Commercial Contracting in Procurement and Supply

QP.1:1: Explain FIVE details that a typical 'Enquiry' or 'Request For Quotation’
(RFQ) form will include.

The wide range of details that might be included in an ‘Enquiry’ or ‘Request for Quotation’ details
are:

• The purchaser's contact details - name, address, telephone and email address. These are
necessary so that each potential supplier will send a quotation to the right place/person.

• A reference number to use in reply: this would be a unique means of identification to provide
ease of referencing.

• A date by which the buyer should receive a reply. This should be related to date that decisions
are required for delivery of goods.

• The quantity and description of the goods or services required. This should include quantities,
units of measure, specification and grades etc.

• The required place and date of delivery. This should include the required method of delivery and
batch sizes as well as description of multi-site locations where relevant.

• The buyer's standard (and any special) terms and conditions of purchase. These might include
warranties, guarantees, insurance etc.

• The buyer's rules relating to terms of payment such as time and preferred methods of payment,
currency and the payment process to be used
NB:
Avoid providing a mere list of Enquiry/RFQ details without any explanation. Some candidates appeared
to give answers from the supplier’s perspective such as ‘price’.

QP.1:1: Describe TWO circumstances in which it may be appropriate for a

procurement function to use a performance specification to specify requirements in a
commercial agreement.

The circumstances in which it may be appropriate for a procurement function to use a performance
specification to specify requirements in a commercial agreement are as follows:

1st, July 2018 By: Joe Munoru, FCIPS, PGCEi, MCILT, CPSM, SCMP, MKISM,
Def. a specification can be simply defined as a statement of the requirements to be satisfied in the supply
of a product or service.

In Performance specification the buyer describes: what s(he) expects a part or material to be able to
achieve, in terms of the functions it will perform and the level of performance it should reach; or what
outputs or outcomes (results) it expects to be delivered by a service. It is up to the supplier to furnish a
product or service which will satisfy these requirements: the buyer specifies the ‘ends’, and the supplier
has relative flexibility as to ‘means’ of achieving that end.

• When the supplier has greater relevant technical knowledge and manufacturing expertise than
the buyer relating to the product/service to be purchased. Here, the buyer will be reliant on the
supplier's expertise which makes effective supplier selection and evaluation very
important.

• When technology is changing rapidly in the supplying industry. In this case, the use of
performance specifications would mean that the buyer will not specify out-of-date
technology/methodology and should get the best out of the supplier's innovation capacity and
technological development.

• When there are clear criteria for evaluating alternative solutions put forward by suppliers
competing for the contract (e.g. at the tendering stage). Here, the use of performance
specifications should

• Make the appraisal of proposals from different potential suppliers easier to evaluate and
compare.

• When the buyer has sufficient time and expertise to assess the potential functionality of
suppliers'

• Proposals and competing alternatives, particularly if the supplier is using technology with which
the buyer is unfamiliar.

Conclusion:

Performance specifications have the following advantages to the buyer and supplier:
They give the supplier freedom and are easy to prepare.
They enable the buyer to use substitute materials
They place the risk of nonperformance on the supplier
They are being recognised generally in trade and commerce

NB:
For high marks award give a detailed explanation of any TWO of the nature and
circumstances of use of performance specifications. This might include description of
advantages that performance specifications may be perceived to have over conformance
specifications.

1st, July 2018 By: Joe Munoru, FCIPS, PGCEi, MCILT, CPSM, SCMP, MKISM,
QP.1:1: Outline FIVE potential benefits of using key performance indicators (KPIs) as
performance measures.

The potential benefits of using key performance indicators (KPIs) as performance measures are
identified and briefly described as here below:

Def. Key Performance Indicators (KPIs) are specific, agreed, quantifiable measures of supplier
performance in relation to its critical success factors.

Key performance indicators can be used to: Monitor costs; track progress; assess client satisfaction;
Identify strengths and weaknesses and also assess specific areas of a project such as sustainability,
safety, waste management and so forth.

• They can provide motivation to achieve or surpass a specified performance level, particularly if
they are linked to incentives, rewards or penalties

• They can provide support for collaborative buyer/supplier relationships by enabling integrated
or two-way performance measurement

• They provide the ability to compare year-on-year performance which can allow the
identification of improvement or deterioration trends

• They can allow focus on key areas of results: examples of which might include cost reduction
and quality improvement

• They can allow focus on key areas of results: examples of which might include cost reduction
and quality improvement

• They assist the clear definition of shared goals which can facilitate cross-functional and cross-
organisational teamwork and relationships

• They should lead to reduced conflict arising from such causes as confusion of goals/objectives
and unclear expectations

• They can set clear performance criteria and expectations to motivate compliance and
improvement

• They can assist the managing of supply risk by controlling quality, delivery, value for money, etc.

• They can support contract management to ensure that agreed benefits are obtained

• They can provide feedback for learning and continuous improvement in the buyer/supplier
relationship, both for the supplier and the purchasing department.

1st, July 2018 By: Joe Munoru, FCIPS, PGCEi, MCILT, CPSM, SCMP, MKISM,
Examples of key performance indicators that can be used on construction projects include:

• Cost and budget adherence.

• Project progress relative to milestones.
• Number of complaints.
• Number of incidents / accidents.
• The number of working hours spent on different aspects of the works.
• The use of materials (for example the amount of concrete poured).
• The number of defects.
• The amount of waste generated and the amount of recycling.
• The number of variations

Conclusion:

KPIs can give increased and improved communication on performance issues. This would usually imply
results-focused communication.

QP.1:1: Contract schedules provide additional or more detailed information than is provided
in the main contract terms and can be referred to separately for details on particular
supplementary areas.

Explain the typical content and use of the following contract schedules:

(i) Health and safety requirements

(ii) Non-disclosure agreements
(iii) Use of subcontractors.

The typical content and use of the contract schedules in question are:

Health and safety requirements:

Here a schedule may be used to highlight all parties’ statutory duties in regard to workplace health and
safety (e.g. under the 1974 HASAWA in the UK). The schedule may also be used to state agreed terms in
relation to: the health and safety policies with which both parties are to comply; arrangements for the
monitoring of health and safety standards and staff training; health and safety records and reporting;
the reporting of critical incidents all relevant standards, law and regulation which apply to the
agreement

Non-disclosure agreements:
These are used where strict confidentiality is required because commercially sensitive information may
be exchanged in negotiation and/or performance of the contract. Here, a separate non-disclosure

1st, July 2018 By: Joe Munoru, FCIPS, PGCEi, MCILT, CPSM, SCMP, MKISM,
agreement might be included in the contract as a schedule. This should define 'confidential information'
(i.e. information that is specifically applicable to the contract) and stipulate that the other party will take
all necessary steps to keep such information confidential and apportion liability for damages in the
event of breach.

Use of subcontractors:
A subcontracting and assignment clause in the main contract might be used to prevent any assignment
or subcontracting of work or service provision by the supplier to a third party without written consent
by the buyer. A separate schedule may set out the details of such an agreement such as: circumstances
in which the supplier may and may not be permitted to subcontract; notification and notice periods for
buyer approval of nominated subcontractors; policies and standards to which any subcontractor must
comply and specimen forms for subcontractor prequalification or rating.

NB
Make it clear that each of the schedules relate to possible aspects of contracts between the buyer and
supplier. Statements of relevant aspects of each schedule should be given, good examples used for
these were ‘intellectual property’ under ‘Health and safety requirements’.

QP.1:1: Discuss THREE merits of performance specifications in commercial agreements.

Def. a specification can be simply defined as a statement of the requirements to be satisfied in the supply
of a product or service.

The merits of performance specifications in commercial agreements include:

• It can be much quicker to write a performance specification; and a performance specification is

likely to be a very much shorter document than a conformance specification, making it much
easier and cheaper for all interested parties to handle, amend, read and understand it.

• A performance specification places all risks of non-achievement of performance squarely with

the supplier. If the required performance is not met, then the supplier must remedy the
situation, wholly at their time and cost.

• A performance specification allows for innovation and new approaches to achieving

desired/required performance and to dealing with any problems that arise. This encourages
flexibility and innovation in the marketplace

• The efficacy of the specification does not depend on the technical knowledge of the buyer
(unlike conformance specifications). The supplier may know best what is required and how it
should be manufactured.

• The potential supply base is wider than might be the case with a conformance specification. The
expertise of different suppliers might provide a wide range of solutions as to how a particular
function should be performed.

1st, July 2018 By: Joe Munoru, FCIPS, PGCEi, MCILT, CPSM, SCMP, MKISM,
 Conclusion:

Performance specifications have the following advantages to the buyer and supplier:

• They give the supplier freedom and are easy to prepare.

• They enable the buyer to use substitute materials
• They place the risk of nonperformance on the supplier
• They are being recognised generally in trade and commerce
NB:

• Command word explanation: Discuss – consider something by writing about it from

different points of view

• There are many merits of performance specifications in commercial agreements which

should be explained and the disadvantages of conformance specifications may be
explained in order to match the ‘discuss’ command word.

QP.1:1: Describe TWO circumstances in which it may be appropriate to use a conformance

specification in a commercial agreement.

The circumstances in which it may be appropriate to use a conformance specification in a commercial

agreement includes:

In Conformance specification, the buyer details exactly what the required product, part or material must
consist of. This may take the form of an engineering drawing or blueprint, a chemical formula or ‘recipe’
of ingredients, or a sample of the product to be duplicated, for example. The supplier may not know in
detail, or even at all, what function the product will play in the buyer’s operations. The supplier’s task is
simply to conform to the description provided by the buyer.

• Where technical dimensions and weights are absolutely critical, perhaps in terms of sports and racing
equipment where exact match to a predetermined technical set of specifications and exact compatibility
are essential.

• Another situation could be in medical/pharmaceutical industry areas, where type approval is only
given to specific formulations, and the ‘recipe’ must be followed precisely.

• A similar situation may arise where foodstuffs are required to match recipes.

Another might be in military applications, where conformance to battlefield configuration is all

important.

• Conformance specifications are also useful for spare parts for existing plant and equipment.

Conclusion:

1st, July 2018 By: Joe Munoru, FCIPS, PGCEi, MCILT, CPSM, SCMP, MKISM,
Conformance specifications are strict and technical, the supplier must exactly meet the buyer
requirements .They are used in the following circumstances: Engineering drawings, pharmaceutical
industry when prescribing drugs etc

NB:

• Command word explanation: Describe – give a full account of something

• It would also be possible to take circumstances from individual work experience in workplaces
providing such examples are relevant.

• Give detailed explanation of any TWO of the above points. Such explanation should give a sound
explanation of the actual circumstances of use as well as reasons why these circumstances may
arise

QP.1:1: Identify FIVE details of the buyer’s requirement that might be included in a standard
enquiry (request for quotation) form.

The buyer’s requirement that might be included in a standard enquiry (request for quotation) form
are identified as follows:

• The purchaser’s contact details (telephone, e-mail address, etc.)

• A reference number that the potential supplier should use when responding

• The date by which a response to the enquiry (quotation) should be provided

• The quantity of the goods that will be required

• A description of the goods required

• The required place(s) of delivery

• The required date(s) of delivery

• The buyer’s standard legal contract terms

• Any ‘special’ contract terms that might be relevant to the potential contract

• The buying organisation’s terms of payment.

NB:
• Command Word: Identify - mention items separately

1st, July 2018 By: Joe Munoru, FCIPS, PGCEi, MCILT, CPSM, SCMP, MKISM,
 • Points only need to be mentioned (not explained) but they needed to be relevant

QP.1:1: A best-practice tender procedure would include a number of steps for the
preparation of the invitation to tender.

Outline FIVE steps that should be included in a best-practice tender procedure

• Preparation of detailed specifications and draft contract documents. The purpose of these is
that potential bidders can present a realistic quotation that includes all important features

• Advertisement of the requirement: this should include tender procedures that should be
followed and the required tender process timetable

• Sending out pre-qualification questionnaires, in response to expressions of interest from

potential suppliers if it is a selective tendering process. Timescales for response should also be
included

• Issuing of invitation to tender (ITT) and tender documents to those potential suppliers
responding to the ITT within the prescribed time frame

• Arrangement for receipt of tenders (as sealed bids), for opening by the tender evaluation team
after the submission closing date

• Analysis and comparison of each tender with a view to selecting the ‘best offer’
• Arrangements for post-tender clarification, verification of supplier information and/or
negotiation where required

• Criteria for contract award to the supplier providing the ‘best’ quotation. This part of the
process might include de-briefing unsuccessful tenderers
NB:

• Command word: Outline - give the main features, facts or the general idea of something

• It is important that the points were described rather than merely mentioned in order to attract
high marks although the description does not need to be over-detailed.

QP.1:1: Explain the purposes of a documented specification within a commercial agreement.

Def. a specification can be simply defined as a statement of the requirements to be satisfied in the supply
of a product or service.

1st, July 2018 By: Joe Munoru, FCIPS, PGCEi, MCILT, CPSM, SCMP, MKISM,
The purposes of a documented specification within a commercial agreement includes:

o Defining the requirement in a way that encourages all stakeholders, including users, to
consider what they really need and whether this is the best solution.

o Communicating the requirement clearly to suppliers so that they can plan to conform and
perhaps use their expertise to develop innovative or lower-cost solutions to the
requirement.

o Minimising the risk and cost associated with any doubt, ambiguity, misunderstanding or
dispute as to the nature of the requirement and what constitutes satisfactory quality and
fitness for purpose.

o They provide a means of evaluating the quality or conformance of the goods or services
supplied so that they can be accepted if they conform to the specification or be rejected if
they do not conform.

o They can support standardisation and consistency where goods or services are provided by
more than one source of supply.

NB:
• Command word: Explain - give reasons for or account for something
• This question requires explanation of the purposes of documented specifications

QP.1:1: Explain THREE reasons why it may be more difficult to develop specifications in
contracts for services rather than in contracts for goods.

Def. Services are actions individuals or organisations perform which confer a benefit, but do
not result in the ‘ownership’ of anything whereas, goods are intangible or material items, which

1st, July 2018 By: Joe Munoru, FCIPS, PGCEi, MCILT, CPSM, SCMP, MKISM,
can be consumed, and works includes projects such as the construction, alteration, repair,
maintenance or demolition of buildings or structures; the installation of fittings; and so on.

Reasons why it may be more difficult to develop specifications in contracts for services rather than in
contracts for goods

• Requirements of services are hard to specify where there is uncertainty about actual work;
information asymmetry (e.g. only provider understands the task); or complexity
• SLAs need to be drawn up to specify the exact nature and level of service to be provided
• Different users of services may have different priorities, and no simple measure may exist on
which all agree.
• Services are actions individuals or organisations perform which confer a benefit but does not
result in the ownership of anything
• KPIs should be drawn up to suit the particular need of contract
• Specifying services is hard because outcomes are hard to measure, unpredictable and
interdependent

Conclusion

A service level agreement should be established in such a situation to cover the following
aspects in the contract:

• Standards or levels of service

• The allocation of responsibility for activities, risks and costs
• How services and service levels will be monitored and reviewed
• How disputes and complaints would be managed
• When and how the agreement will be reviewed and revised

QP.1:1: Explain the purposes of a documented specification within a commercial agreement

A specification is a statement used to define requirements

It should fulfill the following purposes:

1st, July 2018 By: Joe Munoru, FCIPS, PGCEi, MCILT, CPSM, SCMP, MKISM,
 • To define the requirement
• To communicate the requirement
• To provide a means of evaluating the quality or conformance of the goods or services supplied
• To enable achievement of value for money
• A basis of solving disputes if they arise
• Support standardization and consistency
• Minimize risk and cost of getting it wrong

QP.1:2: Explain FIVE requirements for ensuring the creation of a legally binding contract.

Def. A contract is an agreement between two or more parties which is intended to be enforceable by law.

The requirements for ensuring the creation of a legally binding contract:

Offer:

This exists when an offerer makes known the terms upon which they are prepared to enter into a
contract and promises to be bound by these terms. Offers can be either an offer to sell or an offer to
buy.

Under ‘offer’, only a firm offer, indicating that the offerer intends to be bound without further
negotiations, is capable of acceptance for a binding contract to come into force. Therefore a contract
comes into force when the offer has been validly and unconditionally accepted by the offeree.

Example:

Case: Carlill V Carbolic Smokeball `Co (1893)

Held: An offer could be made to the whole world, the wording of the advert amounted to such an offer, and Mrs
Calill had accepted it by buying and properly using the smokeball

Acceptance:

For a legally binding contract to exist, an offer that has been made must be accepted by the offeree
(the person receiving the offer).

If any changes are made by the offeree, acceptance has not happened and a ‘counter-offer’ is
developed. For a contract to exist, the counter-offer would need to be accepted.

Consideration:

This is essentially the price of the contractual promise. It may consist of monetary or in kind (legal
systems usually recognise an exchange of something of value) although, in payment commercial
procurement, it is usually monetary payment.

1st, July 2018 By: Joe Munoru, FCIPS, PGCEi, MCILT, CPSM, SCMP, MKISM,
 ‘Consideration’ should be of value but does not need to be adequate. In other words, it does not need
to be equal or fair in a commercial sense providing both parties agree to it.

Intention to create legal relations (sometimes referred to as ‘intent’):

To be legally enforceable there must be clear indication that both parties intend that the contract will
be legally binding. This usually requires documents such as purchase orders and acknowledgements.
Oral contracts can be binding but will not have any evidence meaning that the ‘intent’ will be regarded
as dubious

Under ‘intent’, a major factor in deciding whether there is intent is whether the agreement is of a
domestic nature or a commercial one

Contractual Capacity:

A person of full legal age (18 in UK) has the capacity to enter any contract and in an organisation,
personnel that are reasonably assumed to have authorisation to enter into contracts on behalf of
the organisation do have such capacity.

Under ‘capacity’, persons entering into contracts should be of sound mind and not under the influence
of alcohol or drugs. For contracts between organisations individuals such as procurement managers
would be reasonably assumed to have authority to enter into contracts on behalf of the organisation
but individuals such as cleaners would not.

NB:

Under each ‘requirement’, the use of examples would gain high marks as would use of relevant existing
cases such as Thomas v Thomas.

QP.1:2: Explain THREE requirements that an offer must full fill in order to be legally
valid.

Def. An offer is an express or implied proposal or promise, made by an offeror to an offeree, to be bound
on specified terms.

1st, July 2018 By: Joe Munoru, FCIPS, PGCEi, MCILT, CPSM, SCMP, MKISM,
The requirements that an offer must full fill in order to be legally valid are explained as
follows:

• An offer must be a definite, unequivocal or un ambiguous statement of willingness to be

bound in contract. This means that an offer is not a ‘general’ picture of what a seller may
be willing to sell (e.g. a catalogue or goods placed on the shelves of a shop). Nor should
it be (e.g.) a request for a quotation from a buyer. It should be remembered here that an
offer can be an offer to buy or an offer to sell.

• The person/organisation making the offer (offeror) must intend to be bound by it. A
legally valid offer is one which the person /organisation receiving the offer(offeree) only
has to accept, on the basis of terms laid down by the offeror, in order to complete a
legally binding contract. If proposed terms are likely to change as a result of e.g.
Negotiation, each new set of terms is a separate offer.

• An offer must be communicated successfully to the offeree. This might appear to be

obvious but in cases where offers are communicated (e.g.) by post, e-mail or telephone, it
is possible that the offer is being made. Equally, if the offeree has limited knowledge of
contract law, they may not be aware that a legally valid offer is being made in any
circumstances.

• The offer must be open (still in force) when the offeree accepts it. Once an offer has
been ‘closed’ (e.g. by an end date stated in the offer) or revoked by the offeror, it can no
longer be accepted.

• The party making the offer must have the capacity to do so e.g. not a minor (below the
age of 18 years, of sound mind or intoxicated by alcohol or drugs. In an organisation, the
person receiving the offer should be given capacity to do so by senior management.

QP.1:2: Explain what is meant by ‘battle of the forms’ in relation to the precedence of the
buyer’s contract terms or the supplier’s contract terms.

The ‘battle of the forms’ in relation to the precedence of the buyer’s contract terms or the
supplier’s contract terms:

1st, July 2018 By: Joe Munoru, FCIPS, PGCEi, MCILT, CPSM, SCMP, MKISM,
The battle of the forms occurs in a situation where no acceptance to an original offer has taken
place, in most cases because what the offeree intended to be acceptance, was actually a
counter -offer due to differences occurring between the offer and the intended acceptance. Such
differences would usually occurs because of a difference in contract terms. The term ‘battle of
the forms’ derives from the fact that a stream of documents (forms) may pass between buyer
and seller with each one containing the senders’ contract terms meaning that the document
would be a counter - offer when related to the previous form. Actual documents involved in
the ‘battle’ could be a purchase order that differs from a quotation or an order
acknowledgement that differs in some way from the purchase order.
Once the goods have been delivered ( because any differences contained in the various
documents preceding delivery may not have been identified ) and accepted by the buyer, a
legally binding contract is deemed to exist with the binding terms being contained in the last
document that passed between the parties. This situation is often referred to as ‘firing the last
shot’. An example of this might be the buyer signing the supplier’s delivery note without
inspecting the supplier’s contract terms. This would mean that the buyer has accepted the
supplier’s contract.

Conclusion:

The “battle of the forms” occurs where there is a hand stand – off between the supplier and the
buyer on whose terms to use.

The general rule is that “the last piece of paper will govern which set of terms should apply”

QP.1.2: Explain the main legal differences between an ‘offer’ and an ‘invitation to treat”

The legal difference between an ‘offer’ and an ‘invitation to treat’:

1st, July 2018 By: Joe Munoru, FCIPS, PGCEi, MCILT, CPSM, SCMP, MKISM,
The distinction is based on the fact that an ‘offer’ is the starting point of a contract and will lead
to a legally binding contract if the offer is accepted whereas “an invitation to treat” is where
one party is not willing to implement terms but is merely seeking to receive initial offers.

Examples:

➢ A request for quotation or invitation to tender is not an offer to buy

(Spencer v Harding)

➢ The display of goods in a shop is not an “offer” to sell (Pharmaceutical Society of GB & Boots)

➢ An advertisement to sell goods is not an offer in itself (Patridge v Crittenden)

➢ Supply of information (e.g. Price) is not an offer (Harvey v Facey)

QP.1:2: Explain the nature of a call - off contract

The nature of a call – off contract:

This is a set-up of contract for a specific period of time (usually 12 months or ne year). There is
often (although not always) a commitment by the purchaser to purchase a stated quantity of the
item or service that is the subject of the contract during the agreed time period. For example, an
agreement might be for 2000 items to be called off as and when required over a 12 month period.
Quantities will then be “called off” by the buyer at intervals (not always ‘regular’ intervals).
There is usually a binding commitment by the buyer to take the total stated quantity over the
contract’s life span.

This kind of arrangement is sometimes called “blanket order”

Conclusion:

Such a contract has the following merits:

➢ Purchase orders submitted by the purchaser against the framework agreement

➢ Relatively simple, so it is often made by a junior member of staff
➢ If the offer is accepted a contract is formed (frameworks do not show contractual
commitment)
➢ Buyer can request for deliveries from standing orders, i.e. from a standing order for one
year.

QP.1:2: Outline THREE risks associated with oral contracts between purchasers and suppliers.

Risks associated with oral contracts between purchasers and suppliers:

1st, July 2018 By: Joe Munoru, FCIPS, PGCEi, MCILT, CPSM, SCMP, MKISM,
 • Different parties to a discussion having different perceptions or recall of precisely what was
agreed
• Commitment to inappropriate or disadvantageous terms
• ‘Mistake’ in contract: that is, lack of genuine agreement
• The voiding of a contract because of mistake or ambiguity of contract terms
• Subsequent misunderstandings and contractual disputes
• Lack of written terms against which compliance and performance can be measured
• Lack of transparency and audit trail for contract award decisions

QP.1:2: Explain the term ‘misrepresentation’ in contracts and give TWO examples of possible
misrepresentation

Def. Misrepresentation is a false statement of material fact made by one of the contracting parties
intended to induce the other party to make a contract.

The forms in which it can occur:

Fraudulent Misrepresentation: false representation of material fact made knowing it to be false or

without belief in its truth or recklessly not caring if true or false.
Remedy: rescission and can also claim damages under tort of receipt, not under contract

Negligent Misrepresentation: false statement made without dishonesty; made without reasonable
grounds for believing it to be true (Misrepresentation ACT 1967)
Remedy: right to rescind but court has power to refuse and award damages instead.

Innocent misrepresentation: false statement with reasonable grounds for believing it to be true
Remedy: rescission and indemnity. Court has discretion to award damages if equitable to do so.

QP. 1.3. Define the term “framework agreement” and outline the circumstances in which it
may be appropriate to be a framework agreement with a supplier

1st, July 2018 By: Joe Munoru, FCIPS, PGCEi, MCILT, CPSM, SCMP, MKISM,
Def. ‘Framework agreement’ is a general agreement with suppliers/service providers that sets out
terms and conditions under which specific purchases can be made throughout the term of the
agreement. Sometimes called Spot Purchase Agreement or Call off Agreement.

Examples of framework agreements:

• Supplies from a single provider

• Supplies from several providers
• Consultancy services
• Minor works
• Major works

Circumstances in which framework agreements may be appropriate:

➢ Where the general terms of an agreement with terms and conditions set out are established
prior to the actual need for goods or services arising. For example an agreement between
1 or more parties that if party one A or (Buyer) want to purchase something from party B
(Supplier) then they can at a pre-agreed price/rate

➢ The circumstances within which an organisation knows that a requirement will exist in
the future but the exact details in terms of quantity, delivery and even specification may
not have yet been established.

➢ The circumstances where goods are required on a regular basis with similar specifications

➢ Where an organisation wishes to reduce the time from receipt of requirement to delivery
as the contracting process for the final call-off is all that will be required. This can allow
(e.g.) users to ‘call-off’ their requirement under the terms of the agreement which would
allow the procurement function to pay attention to activities with more value to their
organisation than merely calling-off an agreed requirement.

Conclusion

Framework agreements are suited to circumstances where regular requirements exist but the
exact details of quantities, delivery location and date and (perhaps) items actually required are
not known. However, the overarching requirement is understood by both parties and this will
allow the framework agreement to be put in place.

1st, July 2018 By: Joe Munoru, FCIPS, PGCEi, MCILT, CPSM, SCMP, MKISM,
QP. 1.3. Explain TWO advantages and TWO disadvantages for a procurement organisation
of leasing an asset (such as a piece of equipment), rather than buying it outright.

Def. Leasing is a contract between the owner (lesser) and the lessee for the hiring of a
specific assets.

Typical advantages

• No initial capital investment is required by the procurement organisation that will tie up

the capital.

• The total cost of the lease contract will be known and agreed in advance and the

procurement organisation may have the option to secure outright ownership of the assets

or to return it to the leasing company at the end of the contract

• Leasing can protect the procurement organisation from possible technological

obsolescence of the asset and it should be easier for the assets to be upgraded or replaced.

• The total cost of the lease contract will be known and agreed in advance and would allow

the procurement organisation to create a clear budget for the acquisition.

• Protection against possible technological obsolescence of the asset should make it easier

for the asset to be upgraded or replaced.

• Leasing allows the procurement organisation to protect itself against inflation.

• The leasing of the asset means that there may be fewer complex tax and depreciation

calculations for the procurement organisation

Typical disadvantages
• The procurement organisation will be committed to making regular payments to the

leasing company over the period of the lease contract.

1st, July 2018 By: Joe Munoru, FCIPS, PGCEi, MCILT, CPSM, SCMP, MKISM,
 • The leasing company will make a charge to finance the leasing contract and make a profit

meaning that the total cost for the procurement organisation over the contract period may

be greater than for an outright purchase.

• The asset remains in the organisation does not have total control of the asset.

• The procurement organisation may find making regular payments to the leasing company

difficult if it has cashflow problems itself.

• A large procurement organisation may be able to obtain better financing terms from

banks than the then terms available from leasing company.

Conclusion

Leasing can apply any fixed assets and quite commonly used for plant and machinery, office
equipment and motor vehicles.

Instead of acquiring these assets for itself, the company enters into an agreement with leasing
company whereby the latter purchase the assets in question and then lease them (rent or hire
them) on a long-term basis to the former.

No initial funds required but there is instead a regular charge for lease payments to be charged in
the profit and loss account

QP. 1.3. Outline THREEE elements of a contract for the hire of goods that are not present in a
contract for the sale of goods.

➢ There is no transfer of ownership from the owner of the goods to the organisation hiring
them whereas, in a contract for purchase, the buyer becomes the owner of the goods.

1st, July 2018 By: Joe Munoru, FCIPS, PGCEi, MCILT, CPSM, SCMP, MKISM,
 ➢ The hirer is allowed possession and use of the goods for the period specified in the
contract whereas, when the item purchased, the goods remain the property of the
buyer until they choose to sell.

➢ The hirer is obliged to pay the owner at the hire rate per period of hire, as agreed in the
contract, whereas if the item is purchased, then the full purchase price has to be paid.

➢ The hirer has a duty to take reasonable care of the goods while they are in its possession
(e.g. to maintain them properly or use them safely)

Conclusion

Under the ‘transfer of ownership’ the hirer will return the goods to the owner at the end of the
contract period and that, when the item is purchased, the goods remain the property of the buyer
until they choose to sell.

1st, July 2018 By: Joe Munoru, FCIPS, PGCEi, MCILT, CPSM, SCMP, MKISM,