contract terms refined
  4. Draft contract issued with RFQ, ITT or invitation to negotiate
  5. Quotes or tenders received on the basis of stated terms OR terms negotiated as part of negotiation process
  6. Quote/tender/final negotiatied offer accepted, including confirmation of agreed terms
  7. Formal contract documents produced and signed
41
Q

What is Market leverage?

A

Another term for buying power, the ability of a purchaser to strongly influence the outcome of commercial negotiations

42
Q

Why are contract terms designed?

A

To protect the supplier

To protect the purchaser

To balance the protection between them

43
Q

What are ways of establishing the terms of an informal contract if nothing was written down, e.g. by telephone

A
  • if the parties were contracted previously, the terms of those agreements might be assumed to apply again
  • if there are normal sector expectations about certain aspects of the delivery, they might be assumed to apply
  • either of the above could be discounted if there were any evidence suggesting that either party had indicated that other circumstances should apply in this case
44
Q

What is a Schedule to a contract?

A

An appendix to the body of the contract form

45
Q

Why are Schedules used?

A

They make it easier to incorporate project-specific information in a contract without having to amend the wording of the main body of the document clause by clause

46
Q

What are the Benefits of adding a schedule as an appendix to a contract?

A

Drafting the contract is simplified, therefore quicker and more cost effective

Within the purchasing organisation, clauses for similar contracts have identical wording, avoiding the risk of different approaches

Contract managers become familiar with the forms that are used regularly

The contrat can be drawn up in such a way as to allow direct incorporation of a suppliers tendered offer, reducing the risks of misinterpretation

47
Q

What are the most common types of schedules

A
  • Specification
  • Preliminaries or contractual/operational matters
  • Performance management framework
  • Site lists, maps and plans
  • Health and Safety
  • Method statements
  • Suppy chain
  • Alliancing agreements
  • Core list or exclusions list
  • Suppliers staff
  • Codes of Conduct
  • Data Management
48
Q

What is Geographic Information System (GIS) mapping?

A

A means of storing, retrieving, managing, displaying and analysing data in relation to its geographic or spatial context. It can be used for any kind of data (quantitative or qualitative) mapped in layers which can range from global/international down to precise locations within buildings, depending on the parameters set and the needs of the data users

49
Q

What are Schedule of rates?

A

An itemised list of component parts within a lump-sum contract, or a list of individual products, giving a price for each unit

50
Q

What is a General Date Protection Regulation (GDPR)?

A

European regulation which sets out how personal data must be managed, applying to any data relating to any person in the EU, whether they are a European citizen or not, and to all organisations doing business, regardless of the nationality of the business ownership

51
Q

Contract Variations - The change process should be set out in the contract and should include

A
  • Who can request a change
  • Who can authorise a change
  • Who can accept a change
  • The mechanism for agreeing price adjustments in respect of such a change
  • The implications for the contract if a variation order (also known as a change order) is rejected
52
Q

What should the Variation Order include?

A
  • A statement of any price impact on the contract value.
  • reference both the clause allowing for the change, and any clauses or schedules which it changes

L4M3 Commercial Contracting - Chapter 1 (3 decks)

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