Deck 14: Contract Management

Question 1

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.

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

Cost-based contracts are generally applicable when the goods or services procured are expensive,complex,and important to the purchaser or when there is a high degree of uncertainty regarding labor and material costs.

Question 5

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 6

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.

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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 13

The choice of contract type is independent of the nature of the buyer-supplier relationship.

Question 14

Escalation clauses allow only increases in the base price.

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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 21

Technically,penalty clauses are 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

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

Question 23

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

Question 24

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

Question 25

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 26

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

Question 27

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

Question 28

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

Question 29

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 30

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

Question 31

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 32

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 33

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

Question 34

Agreeing to a long-term contract seldom allows the buyer to have access to more detailed cost and price information from the supplier in exchange for the extended contract term.

Question 35

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 36

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 37

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 38

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

Question 39

Long-term contracts can help the buyer to gain exclusive access to proprietary supplier technology.

Question 40

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

Question 41

In the ____ contract,if a 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 buyer 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 42

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

A) most favored customer
B) liability
C) specifications, quality, and health, safety, environment
D) scope of agreement
E) force majeure

Question 43

In a firm fixed price contract if market prices ____ the stated contract price due to 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 these choices.

Question 44

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

Question 45

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 46

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

Question 47

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 48

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) time and materials
E) fixed-price with redetermination

Question 49

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

A) Arbitration
B) Mediation
C) Contingency contracting
D) Preventive contracting
E) None of these choices.

Question 50

The ____ section 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 51

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 52

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 53

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

Question 54

In a/an ____ 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 these choices.

Question 55

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

Question 56

Taking a dispute into the jurisprudence system should be an automatic first step in resolving the dispute as other methods are not as effective.

Question 57

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 these choices.

Question 58

The ____ section 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 59

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) distance between the buyer and supplier facilities

Question 60

With a pure ____ contract,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 61

In the ____ approach to a systems supplier's level of service,the client company essentially turns over the entire outsourced service at a given point in time.

A) modular
B) incremental
C) turnkey
D) shared
E) None of these choices.

Question 62

Which of the following is not one of the potential disadvantages of using long-term contracts?

A) Supplier volume uncertainty.
B) Volume leveraging.
C) Buyer is unreasonable.
D) Selecting the wrong supplier.
E) Supplier foregoes other business.

Question 63

A/An ____ is new intellectual property developed as the result of the interaction between the enterprise and the consulting company.

A) evergreen contract
B) output
C) good
D) service
E) residual

Question 64

A/An ____ is defined as a contract purchase that is routinely made over a relatively limited time horizon,typically one year or less.

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

Question 65

A/An ____ generally runs for a 12-month period and may or may not come up for renewal at the end of the year.

A) national contract
B) annual contract
C) open-ended agreement
D) blanket order
E) None of these choices.

Question 66

All of the following are reasons for suppliers preferring long-term contracts except ____.

A) the supplier receives better scheduling information, which in turn helps the supplier's production area improve efficiency and materials planning
B) detailed projections of volumes and delivery dates allow the supplier to better budget the flow of funds and investment stemming from the expectation of continued future volume
C) the supplier's organization lowers unit costs because fixed costs are spread out over the term of the contract
D) the supplier can pay its workforce higher wages to increase its productivity
E) All of these choices.

Question 67

In the ____ approach to a systems supplier's level of service,the outsource service supplier takes on only two or three small functions from the client,using a stepping stone approach.

A) evergreen
B) turnkey
C) shared
D) modular
E) time and materials

Question 68

A/An ____ is a purchase contract that is made on a continuing basis for a specified or indefinite period of time,typically exceeding one year.

A) one-time buy
B) short-term contract
C) spot contract
D) long-term contract
E) None of these choices.

Question 69

A/An ____ specifies that the buyer will buy a certain amount of goods and services for the duration of the agreement.

A) pricing agreement
B) evergreen clause
C) national buying agreement
D) national contract
E) blanket order

Question 70

A/An ____ 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) alliance
B) long-term contract
C) short-term contract
D) spot contract
E) JIT contract

Question 71

Which of the following is not an example of a contingency element of a long-term contract?

A) Initial price.
B) Price-adjustment mechanisms.
C) Delivery dates and times.
D) Supplier performance improvement.
E) Evergreen, penalty, and escape clauses.

Question 72

____ 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 these choices.

Question 73

____ are based on the notion that as purchase volume rise,cost structures change.

A) Short-term contracts
B) Firm fixed price contracts
C) Long-term contracts
D) Time and materials contracts
E) Blanket orders

Question 74

A/An ____ clause allows the buyer (and possibly the supplier)to terminate the contract if either side fails to live up to contractual requirements.

A) penalty
B) evergreen
C) systems contract
D) time and materials
E) escape

Question 75

A/An ____ clause assumes the contract will be renewed every year unless the supplier is otherwise notified that this is not the case.

A) evergreen
B) due diligence
C) penalty
D) escape
E) None of these choices.

Question 76

Which of the following is not one of the potential advantages of using long-term contracts?

A) Assurance of supply.
B) Volume leveraging.
C) Access to cost/price information.
D) Access to supplier technology.
E) Supplier opportunism.

Question 77

In the ____ approach to a systems supplier's level of service,the service provider and the client company share resources and operational control over the outsourced service.

A) shared
B) commonality
C) evergreen
D) modular
E) turnkey

Question 78

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 79

Which of the following is not one of the basic levels of service that a systems supplier can provide to the buyer?

A) Turnkey.
B) Modular.
C) Shared.
D) All of these choices.
E) None of these choices.

Question 80

A/An ____ contract is designed to provide access to expensive computer networks and software that single companies are unable to afford on their own.

A) time and materials
B) systems
C) firm fixed price
D) cost-sharing
E) evergreen