L4M3 COMMERCIAL CONTRACTING

Questions: Chapter 1

1 A company wishes to buy a large quantity of a standard product item in a single purchase
order, and is looking for a competitive price from the supplier. There are a large number of
suppliers in the market. The most appropriate approach to procurement in this instance is
to:

A buy the item from a supplier’s e-catalogue

B issue ITTs to a number of suppliers

C invite suppliers to bid for a call-off contract

D issue RFQs to a number of suppliers.

2 Which of the following should be included in a request for quotation? Select TWO items that
apply.

A Latest date for reply

B Purpose of the purchase

C Key performance indicators

D Criteria for awarding the contract

E Unique reference number

3 A company receives a number of bids from suppliers in a restricted tendering procedure,

and selects one of these as its preferred bid. Does selecting the bid create a legally binding
contract between the buyer and the selected supplier?

A Yes, because it is a formal acceptance of the supplier’s offer

B Yes, because other buyers are made aware that their bids are unsuccessful

C No, because there may be negotiations before a contract is signed

D No, because selecting the preferred bid is an offer, and not acceptance
4 In a tendering procedure, performance specifications are preferable in the invitation to
tender documentation when:

A the buyer is willing to accept the specification risk

B the potential suppliers have greater technical knowledge of the product than the buyer

C there are a limited number of potential suppliers

D there is a risk of over-specification.

5 A national government wants to build a road bridge over a river, that will be able to carry up
to a specified number of vehicles per hour. It has no expertise in designing or building
bridges and is open to any offers in a competitive tendering process. The government is
likely to include its requirement in:

A a conformance specification report.

B an output specification.

C a functional specification.

D an outcome specification.

Questions: Chapter 2

6 Key performance indicators (KPIs):

A should be included in the terms of a purchase contract

B must measure all aspects of supplier performance

C should include the right of the supplier to prompt payment

D should be relevant to what the organisation is trying to achieve.

7 Key performance indicators (KPIs) should be SMART. Which of the following measures could
be a measurable and an achievable KPI of supplier performance?

A Number of stockouts of a key item

B The average length of internal lead time for purchase orders

C The percentage of deliveries that are on time and in full

D The number of complaints from user departments

8 A term in a purchase contract that limits the liability of the supplier for losses suffered by the
buyer in the event of a breach of contract is an example of:

A a condition

B an express term

C an implied term

D a warranty.

9 A buyer’s standard terms and a supplier’s standard terms for straightforward procurement
contracts may differ in many respects, but are usually the same with respect to:

A the conditions under which the supplier’s warranty will apply

B what constitutes offer and acceptance

C the credit period to be allowed for payment

D measures to be taken in the event of insolvency of the buyer.

10 A schedule to a service contract between a contractor (service provider) and a customer

(buyer) may specify:

A safety regulations that shall apply to the contractor’s employees working at the
customer’s premises

B details of legal and regulatory requirements that the contractor and customer must
comply with

C the maximum working hours per week for the contractor’s employees

D which subcontractors the contractor must use.

Questions: Chapter 3

11 Which of the following are invitations to treat? Select TWO that apply.

A Supplier quotation

B Request for proposal

C Supplier’s price catalogue

D Purchase contract

E Bid in an e-auction

12 An organisation agrees a procurement arrangement with a supplier ‘subject to contract’.

This means that:

A the buyer has accepted the supplier’s offer

B the buyer is making an offer to the supplier

C the terms of the agreed contract must be complied with

D the arrangement is conditional on a written contract being agreed and signed.

13 A company has a contract with an external supplier for an office cleaning service. The
contract manager for the company has asked the contractor to clean the stairs and corridors
as an additional task, but without any additional payment. Is the contract manager able to
ask for the additional work without making an extra payment?

A Yes, because cleaning the office is a contractual requirement

B Yes because the buyer has the right to specify what should be cleaned

C No, not until the company’s offer is accepted by the contractor

D No, because the company is asking for something without offering consideration in
return
14 A buyer agrees a contract with a supplier for the purchase of goods, relying on the supplier’s
claim to have certification under ISO 9001 for its quality management system. The supplier’s
claim is subsequently found to have been a deliberate falsehood, after the contract has been
agreed but before the goods have been delivered. The buyer is angry but has not suffered
any loss. What is the legal position?

A The buyer can declare the contract void, but cannot take any further legal action.

B The buyer can declare the contract void, and can claim damages for fraudulent
misrepresentation.

C The buyer cannot declare the contract void because a misrepresentation must
concern a statement of fact.

D The supplier is required to deliver the goods contracted for, but cannot claim
payment for them.

15 The Vienna Convention on Contracts for the Sale of International Goods establishes
contractual conditions for transactions for the purchase and sale of goods when:

A the buyer and supplier are both located in countries that have ratified the
Convention

B the buyer and seller are in any different countries

C incoterms have not been agreed between the buyer and the seller

D either the buyer or the seller is in a country that has ratified the Convention.

Questions: Chapter 4

16 Which one of the following is an advantage for the buyer in making a one-off purchase of a
product?

A Predictable product quality

B Security of ongoing product supply

C No requirement for contract terms and conditions

D No commitment to repeat or ongoing purchases

17 Which of the following are features of a framework agreement arranged by the buyer of a
product item? Select TWO that apply.

A The agreement specifies the price for call-off contracts

B The agreement specifies the total quantity of the product to be purchased

C The timing of each call-off contract is specified

D The agreement is a legally binding contract

E The agreement does not commit any party to either buy or supply

18 A company has made a framework agreement with a number of suppliers for the supply of a
number of products. It is now inviting some of the suppliers to enter into a mini-competition
for a call-off contract order. Which one of the following arrangements will apply to the mini-
competition?

A Suppliers will compete for the contract on the basis of price.

B An invitation to quote will be issued to every supplier in the agreement that is

capable of supplying the product item.

C Suppliers who are sent an invitation to quote must submit a bid.

D In submitting a bid, suppliers are allowed to propose changes to the basic terms in
the framework agreement.

19 Which one of the following is a feature of contracts for the performance of a service?

A Subcontracting of the service is not permitted under any circumstances.

B All key performance indicators are expressed in qualitative terms.

C A service level agreement may be included as part of the contract.

D There are no terms or conditions for the resolution of a dispute.

20 Which one of the following is a feature of a contract for the long-term lease of an asset?

A The lessor remains the legal owner throughout the lease term.

B The lessor is responsible for repairs and maintenance of the asset.

C The lessee owns the asset and pays for it in instalments over the lease term.

D The lessor retains ownership of the asset until the lessee makes the final rental
payment, when the lessee then acquires ownership.

Questions: Chapter 5

21 A previous specification can be used as a basis for preparing a draft specification for a new
purchase order in the case of:

A a re-buy

B a reverse e-auction

C a modified re-buy

D a new buy.

22 In drafting the specifications for a complex purchase order, an important contribution of the
procurement function is likely to be:

A making technical assessments

B promoting the use of a conformance specification

C writing the specification

D market dialogue with suppliers.

23 A benefit of using standard parts in similar products is that standardisation:

A simplifies the process of preparing specifications for purchase orders

B reduces the quantities of waste

C improves relationships with suppliers

D removes the need for competitive tendering.

24 Which of the following items are typically included in the detailed specifications in a
purchase order? Select TWO that apply.

A Definition of technical terms

B Purpose of the order

C Identity of the buyer and contact details

D Timescale for delivery

E Packaging requirements

25 What is the purpose of information assurance in procurement?

A To ensure that information is correct and up-to-date

B To protect information against security risks

C To ensure that information is not used unless it adds value

D To ensure that information is not lost or overlooked

Questions: Chapter 6

26 Which one of the following is a requirement in order for supplier performance

measurements to be included in a procurement contract?

A A qualitative measure of performance

B An external benchmark of performance

C Supplier incentives for good performance

D Quantitative measures of performance

27 A dispute has arisen between a buyer and a supplier about the supplier’s performance. The
buyer has complained that the supplier has failed on most occasions to deliver goods on
time and in full. The supplier has argued that the buyer has unrealistic expectations about
lead times, and also that the buyer had been informed that the supplier had limited output
capacity for meeting customer orders quickly. Which aspect of performance measurement
are the buyer and supplier arguing about?

A Attainability

B Relevance

C Measurability

D Sustainability

28 Which of the following measures of supplier capability or performance is the most difficult
to measure quantitatively?

A Delivery performance

B Purchase price

C Technological capability

D Quality

29 The Chief Executive Officer of a company wants to monitor the performance of the
procurement function and has set an overall target for reducing the prices paid for materials
purchases. Which one of the following KPIs would be the most appropriate for monitoring
this aspect of performance of the procurement function?

A A procurement function budget

B Paying lower prices for regularly purchased items than in the previous year

C Setting maximum targets for actual prices paid as a percentage of a benchmark price

D Setting a maximum limit to the difference between the price agreed for contracts
and the lowest bid price
30 In an agreement for the provision of a courier service, the agreed fee is a fixed price every
month plus a variable amount for miles travelled by courier vans. The agreement stipulates
that all requests for the courier service must be met within one hour, and 5% of the monthly
fixed fee will be deducted for every time a service is not provided within this time. This
‘penalty’ clause is an example of a term involving:

A quality of service

B efficiency target levels

C time to complete a service

D a service credit arrangement.

Questions: Chapter 7

31 Which one of the following is a key difference between a condition and a warranty in a
commercial contract for the procurement of goods or services?

A Right to claim damages

B Need for proof of breach of contract

C Right to an out-of-court settlement

D Right to terminate the contract

32 Which one of the following cannot be an implied term in a contract for the sale of goods or a
service?

A The supplier’s right to sell the goods

B A requirement to deliver a service within a reasonable time

C A requirement for the price to be fair and reasonable

D A requirement that goods supplied will correspond with their description

33 Which one of the following can be a problem for a buyer seeking to apply its own standard
terms and conditions to a contract for the purchase of goods?

A The supplier may want to apply its own standard terms

B The supplier is not able to see them before agreeing to them

C All the standard terms may not be applicable to a particular contract

D They cannot be used in high-value contracts

34 Express terms in a commercial contract for the procurement of goods:

A must be in writing

B must be included in the main body of the contract

C must include product specifications

D must be standard terms.

35 Which one of the following is a benefit from using model form contracts to prepare a
contract with complex technical terms?

A They are a standard form of contract that removes the complexities

B Most model form contracts have been developed by professional bodies

representing buyers

C They save time in the negotiation of complex terms

D They remove the need for the parties to have legal advice in establishing contract
terms
Questions: Chapter 8

36 A manufacturing company buys a key component for a product that it manufactures from a
single supplier. It is concerned that any defects in the component could make its own
product dangerous to use, and result in financial claims from its customers. What type of
clause might the manufacturing company seek to include in its purchase contracts with the
supplier in order to obtain protection against the risk of claims from customers as a result of
defects in the component?

A Limitation of liability clause

B Exclusion clause

C Indemnity clause

D Insurance clause

37 In a contract for the supply of goods, an exclusion clause excludes the supplier from liability
for any losses incurred by the buyer as a result of breach of contract by the supplier. Is this
clause legally enforceable?

A No, because a supplier cannot avoid liability for losses to the buyer from failure to
fulfil its contract obligations

B Yes, because it is an agreed term in the contract between supplier and buyer

C Only if it specifies a maximum monetary amount to the exclusion of liability

D Only if the terms of the exclusion clause are reasonable

38 Why might an insurance clause be included in a contract for the supply of goods?

A To insure the goods in transit between supplier and buyer

B To insure the supplier against claims for defective products

C To require the buyer or seller to insure the goods during transit between them

D To guarantee to the buyer that the goods will be manufactured and delivered
39 A parent company owns a subsidiary company. The subsidiary makes a contract with a
supplier for the purchase of goods. The supplier asks for and obtains a guarantee from the
parent company that in the event of failure by the subsidiary to pay for the goods, the
parent company will make the payment. Which one of the following statements is correct?

A The guarantee is between the parent company and the supplier, and is a separate
contract

B The guarantee is between the parent company and the supplier, included as a clause
in the supply contract

C The guarantee is between the parent company and the subsidiary, and is a separate
contract

D The guarantee is between the parent company and the subsidiary, included as a
clause in the supply contract

40 Which one of the following statements about liquidated damages in a supply agreement is
correct?

A Liquidated damages are a specified amount in the supply contract and must be paid
in full in the event of a breach of contract

B Liquidated damages are a specified amount in the supply contract and set a cap or
limit on the amount payable in the event of a breach of contract

C Liquidated damages can be replaced by unliquidated damages in the event of a

breach of contract if the claimant’s losses are a higher amount

D Liquidated damages are determined by a court of law in advance of agreeing the

supply contract

Questions: Chapter 9

41 Which of the following pricing arrangements involves the greatest risk for the buyer?

A Fixed price

B Actual cost plus profit margin

C Target price

D Price adjustment for indexation

42 Which of the following best describes a cost plus award fee (CPAF) cost-reimbursable pricing
structure?

A Actual costs plus fixed fee

B Actual costs plus bonus based on contractor’s performance

C Allowable costs plus fixed fee

D Allowable costs plus bonus based on contractor’s performance

43 A pricing arrangement for a long-term contract provides for six-monthly payments by the
buyer to the contractor. There is an adjustment to the price payable for the increase in
allowable costs: this is calculated as 90% of the increase in a chosen cost index from a base
period to the period when the payment is made, applied to allowable costs in the period.
During a six-month period, allowable costs were $80,000 and the chosen cost index, which
was 200 in the base period, was 206 for the six-month period. What is the amount of the
adjustment to the price payable to the contractor for this period?

A $2,160

B $2,400

C $4,320

D $4,800

44 A contract between a buyer and a supplier is based on a target price. The target price is
agreed as a target cost of $200,000 plus a profit mark-up of 20% on cost. The agreement
provides for a 50: 50 split between the contractor and the buyer for any reduction in
allowable cost below the target cost, with no cap. The contractor’s actual allowable costs
for the contract were $170,000. How much will the contractor be paid?

A $215,000

B $225,000

C $240,000

D $255,000
45 A supplier offers a buyer payment terms of 2/5 Net 30. In which document are these terms
set out?

A Order acknowledgement

B Purchase order

C Invoice

D Supplier’s quotation
Solutions and Feedback: Chapter 1

1 Answer D

The company wants a competitive price for a standard item, indicating that a form of competitive
bidding is required. The contract will be awarded on the basis of price; therefore issuing RFQs (rather
than ITTs) is appropriate.

Reference Chapter 1 Section 2.1

2 Answer A and E

A latest date for reply is needed to avoid unnecessary delays in the procurement process. A unique
reference number is to enable the buyer to link the bid easily to a particular procurement contract.
The purpose of the purchase and contract award criteria should be included in ITTs, but are not
needed for RFQs.

Reference Chapter 1 Section 2.3

3 Answer C

A preferred bid in a competitive tendering process should be accepted subject to negotiation. It is

therefore not a formal acceptance in legal terms.

Reference Chapter 1 Section 3.3

4 Answer B

When suppliers have greater technical knowledge of a product than the buyer, and the buyer is
using a tendering procedure for competitive bids, a performance specification is appropriate
because it gives suppliers scope to devise an offer to meet the buyer’s functional requirements for
the item. The supplier, not the buyer, will have the specification risk. Over-specification can occur
with either conformance or performance specifications.

Reference Chapter 1 Section 5.4

5 Answer D

The government has no technical expertise in designing or building bridges, so it would be

appropriate to specify the outcome it wants and invite bidders to submit tenders that include
proposals for how the outcome can be achieved.

Reference Chapter 1 Section 5.6

Solutions and Feedback: Chapter 2

6 Answer D

KPIs should be SMART: specific, measurable, achievable, relevant and time-bound. A KPI should only
measure an aspect of supplier performance if it is relevant, and not all aspects of performance need
to be included in KPIs. KPIs may be included within the terms of a contract, but this is by no means a
requirement.

Reference Chapter 2 Sections 2.2–2.3

7 Answer C

The number of on time and in full deliveries (OTIF) is a commonly-used KPI, because late time and in
full deliveries can be measured, and a reasonable performance target can be set. The number of
complaints would not be a good KPI, because complaints can vary in seriousness and validity, and
what should be an ‘achievable’ target? Stockouts (unless they are caused by late deliveries) and
internal lead times are not measures of supplier performance.

Reference Chapter 2 Sections 2.2–2.3

8 Answer B

This type of clause is a limited liability clause, but it must be clearly stated in the contract as a
contract term, so it is an express term within the contract.

Reference Chapter 2 Sections 3.2–3.3

9 Answer B

A supplier may want to specify the conditions under which its warranty for the goods will apply,
whereas the buyer’s expectations about warranty conditions may differ. Similarly the supplier’s and
buyer’s terms may differ about the period of credit allowed for payment. A term about the
insolvency of the buyer may be included in a supplier’s standard terms, but will not appear in the
buyer’s terms. Both supplier and buyer may agree, however, on what constitutes an offer and what
is acceptance: this usually occurs with the purchase order (offer) and acceptance or
acknowledgement of the order by the supplier (acceptance).

Reference Chapter 2 Sections 3.4–3.5

10 Answer A

A schedule to a contract may deal with the application of health and safety regulations. A contract
for services may have a schedule about subcontracting, giving the customer the right to approve any
subcontractor that the contractor wishes to use, but a contract will not usually give a customer the
right to specify subcontractors that must be used. Both parties must comply with relevant laws and
regulations, and there is no requirement to specify in detail what these are: a term in the contract
may refer to any specific piece of legislation or regulations that are particularly relevant to
performance of the contract.

Reference Chapter 2 Section 4

Solutions and Feedback: Chapter 3

11 Answer B and C

An invitation to treat is an invitation to someone to make an offer (an offer to buy something or to
supply something). RFPs invite suppliers to submit a proposal, and an e-catalogue invites potential
buyers to make an offer to buy. An advertisement is another example of an invitation to treat.

Reference Chapter 3 Section 1.3

12 Answer D

An agreement subject to contract indicates conditional acceptance by the buyer, but there is not yet
a legal contract.

Reference Chapter 3 Section 3.3

13 Answer D

For a contractual agreement, the two sides must exchange consideration. The contractor is not
obliged to agree to the company’s demand without being offered consideration (payment) in return
and accepting the offer.

Reference Chapter 3 Sections 4 and 5.1

14 Answer A

The buyer has the right to declare the contract void, but cannot claim damages for fraudulent
misrepresentation because it has not suffered any loss.

Reference Chapter 3 Section 8.3

15 Answer A

In the event of a contractual dispute between a buyer and seller of goods, each located in a country
that has ratified the Convention, the dispute should be resolved with reference to the contractual
conditions in the Convention. This avoids the requirement for the contract between buyer and seller
to specify which country’s legal system will be used to deal with any dispute.

Reference Chapter 3 Sections 9.3–9.4

Solutions and Feedback: Chapter 4

16 Answer D

A one-off purchase means that the buyer is not legally committed to a repeat purchase, but if the
product is a regularly purchased item, the buyer does not have predictable product quality or
security of future supply. Contracts must have legal terms and conditions.

Reference Chapter 4 Sections 1.3–1.4

17 Answer A and E

A framework agreement is not a legally binding contract, but it sets out the main terms for any call-
off contracts, including the product price. None of the parties are committed to buying or supplying,
and the agreement does not specify the quantity of products to be purchased or the timing of call-
off contracts.

Reference Chapter 4 Section 2.3

18 Answer B

When a framework agreement includes a number of suppliers and a number of different products,
an invitation to quote in a mini-competition must be sent to every supplier who is capable of
supplying the particular product. Suppliers are not obliged to submit a bid, but they cannot alter the
main/basic terms (including the product price) for call-off contracts as set out in the framework
agreement.

Reference Chapter 4 Sections 4.2–4.3

19 Answer C

Contracts for the performance of a service will often include a service level agreement. Any KPIs
should be expressed in quantitative (objective and measurable) terms. Subcontracting is permissible,
but possibly only with the written consent of the customer/buyer of the service.

Reference Chapter 4 Sections 5.2–5.5

20 Answer A

In a long-term lease agreement, the lessee has possession and use of the asset, and is responsible
for repairs and maintenance, but the lessor remains the legal owner of the asset. Purchasing an
asset in instalments is a hire purchase arrangement, not a lease. At the end of the term of a lease,
the lessee may have an option to purchase the asset, but this does not occur automatically with the
final lease rental payment.

Reference Chapter 4 Sections 6.3–6.4

Solutions and Feedback: Chapter 5

21 Answer C

A previous specification can be used as the bass for preparing a new specification in the case of a re-
buy with some modification. In the case of a straight re-buy, the previous specification can be used
again.

Reference Chapter 5 Section 1.2

22 Answer D

A complex specification should be written by technical experts and the procurement function is likely
to promote the use of a performance specification because of the complexity. However, dialogue
with suppliers could be very useful in obtaining information to help with the preparation of the
specification.

Reference Chapter 5 Section 1.4

23 Answer A

Standardisation of parts has several benefits. One is to simplify the process of preparing
specifications.

Reference Chapter 5 Section 6.3

24 Answer D and E

The detailed specifications will contain, where appropriate, the timescale for delivery and packaging
requirements. The purpose of the order, a definition of technical terms and the buyer’s identity
should all be included in the purchase order/specifications, but not as part of the detailed
specifications.

Reference Chapter 5 Section 5

25 Answer B

IT systems and digital technology expose information to a range of risks, such as hacking and theft,
corruption, and loss of confidentiality. Information assurance is concerned with ways of containing
these risks.

Reference Chapter 5 Section 8.4

Solutions and Feedback: Chapter 6

26 Answer D

A performance measure in a legally binding contract must be one where compliance or non-
compliance with the measure can be established objectively. Performance measures in a contract
should therefore be quantitative. Supplier incentives for good performance can be included in a
contract, but this is not essential.

Reference Chapter 6 Sections 1.23 and 2.1

27 Answer A

The buyer and supplier are arguing about whether it is reasonable for the buyer to expect a shorter
lead time than the supplier is able to fulfil, and possibly also the quantities that the supplier is able to
provide.

Reference Chapter 6 Section 2.2

28 Answer C

Technological capability can be assessed in terms of the technical capacity of a supplier, the
production systems used by a supplier and the products or services that the supplier provides, but
these cannot be expressed easily in quantitative terms.

Reference Chapter 6 Section 3.1

29 Answer B

The other targets or performance measures do not specifically address the requirement to reduce
prices.

Reference Chapter 6 Section 3.4

30 Answer D

The provision to deduct 5% of the fixed fee every time a courier is not available within one hour is a
service credit arrangement. The requirement to provide a service within one hour relates to the
quality of service and possibly also efficiency.

Reference Chapter 6 Sections 4.2 and 4.4

Solutions and Feedback: Chapter 7

31 Answer D

A breach of condition is regarded as a major breach of contract, giving the injured party the right to
terminate the contract. A breach of warranty (a minor breach) does not give the injured party this
right. With any breach of contract, the injured party can try to reach an out-of-court settlement, and
if this is not possible sue for damages for loss or costs incurred as a consequence of the breach.

Reference Chapter 7 Section 1.3

32 Answer C

There is no implied term in a commercial contract that the supplier’s price should be fair and
reasonable. This is a matter for negotiation between buyer and supplier.

Reference Chapter 7 Section 2.2

33 Answer A

Both the buyer and the seller may want to apply their own standard terms to a contract, and their
standard terms may differ. This can lead to a ‘battle of the forms’ to establish whose standard terms
will apply.

Reference Chapter 7 Section 3

34 Answer C

A contract for the procurement of goods must specify what the goods should be. Express terms can
be agreed orally (eg by telephone) and may be included in an annex or schedule to the main
contract.

Reference Chapter 7 Section 2.1

35 Answer C

Model form contracts speed up the process of preparing a complex contract, because they cover
complex issues and reduce the need for negotiation on various points. They provide a template for a
contract, but they are not a standard contract and the parties will need to reach agreement on
terms, possibly with the assistance of lawyers. Many model form contracts have been developed by
professional bodies, and so address potentially complex issues, but the professional bodies typically
represent suppliers, not buyers.

Reference Chapter 7 Section 4.8

Solutions and Feedback: Chapter 8

36 Answer C

The purpose of an indemnity clause in this situation would be for the supplier of the component to
indemnify the manufacturing company against all claims arising as a result of defects in the
components it supplies.

Reference Chapter 8 Sections 4.1–4.2

37 Answer D

Exclusion clauses are legally enforceable. However, the terms of the exclusion clause must not be
unreasonable.

Reference Chapter 8 Section 3.3

38 Answer C

An insurance clause is a clause in a contract that requires one of the parties to take out an insurance
contract. It is not a contract of insurance itself.

Reference Chapter 8 Section 5.1

39 Answer A

The guarantee is an agreement between the parent company and the supplier. It is a separate
agreement from the contract for the procurement of the goods.

Reference Chapter 8 Section 6.1

40 Answer A

When liquidated damages are included in a supply contract, the amount is agreed between buyer
and supplier as a specified amount. In the event of a breach of contract, the claimant is awarded the
liquidated damages amount, regardless of whether its actual losses are higher or lower than this
amount.

Reference Chapter 8 Sections 8.1–8.2

Solutions and Feedback: Chapter 9

41 Answer B

If the buyer pays the supplier actual costs plus a profit margin, it takes on the risk for any
unexpected increase in costs during the course of the contract.

Reference Chapter 9 Section 1.3

42 Answer D

Only allowable costs are recoverable in the price. (Actual costs may exceed allowable costs.) The
award fee payable in addition to allowable costs is based on the contractor’s performance, as
defined in the contract agreement.

Reference Chapter 9 Section 4.3

43 Answer A

90% × $80,000 × [(206/200) – 1] = $2,160.

Reference Chapter 9 Section 4.6

44 Answer B

Actual allowable costs were $30,000 below target cost, and the benefit is split 50: 50 between
contractor and buyer. The contractor therefore receives the allowable costs ($170,000) plus the
agreed profit margin ($40,000) plus 50% of the cost savings ($15,000), or $225,000 in total. An
alternative calculation is that the buyer pays the target price of $240,000 minus its share of the
savings ($15,000) – $225,000.

Reference Chapter 9 Section 7.2

45 Answer C

The offer of an early payment discount is an accounting/financial matter, and will be included in the
supplier’s invoice.

Reference Chapter 9 Section 8.2