L4M3 Commercial Contracting

Case Study
Philip works for a large IT company. He is responsible for the purchase of a mainframe
computer. Expectations of the mainframe are very complex.

Philip drew up a specification, with input from colleagues, that detailed everything they were
looking for from the contract. He used published standards to allow for different approaches to
be offered that were still able to meet the desired outcome. It also meant that suppliers, who
would be familiar with the standards for their industry, would quickly be able to identify what
was required.

He also included social and environmental criteria in order to make sure that the suppliers
adhered to his organisation’s internal policies and procedures. He included a provisional
delivery schedule, but indicated this could be discussed during negotiations.

During negotiations, the supplier requested that a particular express term related to the
intellectual property was added into the contract – this was to remain the property of the
supplier. Philip understood the implications of this and agreed to it.

Philip used the IPA rule to identify which KPIs to include in the contract: they focused on
delivery, product quality and management information.

Once the delivery of the contract was underway, Philip monitored the performance of the
supplier against the KPIs included in the contract over time. It was found to be stable.

Use the information provided in the case study to answer these questions.

1. Which part of the contract provides a summary of the basic agreement?

a) The articles
b) The recital
c) The terms and conditions

2. In which part of the contractual documentation would you find the detail relating to
intellectual property?

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a) The articles
b) The terms and conditions
c) The contract particulars or the schedules

3. Which of the following terms would come into effect if the supplier failed to deliver on time?
a) Insurance
b) Liquidated damages
c) Guarantee

4. Which of the following is a risk of using published standards?

a) Can allow different approaches to be offered which will meet the desired outcome
b) Can result in conflicts within the specification if standards are not understood
c) Can remove international barriers to trade

5. What was the driver for Philip including social and environmental criteria in the contract?
a) Stakeholder pressure
b) Economic incentive
c) Consumer-led driver

6. Which parties does the buying organisation’s ethical sourcing policy relate to?
a) Only people who work for the supplier
b) People who work for the supplier, and anyone they subcontract work to
c) All the people who work for and supply the supplier, including people who supply the
supplier’s suppliers

7. The parties settled on a pricing schedule arrangement for this contract due to the complexity
of the requirements. Which other pricing method could have been suitable for this purchase?
a) An incentivised contract
b) Fixed price arrangement
c) Indexation and price adjustment formulae

8. Which of the following do KPIs provide information on?

a) The performance of the supplier
b) The performance of the contract
c) The relationship between the supplier and the buyer

9. What does the IPA rule stand for?

a) Important, potential improvement, authority
b) Important, preferential, absolute
c) Imperative, potential improvement, allowable

10. What action does the buyer need to take in response to the supplier’s performance against
the KPIs?
a) None – action is needed only if a supplier’s performance against KPIs deteriorates over time.

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b) Performance should be investigated to find out how the supplier is achieving this to apply to
other contracts.
c) Performance should be investigated to identify whether there are opportunities for
improvement.

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Answers
1. a) The articles
2. c) The contract particulars or the schedules
3. b) Liquidated damages
4. b) Can result in conflicts within the specification if standards are not understood
5. a) Stakeholder pressure
6. c) All the people who work for and supply the supplier, including people who supply the
supplier’s suppliers
7. a) An incentivised contract
8. b) The performance of the contract
9. a) Important, potential improvement, authority
10. c) Performance should be investigated to identify whether there are opportunities for
improvement.