L4M3 Chapter 3 Flashcards
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.
What else can Implied Terms be referred to as?
Customs and Practices
Can an oral contracts be expressly stated?
Yes, for the sake of exams. They are typically implied though as it is hard to evidence.
What is the definition of Inefficient Contract Term?
A term in a contract which cannot be legally enforced.
What is the definition of Time is of the Essence?
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
Is there good reason for contract to use archaic language?
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.
What is the definition of Legal Certainty?
Ability to predict how a court of law will decide a matter following dispute
What is the definition of Legalese?
Complex legal language
Remember, a model form contract is the same as a template?
Can you name examples of model form contracts?
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
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.
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
What is the definition of liability clause?
Where a party states a limit to their liability
What is the definition of an Indemnity clause?
A promise to meet the costs created by the liability.
Will organisation take out insurance policies to cover liabilities and indemnities?
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.
What are the most popular insurance polices in contracts?
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
Remember, you should ask the supplier to confirm if their insurance cover is aggregated! Becomes less valuable to the buyer if it is!
What can subcontractors also be referred to as?
Tiered suppliers
What is the definition of a Guarantee?
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.
What is the definition of Liquidated Damages?
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.
Which organisation is known to improve international labour standards most?
International Labour Organisation (ILO), an agency of the UN.Sets minimum standards for UN member states to meet.
Remember, procurement professional should be ensure supplier follow ILO standards as well as tierd/ sub contract suppliers?
What is the definition of Debt Bondage?
A persons pledge of labour to repay a debt but there is no hope of repaying it
What is the difference between Cost and Price?
Price - Cost to buyer to procure goods/ services
Cost - Cost to supplier to supply the goods/ service
What is the definition of a Price Schedule?
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.
What is the definition of a Schedule of Rates?
Schedule of rates – An itemized list of prices and units. Note, it can also include price breaks for volume thresholds.
What is a combination price rate?
Units of part prices and units of labour hours/ day. i.e. maintenance
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.
When does CIPS recommend using fixed cost pricing?
For small to medium sized non complex projects.
Gives budget certainty.
It is common to use both fixed and Schedule of rates
Remember, Cost plus, Cost Reimbursable, and Open Book pricing are the same thing.
i.e cost + % margin
What factors make up a cost?
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
What is Mark Up?
Profit shown as a % of total costs
What is Profit Margin?
Profit shown as a % of total sales
Why does a cost + model create risk for purchaser and provide little incentive for supplier to control costs?
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
What is the Indexation?
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
What is the difference between CPI and RPI?
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
As cost + model does not provide incentive for supplier to control costs, what should you so to mitigate the risks?
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.
What does a cost +, target, gainshare contract look like?
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.
Mathematical example of an incentivised contract? i.e target cost, gainshare contract.
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
What is the definition of Ratio Decendi & Obiter Dicta (Latin)?
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.
