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1

Explain 3 objectives of a business case that could be used as the criteria to judge its success (25)

 

Jul 2015

Explain 3 objectives of a business case that could be used as the criteria to judge its success (25)

1. Fostering strategic business focused thinking requiring people with authority to recommend projects/propsals to pre-evaluate their value, rosk or priority

2. Improve efficiency and quality of decision making by weeding out the proposals that cannot demonstrate business value

3. Enable management to evaluate proposals for feasibility, suitability and acceptability

4. Enable management to compare alternatives and options on objective cost/benefit criteria

5. Establish measurement yardsticks by which the subsequent performance, deliverables or outcomes of projects can be evaluated at key review points.

2

Outline the different approaches to the purchase of production materials and capital items (20)

 

Mar 2013

Outline the different approaches to the purchase of production materials and capital items (20)

Production Materials

  1. Items are often bought on repetitive basis, possibly against forecasted demand and linked to a computersied stock management system such as MRP, ERP or SAP system. Repetitition allows for buyer/supplier relationships, purchasing systems and cost reduction programmes to be developed or instigated
  2. Purchasing inevitably plays a key role in the acquisition of such items including supplier selection, price, negotiation and contract formation and supplier relationship management
  3. Application of the operational objectives of the 5 rights of purchasing applies particularly to production materials
  4. Expenditure might be segmented using tools such as Krajlic and different purchasing strategies developed depending on criticality of the items/supply side risk and/or impact on final price. Purchasing has significant influence over such activities.

Capital Expenditure

  1. Unlike operational items which entails purchasing's day to day involvement, capital items are bought far less frequently and are bought for what they can do rather than part of the end product
  2. A key distinction lies in the originator of the purchase decision and the decision making.  Often production/technical staff will determine the need for specification and in many instances initiate the acquisition by eg requesting prices, undertaking product trials and tests and so on
  3. Purchase decisions are more likely to be made on machine (technical) attributes rather than commercial aspects. This does not mean purchasing is excluded from the purchase process but rather they play a difference role for example
    • ​​Lifecycle/Whole life costs
    • Countring the possible prejudice of users
    • Provision of commercial, contractual and negotiation expertise
    • Identification of alternatives to outright purchase
    • Identification of grants
    • Assisting with the disposal of the displaced asset

3

Outline the diferences between production materials and capital items (5)

 

Mar 2013

 

Outline the diferences between production materials and capital items (5)

Capital items have a long usage life as they are fixed assets used to make the product (ie vehicles, machinery, computer systems, etc) but production materials are part of the actual end product (ie raw materials, components, assemblies, etc).

Capital items are financed/chargeable to a capital account whereas production materials are financed from the revenue budget

When purchasing capital items it is initiated by production/technical staff and purchasing play a supportive role as opposed to production materials that are mainly purchased by purchasing and is concerned with the 5 rights

4

Describe 5 activities a procurement function might undertake when contributing to the development of a business case for a new purchase (15)

 

May 2014, Jan 2017

1. SYSTEMATIC PURCHASING RESEARCH

Looks at factors that affect purchasing of goods/services to ensure company’s competitive position by securing current and future requirements

Tools:

DEMAND ANALYSIS:

Accurately forecast demand for high value, high usage, high risk materials to minimise sourcing, inventory wastes and risks

VENDOR ANALYSIS:

Evaluate capability of potential suppliers and performance of current suppliers to optimise supplier value and minimise supplier risk

SUPPLY MARKET ANALYSIS:

Appraising conditions in supply market relating to factors such as likely availability and the risk of shortages/disruptions to supply, market prices, price fluctuations, etc.

 

2. PROACTIVE VALUE ENGINEERING: Value analysis applied at design, development and specification stage of product development to eliminate wastes, over specification and non-value adding features

3.  PROMOTE EARLY BUYER INVOLVEMENT: To ensure commercial and supply marketing considerations are taken into account at an early stage when they can make the greatest whole life impact

4.  PROMOTE EARLY SUPPLIER INVOLVEMENT: To ensure that solutions take into account supply market expertise, technology and innovation

5.  DEVELOP SPECIFICATIONS, SUPPLIER PERFORMANCE MEASURES AND CONTRACT TERMS which will maximise business benefits and value to the buying organisation

5

Explain the characteristics of 

1) New Purchase

2) Straight Re-Buy

(10)

 

Jul 2017

Explain the characteristics of 1) New Purchase 2) Straight Re-Buy (10)

1) NEW PURCHASE

  • The item has never been purchased before
  • If high value, strategic or high risk item, may be subject to systematic purchasing processes
  • Writing a specification of requirements is a good opportunity to build in business benefits of the product, service or project at development stage
  •  A new purchase will be likely to require a new specification and the need to undertake market research and purchasing research. This may include demand analysis, supplier analysis, supply market analysis, value analysis, early buyer involvement (EBI), and early supplier involvement (ESI).

2) STRAIGHT RE-BUY

  • A ‘Straight Re-buy’ is a purchase of something (goods or services) that has already been purchased in the past, to exactly the same specification, once, or more often than once.
  • There may already be a pre-existing supply chain, and/or existing preferred supplier(s); pre-existing specifications; and pre-existing market knowledge.
  • A business case may have already been undertaken in the past; and the processes for making the ‘re-buy’ will probably be well understood already.
  • The procurement activity around a straight re-buy will therefore be more straightforward than for a new purchase. The activity may include review of stockholding and replenishment methods, and investigating options for ‘pull’ or demand-led ordering, such as JIT (‘just in time’) methods, the review of EOQ (‘economic order quantities’), the review of existing specifications, and the review of supply market changes. 
  • Procurement may also sometimes review the existing long-term contracts, to ensure that the existing suppliers remain competitive; and look to gain additional business benefits from repeat orders and/or renewed contracts.
     

6

Describe 3 elements to be included in a formal business case to justify a significant expenditure (15)

Jul 2017

Describe 3 elements to be included in a formal business case to justify a significant expenditure (15)

 

1. Value Proposition

  • Clearly state the desired business outcomes or deliverables
  • It should indicate the possible business benefits of the outcome in monetary terms.
  • Possibly include
    • cost estimates
    • financial modelling and ROI calculations
    • risks of the project incl proejct risks, business risks, risks of benefots not realised

 

2. Scope

  • The problem or solution scope
  • Assumptions and constraints
  • Options identified and evaluated
  • Assessment of scale and complexity

3. Work Planning

  • Approach
  • Project Stage definitions
  • Workload estimate or breakdown
  • Sourcing or project plans and schedules
  • Critical path analysis

7
1

Using an example to illustrate, explain the term budget (5)

 

Nov-17, Jan-16, May-15, Nov-13

Using an example to illustrate, explain the term budget (5)

 

A budget is defined as a plan quantified in monetary terms,

prepared and approved prior to a defined period of time,

usually showing planned or estimated income to be generated

and/or expenditure to be incurred during that period

and the capital to be employed to attain a given objective

8

Describe 2 approaches to budgetting used to etablish procurement targets (8)

 

Nov-17, Jan-16, May-15, Nov-13

Describe 2 approaches to budgetting used to etablish procurement targets (8)

  1. Incremental Budget
    • Looks at the actual figures from the previous period
    • It is then adjusted in line with known changes to arrive at a budget for the current period
    • For example might add a percentage to the last period's procurement costs to reflect average cost rises or pricing trends in the supply market
  2. Zero based budget
    • The previous periods are ignore and it is started completely from scratch
    • For example we might estimate costs and prices for the procurements planned in the new period

9

Explain 3 purposes of preparing a budget for a procurement function (12)

 

Nov-17, Jan-16, May-15, Nov-13

Explain 3 purposes of preparing a budget for a procurement function (12)

  1. To coordinate operations from various departments' budgets ie sales, engineering, operations, inventory and procurement eg multifunctional projects and processes
  2. To control procurement activities and costs by highlighting areas where business benefits may be at risk owing to unexpected costs or unmanaged costs or cost levels, triggering corrective action
  3. To pre-authorise estimated levels of expenditure for procurement activities which can thereafter be controlled mainly via 'reporting by exception' in the event of a variance

10

Define the term "total lifecycle costing" (5)

Mar-14, Mar-15, Nov-16

Define the term "total lifecycle costing" (5)

Also called Whole Life Costing or Through Life costing can be defined as 'economic assessment' 

considering all agreed projected significant and relevant cost flows

over a period of analysis

expressed in monetary value. 

The projected costs are those needed to achieve defined levels of performance,

including reliability, safety and availability.

11

Describe 5 costs that should be considered when calculating the lifecycle cost of an item, apart from the purchase price of the item (20)

 

Mar-14, Mar-15, Nov-16

Describe 5 costs that should be considered when calculating the lifecycle cost of an item, apart from the purchase price of the item (20)

  1. Various transaction costs eg taxes, foreign exchange rate costs and the cost of drawing up contracts
  2. Operating costs eg labour, consumables, materials, cost of change, for instance, a decision to use alternative materials
  3. Costs of quality ie inspections, re-work or rejection, lost sales, compensation of customers, etc
  4. Costs of storage and other handling, assembly or finishing required
  5. End of life costs such as decommissioning, removal for sale and safe disposal, re-instatement of land or buildings for alternative use

12

Using examples to illustrate, explain the difference between a straight re-buy and a modified rebuy (10)

 

May-14, Jan-17

Using examples to illustrate, explain the difference between a straight re-buy and a modified rebuy (10)

A straight re-buy has been sourced from a supplier before and when it is purchased again the specification remains the same, no changes are ever specified. For example we purchase pvc cards with our company logo pre-printed on it a few times a year to print ID cards in house.  When we notice stock getting low, we simply issue a purchase order to the supplier who then sends us the pre-printed cards. If we wanted to change the design of the card for example to reduce the logo size, it will become a modified re-buy due to the change in specification.  I will have to go back to the supplier, find out if they can indeed make the changes I require, get a quote and then issue a Purchase order for the goods.  If this product was a high value and or high spec item, like a computer or a machine, I would have to justify the modification and put it through a systematic procurement process but small value items dont require  that.

13
2

Describe the role of a specification at 3 different stages within the procurement cycle (9)

 

Nov 2017, Nov 2015

LO2

 

Describe the role of a specification at 3 different stages within the procurement cycle (9)

DEFINE THE NEED

  • Define the requirement in a manner that is clear, concise and unambiguous
  • Communcating with key internal stakeholders to ensure necessary contribution and buy-in

INVITE QUOTATIONS/TENDER

  • Communicating with potential suppliers so that they understand what is required and can produce a credible bid

CONTRACT/SUPPLIER MANAGEMENT

  • Measure whether the supplier is conforming against the agreed specification
  • Provide evidence of good or poor performance by the supplier, including evidence of what was agreed in the event of a dispute with the supplier

14

Assess four potential consequences of drafting a poor specification for a contract (16)

 

Nov-17, Nov-15

Assess four potential consequences of drafting a poor specification for a contract (16)

  1. Possible misunderstandings with the supplier ie if specification was vague, inaccurate or overly technical this could lead to rejection of deliveries, lost production time, legal disputes and damaged relationships
  2. Misunderstanding with other stakeholders over requirements and expectations that dont meet the user's needs.  This could lead to internal conflict, resistance to use the product and loss of credibility to purchasing
  3. Likely to be defects in goods supplied that will be costly ie lost time, scrapped goods, additional inspections and controls. If defects reach the customer it could result in lost customer loyalty, lost business and affecting brand reputation
  4. Even if the materials and services conform to specification they may fail to function as they should (or to meet the business need) the risk and cost of such a failure is borne by the buyer

15

Outline 5 content sections that might be included in a technical specification (10)

Mar 2016

Outline 5 content sections that might be included in a technical specification (10)

  1. Scope of the specification ie its objectives and content
  2. Definitions ie explanations of any technical or specialised terms used
  3. References to any related documentation ie standards or legislation
  4. Desired appearance, texture and finish requirements incl any identification marks, operating symbols, safety instructions
  5. Drawings, samples or models of the required product where available

16

Explain 5 disadvantages of using a brand name in a specification (15)

Mar 2016

 

Explain 5 disadvantages of using a brand name in a specification (15)

  1. Brand names are expensive because of high quality, reliability, well known name and image
  2. There may be restricted choice of branded products in a market, and perhaps only on esupplier of a given product
  3. The supplier may alter specification of its product without changing the branding or notifying customers: ordering by brand may ot therefore conform to the requirement
  4. Branded products may be 'fakes' (product of low quality passed off under the brand name) and generic products claimed as identical equivalents to a branded products (common in pharmaceutical industry). This may be a particular hazard in consumer purchases.
  5. Manufacturers may tend to assume without proper testing, that branded materials or components will be satisfactory but cutting corners on quality assuance is always a risk.

17

Describe 3 circumstances in which a conformance based specification could be used (15)

 

Jan-16, May-14

Describe 3 circumstances in which a conformance based specification could be used (15)

  1. Technical or design specification to meet specific weight, dimensions or tolerance levels that are critical for functional or operational performance. The item must conform to a specification such a drawings, design or blueprint. Typically used in engineering, construction or acrhitectural industries that require a high degree of technical accuracy and very low tolerances
  2. Composition Specification specifying chemical or physical make-up of materials or contents. Appropriate in the manufacture of  chemicals, manufactured materials ie plastic/metal alloys. May be particularly important  where tain physical  properties (ie strength,flexibility, durability) are important for safety and/or performance ie in the case of metal used in car manufacture 
  3. Market Grade Specification - some materials, especially commodities ie steel/wool are subject to a grading system in which qualities such as strength and flexibility are standardised. Buyers are familiar with what each grade implies and purchase according to this grade. 

18

Explain 1 possible advantage and 1 possible disadvantage of involving suppliers in producing a specification (10)

 

Jan-16, May-14

Explain 1 possible advantage and 1 possible disadvantage of involving suppliers in producing a specification (10)

  1. Advantage
    • The supplier is able to provide expert technical  advice in terms of material specifications, tolerances, technological advances, potential changes, etc
  2. Disadvantage
    • The product may be designed around the suppliers' capabilities which may be limiting and may lock the buyer into a supplier relationship however If the supplier becomes complacent and no longer provides a quality product it could be problematic

 

19

Explain the reasons for using standards within specifications (9)

 

 

Jul-17, Jul-14

Explain the reasons for using standards within specifications (9)

  1. Convenient way to specify quality, safety and performance levels, parameters and tolerances
  2. Raise its performance to comply with quality and/or environmental management standards, both to enhance its own quality performance and to demonstrate capability by seeking accreditation or certification under recognised quality schemes
  3. Require or encourage suppliers to comply with quality management standards, to support and demonstrate the quality performance of its supply chain.

20

Describe 4 typical KPI's and outline how they might be used to measure performance in a contract (16)

 

Jul-17, Jul-14

Describe 4 typical KPI's and outline how they might be used to measure performance in a contract (16)

  1. Quality Management 
    • Systems and processes are clear and documented 
    • Use quality systems because:
    • Convenient way to specify quality, safety and performance levels, parameters and tolerances

      Raise its performance to comply with quality and/or environmental management standards, both to enhance its own quality performance and to demonstrate capability by seeking accreditation or certification under recognised quality schemes

      Require or encourage suppliers to comply with quality management standards, to support and demonstrate the quality performance of its supply chain.

  2. Cost Management 
    • Consumable purchasing rates are benchmarked for value for money
  3. Timeliness
    • Service is delivered within the agreed period
    • time of delivery, the lead time, time slots availability and acceptable delay for a delivery.
  4. Compliance
    • Corporate policies and procedures are adhered to

21

Explain 5 reasons why a buyer might favour an output specification over a conformance specification (25)

March 2013

Explain 5 reasons why a buyer might favour an output specification over a conformance specification (25)

  1. Performance specifications are easier and cheaper to draft, compared to more details, prescriptive (conformance) approach
  2. The efficacy of the specification does not depend on the technical knowledge of the buyer, suppliers may well know better than the buyer what is required and how it can best be manufactured.
  3. Suppliers can use their full expertise, technologies and innovative capacity to develop optimum lowest-cost solutions
  4. A greater share of specification risk is borne by the supplier: if the part supplied does not perform its function, or a process or service does nto achieve its target outcome, the buyer is entitled to redress (whereas, with a conformance specification, the specifier bears responsibility for the functionality of the finished result)
  5. The potential supply base is wider than with a conformance specification. If the task is to supply a product/service that will perform a particular function or achieve a given outcome, the expertise of different suppliers could potentially provide a wide range of solutions.

22

Explain 5 types of pricing agreements that may be used in contractual agreements (25)

 

Nov 2017, May 2014

LO3

Explain 5 types of pricing agreements that may be used in contractual agreements (25)

Cost-plus arrangements

The buyer agrees to reimburse the supplier for all allowable, allocable and reasonable costs incurred in performing the contract plus a fixed fee or percentage representing the suppliers profit i.e.

Cost Plus Fixed Fee (CPFF)

  • Payment of allowed costs + pre-determined fixed amount as fee for doing the work
  • Terms will specify a best estimate and/or capped cost and the amount of the fixed fee, which will change only  if the scope of the contract changes (regardless of cost outcome)
  • The buyer should calcuate the effect on total price of higher than estimated costs (ie costs + fixed fee for a range of final cost totals), in order to anticipate total liability
  • This type of arrangement contains no incentive for the supplier to manage costs, so it is used chiefly for highly uncertain contracts with few options (such as R & D contracts)

 

Cost Plus Incentive Fee (CPIF).

  • Includes payment  of allowed costs and higher fee for meeting/exceeding performance or cost target KPI's
  • Used where the cost risk suggests the need for a cost type arrangement but the suppler can be incentivised to reduce costs ie initial production run of new product

Cost Plus Award Fee (CPAF)

  • Includes payment of allowed costs plus a fee (bonus) based on contractor's performance
  • Preferred option for services (cleaning, design or software development)
  • Ability to reward the supplier for non-quantitative aspects of its performance on a subjective basis.
  • An award sum is set aside for the periodic payment of the supplier for 'the application of effort in meeting the buyer's needs ie on the basis of the buyer's subjective evaluation of the supplier's effort and customer service

1) Fixed Price arrangements

A fixed price agreement is a firm agreement to pay a specified price when the items (services) specificed by the contract have been delivered or accepted

Once agreed (on the basis of negotiation or competitive bidding) the price remains fixed for the duration of the contract

We have a fixed pricing arrangement for our supplier who does all our company's cleaning, hygiene services and pest control. Specific tasks at specific sites have a fixed price, any work work that falls outside of that scope requires a quote and a PO.

 

2) Incentive Price arrangements

A fixed price arrangement may provide for adjustment of the final price to include various supplier incentives ie additional bonus payments, profit allowances or value gain sharing for the supplier to shorten lead time or deliver on time, improve quality or technical performance. 

The final price will usually b e subject to a pre-negotiated 'cap' or maximum price to avoid open ended liability.

 

Options:

Fixed price incentive (or incentived/gainshare) contracts

This arrangement may provide for adjustment of the final price to include various supplier incentives

Fixed price with review or re-determination clauses

Fixed price arrangements may also allow

Lump sum;
Firm price;  

23

Explain two examples of model forms of contract that could be used for a major project (10)

 

Mar 2016

Explain two examples of model forms of contract that could be used for a major project (10)

The best known examples are:

  1. NEC3 (National Engineering Council Version three) suite of model form contracts
    • The NEC3 suite of contracts is suitable for procuring a diverse range of works, services and supply projects, spanning major framework deals through to minor works and the purchasing of goods and services
    • Developed in 1990s aiming to introduce a non-adversarial contract strategy to enhance smooth management of contracts
    • They are clear, simple and written in plain English
      using language and a structure which is straightforward and easily understood
  2. FIDIC, issued by the International Federation of Consulting Engineers
    • Developed a range of contracts that is used worldwide
      • Dredgers Contract;
      • Short Form of Contract;
      • Construction Contract;
      • Plant & DB Contract;
      • DBO Contract; and 
      • EPC/Turnkey Contract
  3. JCT contracts from The Joint Contracts Tribunal

24

Outline the purpose and main content of the following types of contractual clauses:

i. Sub-contracting clause

ii. Insurance Clause

iii. Exclusions Clause

 

Mar 2016

LO3

Outline the purpose and main content of the following types of contractual clauses:

i. Sub-contracting clause

  • A subcontracting clause will explain if, and, if so, how any of the work of the supplier may be sub-contracted.
  • Subcontracting may be expressly forbidden; or
  • may be allowed without any conditions; or
  • may be allowed under certain conditions typically only with the expressed permission, to be sought in advance, of the buyer.
  • Subcontracting clauses may also require some contractual  requirements such as payment terms, are cascaded down through to subcontractors

ii. Insurance Clause

  • Insurance clauses usually require a supplier to effect insurance to cover situations that may arise as a result of the contract;
  • such as employer’s liability, public liability, professional indemnity and product liability

iii. Exclusions Clause

  • Exclusion clauses are intended to exclude and/or limit some potential liabilities and responsibilities.  There are rules and regulations applicable to such clauses and these may also be explained
  • Must be constructed concisely and clearly ie the party relying on the clause must prove that properly construed, it relates directly to the loss or damage suffered by the other party

25

Outline FIVE express terms that might be used by a supplier in a commercial agreement for the supply of goods or services  (15)

Jan 2016

(LO3)

 

Outline FIVE express terms that might be used by a supplier in a commercial agreement for the supply of goods or services  (15)

  1. Time of performance
    • Express stipulation of a time performance are usually treated as conditions eg if delivered late then the buyer won't pay or if the timeframes with regard to the delivery milestones are not met the supplier could be penalised
    • When the contract doesnt specify any time of performance they must be performed within a reasonable time
  2. Force Majeure
    • Purpose of Force Majeure is to release parties from liability in circumstances where their failure to perform a contract results from circumstances which were unforeseeable for which they are not responsible and they couldn't have avoided or overcome
  3. Sub-contracting clause
    • A subcontracting clause will explain if, and, if so, how any of the work of the supplier may be sub-contracted.
    • Subcontracting may be expressly forbidden; or
    • may be allowed without any conditions; or
    • may be allowed under certain conditions typically only with the expressed permission, to be sought in advance, of the buyer.
    • Subcontracting clauses may also require some contractual  requirements such as payment terms, are cascaded down through to subcontractors
  4. Insurance Clause
    • Insurance clauses usually require a supplier to effect insurance to cover situations that may arise as a result of the contract;
    • such as employer’s liability, public liability, professional indemnity and product liability
  5. Exclusions Clause
    • Exclusion clauses are intended to exclude and/or limit some potential liabilities and responsibilities.  There are rules and regulations applicable to such clauses and these may also be explained
    • Must be constructed concisely and clearly ie the party relying on the clause must prove that properly construed, it relates directly to the loss or damage suffered by the other party

26

Explain what is meant by an indemnity clause and provide an example of how such a clause may be used (10)

 

Jul 2017, Jul 2014

Explain what is meant by an indemnity clause and provide an example of how such a clause may be used (10)

Indemnity clauses are designed to secure an undertaking from one party that it will accept liability for any loss arising from events in performance of the contract.  It might include costs or debts, loss or damage to buyer's property, business losses incurred by the supplier's poor professional advice, injury to buyer's staff/customers.

 

Example:
If there is a leak to the building and the warranty is breached the Contractor is required to rectify any defect and/or pay any damages to the Principal, often on the basis of an indemnity.

27

Describe, with an example, the following price arrangements in commercial agreements: (9)

1) Fixed Price arrangements

2) Incentive Price arrangements

3) Cost-plus arrangements

 

 

Nov 2014, Nov 2015

LO3

Describe, with an example, the following price arrangements in commercial agreements: (9)

1) Fixed Price arrangements

  • A fixed price agreement is a firm agreement to pay a specified price when the items (services) specificed by the contract have been delivered or accepted
  • Once agreed (on the basis of negotiation or competitive bidding) the price remains fixed for the duration of the contract
  • We have a fixed pricing arrangement for our supplier who does all our company's cleaning, hygiene services and pest control. Specific tasks at specific sites have a fixed price, any work work that falls outside of that scope requires a quote and a PO.

2) Incentive Price arrangements

  • A fixed price arrangement may provide for adjustment of the final price to include various supplier incentives ie additional bonus payments, profit allowances or value gain sharing for the supplier to shorten lead time or deliver on time, improve quality or technical performance. 
  • The final price will usually b e subject to a pre-negotiated 'cap' or maximum price to avoid open ended liability

3) Cost-plus arrangements

  • The buyer agrees to reimburse the supplier for all allowable, allocable and reasonable costs incurred in performing the contract plus a fixed fee or percentage representing the suppliers profit ie
  • Cost Plus Fixed Fee (CPFF)
    • Paymen tof allowed costs + pre-determined fixed amount
    • Contains no incentive for supplier to manage costs
    • Used mainly for R & D Contracts
  • Cost Plus Incentive Fee (CPIF).
    • Includes payment  of allowed costs and higher fee for meeting/exceeding performance or cost target KPI's
    • Used where the cost risk suggests the need for a cost type arrangement but hte suppler can be incentivised to reduce costs ie initial production run of new product
  • Cost Plus Award Fee (CPAF)
    • Includes payment of allowed costs plus a fee (bonus) based on contractor's performance
    • Preferred option for services (cleaning, design or software development)
    • Ability to reward the supplier for non-quantitative aspects of its performance on a subjective basis.

28

Explain two advantages of a fixed price purchase arrangement for a purchasing organisation (8)

 

Nov-14, Nov-15

Explain two advantages of a fixed price purchase arrangement for a purchasing organisation (8)

  1. Financial risk, since its total price commitment is known in advance and the supplier bears all the risk of cost fluctuations
  2. Supplier motivation ie a fixed fee schedules gives the supplier a strong incentive to complete the work efficiently and on time, since any cost saving (below the agreed price) are kept by the supplier and it is liable for any cost blowouts i.e. the supplier's profit depends on the actual cost outcome - without a minimum or maximimum profit limitation.

29

Explain 2 elements that may cause price fluctuations in a cost plus purchasing arrangement (8)

Nov-14, Nov-15

Explain 2 elements that may cause price fluctuations in a cost plus purchasing arrangement (8)

  1. Financial Risk because its total price commitment is not known in advance and it bears all the risk of cost blowouts, exchange rate fluctuations and other factors
  2. Administration and contract management costs - supplier's cost schedules will have to be carefully scrutinised by the cross functional teams (incl financial and management accountants and relevant specialists ie engineers and project planners) and monitored throughout the life of the project to ensure accurate accounting and reimbursement

30

Discuss two examples of standard "Model Form Contracts" (10)

 

MAR 2013

Discuss two examples of standard "Model Form Contracts" (10)

Model Form contracts are published by third party experts (ie trade associations and professional bodies) incorporating standard practice in contracting for specific purposes within specific industries to ensure fair balance of contractual rights and responsibilities fo buyer and supplier.

NEC3 (National Engineering Council Version three) suite of model form contracts

  • intended for use for Civil Engineering, building and electrical or mechanical works
  • Developed in 1990s aiming to introduce a non-adversarial contract strategy to enhance smooth management of contracts

FIDIC, issued by the International Federation of Consulting Engineers (represents the global engineering industry)

Developed a range of contracts for construction industry worldwide incl

  • The Contruction Contract (Red Book)
  • The Plan and Design-Build Contract
  • The Short Form of Contract (Green Book)
  • The Design-Build Operate (DBO) Contract