Question 1

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 says they are not enforceable.

Accepted Answer

This statement is correct. Penalty clauses in construction contracts are technically called "liquidated damages clauses," and if they are labeled as "penalty" clauses, they may not be enforceable.

Question 2

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.

Accepted Answer

Including cost productivity improvements in cost-based contracts can help drive continuous cost reduction and improve efficiency over time. This can benefit both the contractor and the client, as it can lead to savings and improved quality of work.

Question 3

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

Accepted Answer

While a well-written and detailed contract can reduce the likelihood of disputes, it is not immune to disagreements. Interpretation of clauses, unforeseen circumstances, and changes in circumstances can all lead to disagreements or disputes.

Question 4

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.

Accepted Answer

Firm fixed price contracts are typically used when the scope and cost of a project can be accurately estimated, not when there is a high degree of uncertainty regarding labor and material costs.

Question 5

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

Accepted Answer

This statement is true because in global commerce, there's often an assumption that what works or is acceptable in one market will be the same in another, ignoring the significant differences in culture, legal systems, and business practices that can lead to misunderstandings or legal issues.

Question 6

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

Accepted Answer

Cost-based contracts are appropriate for situations where a large contingency fee might be included as they are designed to cover all the costs of the project, including any unforeseen circumstances or additional work that may arise. In fact, cost-based contracts are often used precisely for this reason, as they provide the contractor with some protection against unexpected costs.

Question 7

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

Accepted Answer

Direct negotiation allows the parties involved to openly communicate and work towards a mutually beneficial solution without the need for legal intervention.

Question 8

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.

Accepted Answer

This statement is generally true as complex contracts with high dollar amounts often involve multiple parties, intricate terms and conditions, and potential unforeseen circumstances that could lead to disagreements or disputes over interpretation.

Question 9

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

Accepted Answer

A consultant is typically classified as an independent contractor rather than an employee, primarily because they operate under a separate business entity, have control over their work schedule, and the client does not withhold income taxes. The classification depends on factors such as the degree of control the company has over the worker and the independence of the worker's operation.

Question 10

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.

Accepted Answer

Starting with a general form and samples of past contracts can be a helpful starting point, but it is not the least appropriate method. The least appropriate method would be to simply copy and paste a contract from the internet or from another source without ensuring that it is tailored specifically to the current situation and conforms to all legal requirements.

Question 11

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

Accepted Answer

Once a contract has been signed, it becomes legally binding, and it can be difficult and costly to renegotiate or change its terms. It is important to fully understand and clarify any contractual language prior to signing.

Question 12

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

Accepted Answer

Long-term contracts may include incentive or cost-sharing arrangements to align the interests of the parties and promote performance. However, such arrangements should be clearly defined and agreed upon in the contract to avoid disputes in the future.

Question 13

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

Accepted Answer

This is because the default rule is that the person creating the original work automatically owns the copyright unless they have signed a written agreement assigning the rights to someone else, such as the client company.

Question 14

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

Accepted Answer

It is generally recommended that parties involved in a contractual dispute attempt to resolve the issue through negotiation, mediation, or alternative dispute resolution methods before turning to the legal system. Going to court can be time-consuming, expensive, and may damage the relationship between the parties involved.

Question 15

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.

Accepted Answer

In a firm fixed price contract, the price is agreed upon at the beginning of the contract and cannot be increased unless there are specific conditions agreed upon in the contract, such as changes in scope or unforeseen circumstances. If the supplier increases the price without meeting these conditions, and the anticipated cost increase does not occur, then the purchaser has paid too much for the good or service.

Question 16

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

Accepted Answer

Many companies outsource their system contracts to countries like India for cost-cutting reasons, but there are concerns about the quality of work, language barriers, and cultural differences that could impact the project's success.

Question 17

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.

Accepted Answer

The answer of Perhaps the most compelling reason to consider...

Question 18

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.

Accepted Answer

Under a fixed-price contract, the supplier bears the risk of factor market price changes, as the price of the contract does not change with the cost of inputs.

Question 19

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

Accepted Answer

This is true, as most contracts are based on previous contracts and adapted to fit the specific needs of the parties involved. It is rare for a completely new contract to be created from scratch.

Question 20

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

Accepted Answer

Technical sections of a contract can often be a significant source of misinterpretation of terms and conditions due to their complexity and the specialized knowledge required to understand them fully.

Quiz 14: Contract Management