L4M3 Chapter 3

Question 1

Remember, Contract Term and Contract Terms are used interchangeably.

They can refer to the terms/ clauses of a contract but also refer to the time of a contract. Legal’s preference is terms of the contract.

Question 2

What else can Implied Terms be referred to as?

Answer 2

Customs and Practices

Question 3

Can an oral contracts be expressly stated?

Answer 3

Yes, for the sake of exams. They are typically implied though as it is hard to evidence.

Question 4

What is the definition of Inefficient Contract Term?

Answer 4

A term in a contract which cannot be legally enforced.

Question 5

What is the definition of Time is of the Essence?

Answer 5

Term used to state late delivery will heavily impact the buyer and become a conflict of a contract. If time is not detrimental then Time is not of the Essence would be used

Question 6

Is there good reason for contract to use archaic language?

Answer 6

Yes, although it makes it complicated on face value, the use of consistent archaic language ensure confidence between partys about the contracts meaning. It also provides protection because each party knows that the language has been tested in a court of law in common law systems such as UK.

Question 7

What is the definition of Legal Certainty?

Answer 7

Ability to predict how a court of law will decide a matter following dispute

Question 8

What is the definition of Legalese?

Answer 8

Complex legal language

Question 9

Remember, a model form contract is the same as a template?

Question 10

Can you name examples of model form contracts?

Answer 10

NEC – New Engineering Contract – Construction

JCT – Joint Contracts Tribunal – Construction

FIDIC – International Federation of Consulting Engineers

IMechE/IET

CIPS

ITC – International Trade Centre – contracts specifically designed for small companies doing international business

Question 11

Remember, construction industry traditionally has the highest number of legal disputes, therefore, over time, a wide range of model form contracts have been created to provide constancy.

Question 12

Remember, institutes responsible for creating model form contracts have moved away from writing them in favor of the buyer/ customer. They are now often written in balance of both parties

Question 13

What is the definition of liability clause?

Answer 13

Where a party states a limit to their liability

Question 14

What is the definition of an Indemnity clause?

Answer 14

A promise to meet the costs created by the liability.

Question 15

Will organisation take out insurance policies to cover liabilities and indemnities?

Answer 15

Yes, to ensure that the payout does not bankrupt them. This risk is passed to the insurance company under a Transfer of Risk.

Note, the legal liability does onto pass to insurer. The dispute and legal proceeding must be taken up with the organisaiton.

Question 16

What are the most popular insurance polices in contracts?

Answer 16

Employers Liability – a legal requirement for any company employing staff. This cover personal injury claims directly caused by employment

Product/ Public Liability – also known as third party cover, this relates to personal injury caused by the company product and action affecting people outside the organization.

Professional Indemnity Cover – relates to losses and claims made by negligent advice given in a professional capacity. i.e., a consultants advise leads to a disaster event for the buyer

Goods in Transit Cover – Damage caused in the delivery process

Works/ Buildings – cover for building or to cover cost of unfinished work by supplier i.e., cover cost of getting another supplier in to finish job

Question 17

Remember, you should ask the supplier to confirm if their insurance cover is aggregated! Becomes less valuable to the buyer if it is!

Question 18

What can subcontractors also be referred to as?

Answer 18

Tiered suppliers

Question 19

What is the definition of a Guarantee?

Answer 19

Written assurance that quality conditions will be fulfilled and provide remedy if they are not. Remedy is usually replacement or repair FOC with in a given time period.

Question 20

What is the definition of Liquidated Damages?

Answer 20

otherwise known as ascertained damages, are those which are predetermined during contract formation and payable in specific events/ breaches of contract.

Intended to be compensation, not penalty.

It should only be paid when all other remedies have been explored.

Question 21

Which organisation is known to improve international labour standards most?

Answer 21

International Labour Organisation (ILO), an agency of the UN.Sets minimum standards for UN member states to meet.

Question 22

Remember, procurement professional should be ensure supplier follow ILO standards as well as tierd/ sub contract suppliers?

Question 23

What is the definition of Debt Bondage?

Answer 23

A persons pledge of labour to repay a debt but there is no hope of repaying it

Question 24

What is the difference between Cost and Price?

Answer 24

Price - Cost to buyer to procure goods/ services

Cost - Cost to supplier to supply the goods/ service

Question 25

What is the definition of a Price Schedule?

Answer 25

Also known as ‘fee schedule’, it is usually an appendix to a contract stating what the prices are. This will include a schedule of rates, payment terms, payment milestones etc.

Question 26

What is the definition of a Schedule of Rates?

Answer 26

Schedule of rates – An itemized list of prices and units. Note, it can also include price breaks for volume thresholds.

Question 27

What is a combination price rate?

Answer 27

Units of part prices and units of labour hours/ day. i.e. maintenance

Question 28

Remember, professional bodies publish standard price schedules for certain industries. Their purpose is to provide all party with an estimate of what things should cost. These can be used when drafting RfP specs, i.e. the National Housing Federation (NHF) price schedule + % margin (cost plus model).

This makes it easy for all parties to compare costs due to consistency.

It is important to expressly state the price schedule date of publication and version. Both parties need to be working to the same spec.

Question 29

When does CIPS recommend using fixed cost pricing?

Answer 29

For small to medium sized non complex projects.

Gives budget certainty.

It is common to use both fixed and Schedule of rates

Question 30

Remember, Cost plus, Cost Reimbursable, and Open Book pricing are the same thing.

Answer 30

i.e cost + % margin

Question 31

What factors make up a cost?

Answer 31

Costs are a combination of Fixed and Variable costs

Fixed costs remain the same in the short term and do not increase with production volume

Variable cost change in line with production volume

Draw out a breakeven point graph and total cost graph

Question 32

What is Mark Up?

Answer 32

Profit shown as a % of total costs

Question 33

What is Profit Margin?

Answer 33

Profit shown as a % of total sales

Question 34

Why does a cost + model create risk for purchaser and provide little incentive for supplier to control costs?

Answer 34

Because the supplier will also cover their cost and make a consitant profit.

i.e. if cost goes up from £100 - £110, the supplier simply passed the £10 cost onto purchaser and then make an increase profit as a % of £110!

Therefore, purchaser bares all risk with cost + model

Question 35

What is the Indexation?

Answer 35

Linking of a price/ cost to an index and adjusted in line with movements of the index. It is not a price but the measure of change to price over a period

Question 36

What is the difference between CPI and RPI?

Answer 36

Their only difference in what is included in the basket (metaphorical).The RPI includes mortgage interest, VAT and other taxes.

Therefore, RPI is the higher % index

Question 37

As cost + model does not provide incentive for supplier to control costs, what should you so to mitigate the risks?

Answer 37

Implement an incentivised contract via a cost plus incentive, which is also known as target cost contract or gain share contract. The last definition is most fitting as both supplier and purchaser gain and lose together with movement in cost base. This is based on target cost, target fee and sharing ratio.

Question 38

What does a cost +, target, gainshare contract look like?

Answer 38

Target cost – estimated cost of supply agreed between both parties.

Target fee – the fee/ profit element to be paid by purchaser if actual costs equal target costs

Sharing ratio – proportion of the benefit allocated to the purchaser and supplier. The ratios are often different when cost over target and cost under target.

Question 39

Mathematical example of an incentivised contract? i.e target cost, gainshare contract.

Answer 39

Typical cost + model would look like: £100 cost + 10% mark up so price is £110. Remember, supplier has no incentive to control costs here.

Incentivised cost + model would look like:

Target cost - £100
Target fee - £10
Ratio if cost increase: P:80/ S:20
Ratio if cost decrease: P:60/ S:40

If actual cost meets Target cost of £100, buyer will pay Target fee at £10 so total price is £110.

if actual cost increase to £120, buyer will only pay 80% of Target fee so total price is £120+£8= £128. Supplier has lost £2 margin so should be incentivised to control most more. Purchaser has limited their risk.

If actual cost decrease to £80, buyer will pay 40% more of the Target fee s total price is £80+£14=£94. Supplier ability to control cost has earned them more margin/ profit and purchaser has gained by cost reducing and paying a lower price. Thus an incentive for supplier to control costs

Question 40

What is the definition of Ratio Decendi & Obiter Dicta (Latin)?

Answer 40

Ration Decendi - (in court) Judges explanation of how they have came to their conclusion. The methodology behind it.

Obiter Dicta - (in court) Judges making other supportive remarks but are not legally binding. They can be persuasive in future cases.