Deck 14: Contract Management

Question 1

Under a fixed-price contract, increasing factor market prices will place more risk on the purchasing organization whereas decreasing such prices will shift the contract economic risk to the supplying organization.

Answer 1

False

Question 2

Cost-based contracts are inappropriate for situations in which there is a risk that a large contingency fee might be included.

Answer 2

False

Question 3

To be most effective, cost-based contracts should include cost productivity improvements in order to drive continuous cost reduction over the life of the contract.

Answer 3

True

Question 4

In the firm fixed price contract, the price stated in the agreement does not change, regardless of fluctuations in general overall economic conditions, industry competition, levels of supply, market prices, or other environmental changes.

Question 5

In a fixed price contract with escalation, all price changes should be keyed to a third-party price index, preferably to a well-established, widely published index.

Question 6

There is an incentive, at least in the short run, for suppliers to be inefficient in cost-based contracts because they are rewarded with higher prices.

Question 7

The least appropriate method of drafting a new contract is to start with a general form (or forms) and samples of past contracts for similar situations.

Question 8

Firm fixed price contracts are generally applicable when the goods or services procured are expensive, complex, and important to the purchasing party or when there is a high degree of uncertainty regarding labor and material costs.

Question 9

Cost-sharing contracts are especially important during a period when raw material prices are decreasing.

Question 10

In a firm fixed price contract, if the supplier increases its contract price in anticipation of rising costs, and the anticipated conditions do not occur, then the purchaser has paid too high a price for the good or service.

Question 11

Escalation clauses allow only increases in the base price.

Question 12

The longer the term of the purchase agreement, the less likely firm-fixed price contracts will be acceptable to the supplier.

Question 13

In global commerce, people assume that the terms of one market are acceptable in another and do not recognize cultural or legal landmines.

Question 14

It is often easy to go back and negotiate what contractual terms actually mean once the contract has been signed and a period of time has passed.

Question 15

Technical sections of the contract are typically the least source of misinterpretation of terms and conditions.

Question 16

It is always a good idea to double-check all attachments to the contract, because many of the technical details are included here.

Question 17

Once a contract has been negotiated and signed, the real work is over.

Question 18

Most commonly used contracts are developed from earlier contracts that are subsequently modified to fit the situation at hand.

Question 19

The assignment and contracting clause of a contract stipulates whether the supplier can assign its rights described in the agreement to another party and whether subcontracting is permissible.

Question 20

Fixed price contracts are the most complex and difficult for purchasing to manage because there is a need for extensive auditing or additional input from the purchasing side.

Question 21

In construction contracts, penalty clauses are technically called "liquidated damages clauses;" if they are labeled "penalty" clauses, there is a long line of cases that say they are not enforceable.

Question 22

Agreeing to a short-term contract frequently allows the buyer to have access to more detailed cost and price information from the supplier in exchange for the flexible contract term.

Question 23

Perhaps the most compelling reason to consider a short-term contract, from the buyer's perspective, is that such contracts may reduce the level of risk incurred if longer-term contracts are employed.

Question 24

An important factor to consider when hiring an outside consultant to perform contract services for a company is that such a person is the purchasing company's employee, not its agent.

Question 25

As the total dollar value/unit cost of the contract decreases, purchasers must spend more effort creating effective pricing mechanisms.

Question 26

In a systems outsourcing situation, acceptance test criteria can only be determined after issuing the contract as actual operating conditions cannot be specified until the system is fully operational.

Question 27

One of the leading causes for failure of systems contracts is that purchasers get locked into price structures that do not adequately reflect changes that have occurred since the agreement was originally signed.

Question 28

Even when there is no contract, most transactions are covered by a "gap filler" known as the Uniform Commercial Code.

Question 29

Perhaps the most important clause of a consulting contract to the consultant is the assurance of payment.

Question 30

If suppliers are not forthcoming with labor and material cost data, cost models can be developed to improve the buyer's negotiating position using material/labor ratios available from industry databases.

Question 31

There is automatic determination of copyright ownership unless the consultant and the client company execute an agreement specifically assigning the copyright to the client company.

Question 32

A carefully worded and prepared contract is not subject to any form of dispute or disagreement.

Question 33

The use of automated online catalogs by major suppliers of MRO items allows users to buy directly from blanket orders and national contracts from their desktops.

Question 34

To be successful, a good long-term contract needs to only consider the needs of the buyer.

Question 35

Long-term contracts should be written to avoid incentive or cost-sharing arrangements.

Question 36

A buyer must focus intently on determining an acceptable initial price because over the course of the long-term contract the price adjustment mechanism will use the initial price as the base for future adjustments.

Question 37

A major concern with many outsourced systems contracts today is that much of this work is going overseas to countries such as India.

Question 38

Even if the client company does not withhold income taxes, a consultant will normally be viewed as an employee, not as an independent contractor.

Question 39

Once a long-term contract with a supplier has been executed, it is much more difficult (and expensive) to switch suppliers.

Question 40

Long-term contracts can help the buyer to gain exclusive access to proprietary supplier technology, and blocking competitor access can result in a short-term competitive advantage.

Question 41

The _____ clause of a contract outlines the relationship between the Agreement and any other purchase orders issued by the company to the supplier.

A) specifications, quality, and health, safety, environment
B) most favored customer
C) statistics
D) effective date and termination
E) purchase orders

Question 42

The _____ clause of a contract states whether the buyer can expect to receive preferential status over the supplier's other customers.

A) most favored customer
B) confidentiality
C) notices
D) liability
E) scope of agreement

Question 43

The _____ clause of a contract defines all of the important terms contained within the contract and is important so everyone understands exactly what each term means.

A) supply and delivery
B) specifications, quality, and health, safety, environment
C) scope of agreement
D) force majeure
E) definitions

Question 44

The _____ clause of a contract generally specifies who is responsible if there are injuries or damage, over the course of the contract, and any damages to be paid.

A) supply and delivery
B) key performance indicators and compensation
C) definitions
D) free trade areas
E) liability

Question 45

_____ involves spending more time in the initial contracting stages to fully understand stakeholder requirements, expectations, and repeated communication of expectations, to gain a full understanding of elements.

A) Arbitration
B) Mediation
C) Contingency contracting
D) Preventive contracting
E) None of the above.

Question 46

Purchasers cannot rely on an arbitration clause contained in their forms, particularly if the suppliers' forms do not contain such a clause.

Question 47

The _____ clause of a contract specifies method of manufacture and quality requirements and may include language specific to terms of quality.

A) liability
B) specifications, quality, and health, safety, environment
C) intellectual property
D) assignment and contracting
E) confidentiality

Question 48

The ____ clause of a contract defines what is in and out of scope, which might include the geographical limitations, the validity or invalidity of prior contracts, preferential treatment by the supplier, or other elements.

A) force majeure
B) supply and delivery
C) scope of agreement
D) liability
E) key performance indicators and compensation

Question 49

The _____ clause of a contract stipulates whether either party has the ability to terminate the contract at any time, and how much advance notice must be given.

A) effective date and termination
B) payment
C) third-party rights
D) most favored customer
E) force majeure

Question 50

The _____ clause of a contract specifies conditions regarding who own any IP rights that comes out of the agreement, and who owns what IP going into the agreement.

A) liability
B) confidentiality
C) intellectual property
D) technology improvements
E) assignment and contracting

Question 51

The _____ clause of a contract specifies whether the buyer, if he or she becomes aware of any technology or cost improvements of other products in the market, he or she can share this information with the supplier, and how the supplier should act on this information.

A) confidentiality
B) intellectual property
C) liability
D) technology improvements
E) governing law

Question 52

Taking a dispute into the jurisprudence system should be an automatic step in resolving the dispute, and not viewed as a last resort.

Question 53

The _____ clause of a contract stipulates whether the supplier can assign its rights described in the agreement to another party, and whether subcontracting is permissible.

A) key performance indicators and compensation
B) assignment and contracting
C) supply and delivery
D) scope of agreement
E) None of the above.

Question 54

The _____ clause of a contract specifies terms such as "current price," "prior price," and other criteria that determine how or if prices will be adjusted over the course of the contract.

A) force majeure
B) most favored customer
C) key performance indicators and compensation
D) payment
E) intellectual property

Question 55

Generally speaking, the more complex the nature of the contract and the greater the dollar amounts involved, the more likely it is that a future dispute over interpretation of the terms and conditions will occur.

Question 56

The _____ clause of a contract describes the course of events that occur if there are unforeseen calamities such as earthquakes or hurricanes that prevent a supplier from fulfilling its obligations to the buyer.

A) liability
B) force majeure (LO #1
C) confidentiality
D) third-party rights
E) governing law

Question 57

The _____ clause of a contract specifies the terms for supply and delivery of the product or service.

A) specifications, quality, and health, safety, environment
B) scope of agreement
C) payment
D) confidentiality
E) None of the above.

Question 58

It is important to ensure that an arbitrator's opinion will not be binding on both parties to the dispute.

Question 59

Perhaps the simplest method of resolving a contractual disagreement involves straightforward, face-to-face negotiation between the two parties involved.

Question 60

In many instances, the alternatives to court adjudication are slower than litigation.

Question 61

The _____ clause in a contract describes how an issue will be addressed if a portion of the agreement is void or unenforceable, and which court of law will resolve the difference.

A) force majeure
B) severability
C) notices
D) intellectual property
E) supply and delivery

Question 62

In a firm fixed price contract, if market prices _____ the stated contract price because of outside factors such as competition, changes in technology, or raw material prices, the _____ assumes the risk or financial loss.

A) rise above….purchaser
B) stay the same….seller
C) stay the same….purchaser
D) fall below….purchaser
E) None of the above.

Question 63

_____ refers to the volatility of pricing conditions for major elements of the product, such as raw materials, purchased components, and labor.

A) Supplier's ability to impact costs
B) Component market uncertainty
C) Process or technology uncertainty
D) Total dollar value of the purchase
E) None of the above.

Question 64

All of the following are important factors to consider when negotiating with a supplier over contract type except _____.

A) component market uncertainty
B) degree of trust between buyer and seller
C) process or technology uncertainty
D) supplier's ability to impact costs
E) physical distance between the buyer and supplier facilities

Question 65

The _____ the term of the purchase agreement, the _____ firm fixed-price contracts will be acceptable to the supplier.

A) shorter….less likely
B) longer….more likely
C) longer….less likely
D) longer….same likelihood that
E) There is no relationship between contract term and acceptability to the supplier.

Question 66

The _____ clause in a contract provides specific details on how the supplier's performance will be measured and if any compensation will be awarded by the supplier to the buyer if these certain defined levels of performance are not maintained.

A) key performance indicators and compensation
B) liability
C) notices
D) third-party rights
E) assignment and contracting

Question 67

The _____ clause in a contract ensures that all information, technology, and so on shared between the parties remains confidential and is not shared with other customers or suppliers.

A) assignment and contracting
B) liability
C) third-party rights
D) confidentiality
E) intellectual property

Question 68

The _____ clause in a contract provides guidelines regarding what type of reporting statistics and measures the supplier must provide to the buyer on a regular basis, defined clearly.

A) statistics
B) notices
C) most favored customer
D) confidentiality
E) third-party rights

Question 69

The _____ clause of a contract identifies any free trade issues and benefits, and how to share the benefits.

A) assignment and contracting
B) free trade areas
C) key performance indicators and compensation
D) payment
E) scope of agreement

Question 70

The _____ clause of a contract stipulates the court of law where any disputes will be settled.

A) third-party rights
B) notices
C) assignment and contracting
D) governing law
E) liability

Question 71

A _____ contract should be used in cases where the parties cannot accurately predict labor or materials costs and quantities to be used prior to the execution of the purchase agreement.

A) fixed-price with escalation
B) firm fixed price
C) cost sharing
D) cost-based
E) fixed-price with redetermination

Question 72

The _____ clause in a contract stipulates that any benefits attributed to a third party (other than the buyer or supplier) identified in the contract must be enforced.

A) governing law
B) severability
C) most favored customer
D) assignment and contracting
E) third-party rights

Question 73

The _____ contract is generally used in plant and equipment maintenance agreements, where the supplier cannot determine accurate costs prior to the repair service.

A) fixed-price with redetermination
B) firm fixed price
C) cost-sharing
D) time and materials
E) cost plus fixed-fee

Question 74

With pure ______ contracts, allowable costs are shared between the parties on a predetermined percentage basis.

A) cost-sharing
B) time and materials
C) fixed-price with incentives
D) cost plus incentive fee
E) fixed-price with redetermination

Question 75

A _____ is defined as a purchase that is made on a nonrecurring or limited basis with little or no attention of developed an ongoing relationship with the supplier.

A) purchasing alliance
B) long-term contract
C) short-term contract
D) spot contract
E) JIT contract

Question 76

In the _____ contract, if the supplier can demonstrate actual cost savings through production efficiencies or substitution of materials, the resulting savings from the initial price targets are shared between the supplier and the purchaser at a predetermined rate.

A) time and materials
B) cost plus fixed fee
C) fixed-price with incentives
D) firm fixed price
E) fixed-price with escalation

Question 77

The _____ clause in a contract establishes where bills, invoices, notices, and other documents should be sent, as well as the key contact person at the buying and supplying companies to whom all questions and issues concerning the relationship.

A) severability
B) notices
C) governing law
D) supply and delivery
E) intellectual property

Question 78

The most basic contractual pricing mechanism is called a/an _____ contract.

A) fixed price with escalation
B) cost plus incentive fee
C) firm fixed price
D) cost-sharing
E) fixed price with redetermination

Question 79

​In a firm fixed price contract, if market prices for a purchased good or service _____ the stated contract price, the _____ bears the brunt of the financial loss.

A) rise above….purchaser
B) rise above….seller
C) fall below….seller
D) stay the same….seller
E) None of the above.

Question 80

In a _____ contract, the supplier receives reimbursement for all of its allowable costs up to a predetermined amount plus a fixed fee, which typically represents a percentage of the targeted cost of the good or service being procured.

A) cost plus fixed-fee
B) fixed-price with redetermination
C) time and materials
D) fixed-price plus fixed-fee
E) None of the above.