Lecture 12

Question 1

What does a Purchase Contract do?

Answer 1

Establishes the terms and conditions by which the

parties agree to conduct business

Question 2

Types of Contracts

Answer 2

Fixed-price Contracts

Cost-based Contracts

Question 3

Fixed-price Contracts

Answer 3

Firm fixed price
Fixed-price contract with escalation
Fixed-price contract with redetermination
Fixed-price contract with incentives
High risk for Supplier, low risk for Buyer

Question 4

Cost-based Contracts

Answer 4

Cost plus incentive fee
Cost sharing
Time and materials contract
Cost plus fixed fee
High risk for Buyer, low risk for suppler

Question 5

Firm Fixed Price contract

Answer 5

Price stated in the agreement does not change, regardless of any type of environmental change

Question 6

Fixed-Price Contract with Escalation

Answer 6

Base prices can increase or decrease based on specific identifiable changes in material prices.

Question 7

Fixed-Price Contract with Redetermination

Answer 7

Initial target price based on best-guess estimates of labor and materials, then renegotiated once a specific level or volume of production is reached

Question 8

Fixed-Price Contract with Incentives

Answer 8

Initial target price based on best-guess estimates of labor and materials, then cost savings due to supplier initiatives are shared at a predetermined rate for a designated time period

Question 9

Cost Plus Incentive Fee

Answer 9

Base price is based on allowable supplier costs, and any cost savings are shared between the buyer and supplier based on a predetermined rate for a designated time period

Question 10

Cost Sharing

Answer 10

Actual allowable costs are shared between parties on a predetermined percentage basis and may include cost productivity improvement goals

Question 11

Time and Materials Contract

Answer 11

Supplier is paid for all labor and materials according to a specified labor, overhead, profit, and material rate.

Question 12

Cost Plus Fixed Fee

Answer 12

Supplier receives reimbursement for all allowable costs up to a predetermined amount, plus a fixed fee, which is a percentage of the targeted cost of the good or service
US Military Contracts

Question 13

Considerations When Selecting Contract Types

Answer 13

Component market uncertainty
Desired length of agreements
Degree of trust between the contracting parties
Process or technology uncertainty
Supplier’s ability to impact costs
Total dollar value of the purchase

Question 14

Contract Length

Answer 14

Spot Contracts
Short-term Contracts
Long-term Contracts
Uniform Commercial Code

Question 15

Spot Contracts

Answer 15

Those purchases that are made on a nonrecurring or limited basis

Question 16

Short-term Contracts

Answer 16

Contract purchases that are routinely made over a relatively limited time horizon

Question 17

Long-term Contracts

Answer 17

Made on a continuing basis for a specified or indefinite period

Question 18

Benefits of Long-Term Contracts

Answer 18

Assurance of supply
Access to supplier technology
Access to cost/price information
Volume leveraging
Supplier receives better information for planning

Question 19

Risks in Long-Term Contracts

Answer 19

Supplier opportunism
Selecting the wrong supplier
Supplier foregoes other business
Buyer is unreasonable

Question 20

Contingency Elements of Long-Term Contracts

Answer 20

Initial Price
Price-adjustment mechanisms
Supplier performance improvements
Evergreen, penalty, and escape clauses

Question 21

Dispute Resolution Factors

Answer 21

Relationship between the parties
Type of outcome desired by buyer
Setting precedence for future disputes
Need for direct involvement by the parties
Level of emotion present
Cost to resolve dispute