International Advanced Certificate in Purchasing and Supply PREPARING AND MANAGING CONTRACTS. A8/May11 LEVEL 4 MARKING SCHEME. May 2011.

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1 International Advanced Certificate in Purchasing and Supply PREPARING AND MANAGING CONTRACTS A8/May11 LEVEL 4 MARKING SCHEME May 2011 Shenstone

2 SECTION A Questions 1-10 are multiple choice questions. For each question, select ONE correct answer from A to D and write it in the space provided in your answer booklet. You are advised to spend approximately 30 minutes on this section. Q1 Which of the following best describes a counter-offer? (2 marks) A. The seller agreeing to all of the buyer s contract terms B. The buyer sending a purchase order after seeing a seller s advertisement C. The buyer agreeing to a seller s quote subject to a revised delivery date D. The seller agreeing to negotiate contractual terms with the buyer. Q2 Which of the following best represents an example of a contractual risk? (2 marks) A. The supplier might fail to deliver the product ordered on time B. The supplier might offer a different product than that which was ordered C. The supplier might be able to reduce the price of the product ordered D. The supplier might indicate that they are willing to deliver the product ordered early. Q3 Which of the following contracts would be best suited to a variable pricing method? (2 marks) A. A contract for the supply of 100 printing machines to be delivered next month B. A contract for window cleaning during the next three months C. A contract for the supply of lubricating oil for immediate delivery D. A contract for road building estimated to take five years to complete. Q4 Which of the following best describes the essential nature of contract management? (2 marks) A. Contacting the supplier regularly by to obtain constant delivery updates B. Ensuring that a contract is performed to a standard that fully meets the objectives and expectations agreed between buyer and seller C. Informing a senior manager if something goes wrong with the supplier s performance of a contract D. Allowing a contract to take its course and only taking action if something goes wrong. A8/May11/Shenstone/SK Page 2 of 18

3 Q5 Which of the following best describes a retrospective discount? (2 marks) A. Extra discount awarded by a seller to a buyer after difficult negotiation has taken place B. A special discount awarded by a seller to a buyer because the buyer s company is an old and valued customer C. An arrangement whereby the price of an item is reduced the more of the item is purchased D. A discount that is awarded if the buyer places orders totalling more than an agreed value or volume during the year. Q6 Which of the following best describes price indices that might be used in a contract price adjustment formula? (2 marks) A. A measure of cost movements of a range of materials published independently of both buyer and seller B. Records kept by the buyer of price increases requested by the seller over time C. Records kept by the buyer of many suppliers price increases over a period of time D. A statement by the government indicating that the prices of goods such as oil have increased. Q7 Which of the following best describes litigation as a means of solving contract disputes? (2 marks) A. Discussing the problem with the supplier until an amicable resolution is found B. Taking legal action against the supplier on grounds of breach of contract C. A process of expert determination agreed by both parties to the contract D. A formal process of expert determination agreed as part of the contract. Q8 Which of the following is most likely to be viewed as a minor term rather than a fundamental term of a contract? (2 marks) A. The goods must be delivered on the date and at the time stated on the purchase order B. The price payable must be the price of the goods which is stated on the purchase order C. The supplier will provide three copies of the invoice to the buyer D. Each delivery of the goods must be made in accordance with quantities stated on the purchase order. A8/May11/Shenstone/SK Page 3 of 18

4 Q9 Which of the following best describes the nature of a one-off order? (2 marks) A. An order that covers the continuous supply of an item for a fixed time period B. An order for an item that is sent by to a supplier rather than transmitted on a purchase order C. An order for the supply of a finite quantity of an item to be delivered at a stated, specific time D. An order written on an ordinary letter rather than on the usual purchase order document. Q10 Which of the following is most likely to be regarded as a part of risk assessment relating to a contract? (2 marks) A. Assessing the impact of events that might happen after the contract has been agreed. B. Developing strategies to deal with things that might go wrong with the contract C. Being aware of other suppliers who might be able to supply the goods that are the subject of the contract D. Ensuring that the buyer s organisation has sufficient personnel and equipment to inspect the goods upon delivery. SECTION A MARK SCHEME Answer A D Syllabus Ref: MARKS Answer A D Syllabus Ref Q1 C Q6 A Q2 A Q7 B Q3 D Q8 C Q4 B Q9 C MARKS Q5 D Q10 A A8/May11/Shenstone/SK Page 4 of 18

5 SECTION B Questions are short-answer questions. You are advised to spend approximately 60 minutes on this section. Q11 (a) Explain why many buyers rely on a specification provided by a supplier. (1 mark) Q11(a) : MARK SCHEME. To test the candidates understanding of a frequently encountered, important, contract term/condition Syllabus Reference(s): 1.3; 1.5; 3.2 It is quicker and cheaper than production of a buyers own specification The suppliers specification / goods has previously been used Using the suppliers expertise rather than the buyers Using the suppliers specification has a legal advantage in the event of product failure. 1 mark should be awarded for any one of these points or any other reasonable point. Total 1 mark (b) Explain TWO reasons why a specification might accompany a purchase order. (4 marks) Q11(b) : MARK SCHEME To test the application of knowledge of specifications and their role in purchasing transactions Syllabus Reference(s): 1.3 specifications provide a detailed description of the goods or service required they may be used as a means of judging the quality of the goods delivered or the performance of the service required a specification should be sufficiently tight to ensure that the supplier is contractually bound to supply the goods or service required In order to provide a reference point for future orders Wording is not important as long as the meaning is clear. Up to two marks for each appropriate reason provided Total 4 marks A8/May11/Shenstone/SK Page 5 of 18

6 Q12 (a) Give a definition of fixed pricing. (2 marks) Q12(a) : MARK SCHEME To test the candidates understanding of a commonly used method of pricing a contract Syllabus Reference(s): 2.1 Fixed pricing means that: The contract price is not subject to any variation (1 mark) Unless any such variation is agreed between buyer and seller (1 mark) Total 2 marks (b) Describe THREE reasons why fixed pricing is considered to be desirable from the buyer s viewpoint. (3 marks) Q12(b) : MARK SCHEME To test the application of knowledge of fixed pricing and its role in purchasing transactions Syllabus Reference(s): 2.1 Any three of the following (1 mark each): All risks (e.g. the likelihood of rising costs) are borne by the seller The buyer knows, from the outset, what amount is to be paid Suppliers have the maximum incentive to complete the work efficiently and on time because all savings below the agreed price accrue to the seller whereas all costs above the agreed price have to be met by the seller. There is little or no administration involved because no auditing of seller s costs is necessary. As we will see, this is not the case with some of the other pricing mechanisms. Wording is not important as long as the meaning is clear. Total 3 marks A8/May11/Shenstone/SK Page 6 of 18

7 Q13 (a) Explain why purchasers might prefer not to use the Ex-Works (EXW) incoterm. (4 marks) Q13(a) : MARK SCHEME To test the application of knowledge of Incoterms and their role in international purchasing transactions Syllabus Reference(s): 4.2 All costs of transport, insurance, etc. are borne by the purchaser The supplier has no liability for loss, damage, etc. during the journey Logistically, it can be very difficult for the purchaser because they must arrange loading of the goods onto transport at the supplier s premises The purchaser might not have ready access to transport in the supplier s country 1 mark should be awarded for any of these points or for any other reasonable point. Wording is not important as long as the meaning is clear. Total 4 marks (b) At what point in the journey does title pass from seller to buyer under the terms of the EXW incoterm. (1 mark) Q13(b) : MARK SCHEME To test the candidates understanding of one of the stipulations of a commonly used Incoterm Syllabus Reference(s): 4.2 Title passes when the goods are at the seller s gate or similar wording (1 mark there is no leeway here) Total 1 mark A8/May11/Shenstone/SK Page 7 of 18

8 Q14 Legislation relating to the sale of goods which is aimed at protecting the buyer often states that goods must be of satisfactory quality. Describe TWO typical characteristics of satisfactory quality.. (5 marks) Q14 : MARK SCHEME To test the application of knowledge of sale of goods legislation and its role in international purchasing transactions Syllabus Reference(s): 1.2; and ½ marks should be awarded for reasonable description of any two of the following aspects of the quality of goods. Credit should be given for any other reasonable point. Fitness for all the purposes for which goods of the kind in question are commonly supplied. Appearance and finish Freedom from minor defects Safety Durability Total 5 marks A8/May11/Shenstone/SK Page 8 of 18

9 Q15 The United Nations Convention on Contracts for the International Sale of Goods (CISG) contains regulations relating to counter offers. Identify FIVE elements of an offer which, if changed by the other party, would be defined as a counter offer. (5 marks) Q15 : MARK SCHEME To test the candidate s understanding of contract formation rules laid down by UNCITRAL Syllabus Reference(s): 4.1 Any five of: Price Payment Quality Quantity Place Time of delivery. Total 5 marks A8/May11/Shenstone/SK Page 9 of 18

10 Q16 Explain TWO purposes of a written contract. (5 marks) Q16(a) : MARK SCHEME To test the candidates understanding of the purposes of forming a legally-binding contract as opposed to an informal agreement. Syllabus Reference(s): 1.1 Wording is not important as long as the meaning is clear but any 2 of the following should gain 2½ marks each: A contract is a legally enforceable agreement between two parties that clarifies the details of the agreement and lays down remedies for the innocent party in the event of a breach by the other party. It sets out rights and duties of each party in respect of the contract's subject and apportions liabilities to each party that they must comply with. From the buyer's viewpoint, it will set out rules for the way in which the seller performs its duties and from the seller's viewpoint, rules for the way in which the buyer performs its duties. Credit would be given for any other reasonable point. Total 5 marks SECTION C Questions require full answers with examples where appropriate. You are advised to spend a minimum of 30 minutes on each question. A8/May11/Shenstone/SK Page 10 of 18

11 Q17 It is usually considered useful to identify and manage any potential risks in a supply contract that may occur to the purchasing organisation. (a) State the FOUR headings under which risk is usually identified. (4 marks) Q17(a) : MARK SCHEME To test the candidate s understanding of the process of risk assessment Syllabus Reference(s): 3.3 The four headings under which risk is identified are usually: Cost (1 mark): Quality (1 mark): Timing of the performance of the contract (1 mark): Likely consequences of contract failure (1 mark): The wording is not important as long as the meaning is clear. Total 4 marks (b) For each heading identified in part Q17 (a), give an example of a potential risk. (4 marks) Q17(b) : MARK SCHEME To test the candidate s understanding of the process of risk assessment Syllabus Reference(s): 3.3 Pass grade answer content is likely to include: Cost: the risk is usually of the price of the goods or services increasing during the running time of the contract (1 mark) Quality: the risk is usually of the quality of the goods not being that which was ordered (1 mark) Timing of the performance of the contract: the risk is usually of delays occurring meaning that the contract is completed late (1 mark) Likely consequences of contract failure: the risk is of the potential impact on the purchasing organisation if something, such as the risks above, takes place and causes non- or poor, contract performance (1 mark) Total 4 marks A8/May11/Shenstone/SK Page 11 of 18

12 (c) Describe TWO potential benefits of effective risk assessment. (5 marks) Q17(c) : MARK SCHEME To test the candidate s understanding of the process of risk assessment. Syllabus Reference(s): 3.1; 3.3 Any TWO of the following would gain 2½ marks providing there is reasonable detail: Improved control over the contract performance so that the contract is performed by the supplier such that the buyer obtains the product or service required Better value for money through good control of costs and quality levels Anticipation of risks in the contract (what can go wrong) giving the buyer a chance to put such issues right. This should mean that there would be better management of legal and commercial issues Wording is not important as long as the meaning is clear and credit should be given for any other reasonable point. Total 5 marks (d) Suggest the next logical step following a risk assessment. (2 marks) Q17(d) : MARK SCHEME To test the application of knowledge of risk assessment Syllabus Reference(s): 3.1; 3.3 Creation of an action plan to deal with any risks identified Discussion with key stakeholders for contributions to risk management Create a range of ideas to reduce probability and/or impact of identified risks Deal with the risk resolution ideas Again, wording is not important as long as the meaning is clear. Up to 2 marks for a practical and appropriate response Total 2 marks A8/May11/Shenstone/SK Page 12 of 18

13 Q18 Paddock Paddock is a business which owns large manufacturing and office premises which are now in need of complete modernisation.. After inviting several specialist organisations for quotations, it is apparent that each of Paddock s buildings will need to be dealt with in different ways, with one building being completed before the next building is started. For example, there will need to be significant aspects of the future floor layout that can only be decided upon after clearance of the existing equipment. Groundstroke Ltd, a facilities management company, has been chosen for the contract as it has previously worked on similar projects and has suitable contractors for the range of work required. This includes any necessary repairs to the outside of buildings and the landscaping of Paddock s land which includes lawns, flowerbeds and trees. Paddock has identified that a significant concern will be the payment methods to be included in the contract. It is also concerned that the quality of finished work may not be appropriate. Paddock now needs to clarify these issues prior to negotiation of a suitable contract. (a) Describe a suitable pricing method for Paddock s contract with Groundstroke Ltd, with reasons for your choice. (9 marks) Q18(a) : MARK SCHEME To test the candidate s application of knowledge of pricing methods Syllabus Reference(s): 2.1.; 3.4 The intention is to allow students creativity here and so the answer guide reflects that better answers are possible: Nomination, description and reasons of a fixed price system up to 5 marks Nomination, description and reasons of variable price/contract price adjustment formula/open book or cost plus/budget system with reporting up to 7 marks Nomination, description and reasons of a hybrid system using multiple elements up to 9 marks Total 9 marks A8/May11/Shenstone/SK Page 13 of 18

14 (b) Suggest TWO contract management techniques which could be used by Paddock to ensure that the quality of the finished work is appropriate. (6 marks) Q18(b) : MARK SCHEME To test understanding of common contract terms which relate to performance of suppliers Syllabus Reference(s): 3.2, 3.5 Candidates have a range of opportunities with credit being given for both practical and legal solutions; Up to three marks for each method described that is appropriate to the circumstances: Project management type activities with each stage having an agreed specification and each stage being discussed and documented with inspections at regular intervals by Paddock and Groundstroke jointly. Retention clause to allow any later faults to be rectified before any retention is released Stage payments clauses to prevent payment until work is of an appropriate standard Liquidated damages clause to allow quantified legal remedy Use of an independent quality assessor to confirm quality standards Use of appropriate industry or national/industry standards reference material within the contract to govern the work undertaken Total 6 marks A8/May11/Shenstone/SK Page 14 of 18

15 Q19 Shenstone Supermarkets Shenstone Supermarkets is a chain of supermarkets that sells a range of over 5000 products. Up until now, Shenstone has sourced products from manufacturers, wholesalers and importers based in its own country. Buyers appear to have good knowledge of the products and have made good decisions with particular attention to keeping prices low. Shenstone has become increasingly aware of how other supermarkets have been more successful. The purchasing manager has committed the next six months to reduce the number of unreliable suppliers through more effective contract management. A typical problem involves importers which take orders, promise delivery dates requested by Shenstone but then fail to deliver. FruitFull supply most of the imported fresh fruit and appears to be the most unreliable. The buyer will check shop requirements and then order products over the telephone. Different contacts at FruitFull have previously claimed that no contract is in place with Shenstone as orders placed on the telephone cannot be contracts. FruitFull claim that orders cannot be processed until the product stock can be checked and deliveries planned. TopVeg is the most frequently used supplier of vegetables from other countries. For most of the year, vegetables from other countries are cheaper than those locally produced. A telephone ordering system is used. Although most orders are received on time, there are often missing items. TopVeg has claimed that this is not its fault and it is usually because of problems with their own supplier. The phrase force majeure has often been used by TopVeg when responding to Shenstone s complaint. The purchasing manager has calculated that the loss of profits from missed deliveries and additional costs of obtaining emergency stocks is a significant problem. TASKS A8/May11/Shenstone/SK Page 15 of 18

16 (a) Discuss the legal situation regarding claims from FruitFull that Shenstone s telephoned orders are not contracts. (8 marks) Q19(a) : MARK SCHEME To test candidate understanding of how contracts are formed and become legally binding. Syllabus Reference(s): 1.3 The situation of Shenstone is open to interpretation as there is no comment in the case regarding any written contract and a detail of the discussions is not provided. The following is a guide for markers, with key legal elements provided: Up to 2 marks for identifying that the telephoned order could form the basis of a legally binding contract, (more correctly that it acts as an offer to buy from Shenstone) Up to 6 marks for identifying that acceptance must take place: this case may depend on the comments made by FruitFull staff at the time of the telephone call but Shenstone has previous notice that the orders are not contracts. Given that this pattern of transaction has been followed for a long time, it would be very difficult to prove a contract is in operation at the time of the telephone call. (acceptance at present is likely to be viewed as taking place by delivery, with even the view that FruitFull are offering the consignment at delivery for Shenstone to accept) Additional relevant content might also include: Please note that candidates will gain a maximum of 2 marks for simple statements or key words that are not aligned directly with the case study Total 8 marks A8/May11/Shenstone/SK Page 16 of 18

17 (b) Explain the legal situation regarding claims from TopVeg that it is not responsible for missing items because of force majeure. (4 marks) Q19(b) : MARK SCHEME To test understanding of the term force majeure Syllabus Reference(s): 3.2 Background information: Force Majeure is anything beyond the control of either party to a contract that prevents its satisfactory completion. Examples include: strikes, fire, accident, lightning, earthquakes, storms, floods, explosion, war. TopVeg have no written contract with Shenstone, so any claims are not founded on detailed clauses or interpretation. (2 marks) TopVeg are claiming that a significant event may have prevented its supplier from performing but no details are offered. Simple non performance would not normally be considered force majeure, but the products are subject to transport difficulties and customs formalities (up to 2 marks) Additional relevant content might also include: Candidates providing a simple explanation of force majeure should only receive 1 mark the question requires application of knowledge. Total 4 marks (c) Describe how Shenstone could recover the loss of profits and additional costs through the contents of a written contract with suppliers. (4 marks) Q19(c) : MARK SCHEME To test understanding of common contract terms which relate to performance of suppliers Syllabus Reference(s): 3.2 Candidates should follow a pattern which is based around a liquidated damages clause. (2 marks) This could simply state that the additional costs of sourcing and any loss of profits should be covered by non-performing suppliers, or alternatively provide an estimate of the likely costs incurred by non-performance. (up to 2 marks) Additional relevant content might also include: No marks shall be awarded for penalty clause comments this phrase has a specific legal meaning. Total 4 marks A8/May11/Shenstone/SK Page 17 of 18

18 (d) Describe TWO ways in which suppliers to Shenstone could help by improving the existing ordering arrangements. (4 marks) Q19(d) : MARK SCHEME To test understanding of practical contract management and responsibilities of suppliers Syllabus Reference(s): 1.3, 3.1 The range of possible answers could be quite broad. The most likely answers are: Better information available from the suppliers at initial ordering, perhaps offering guidance where delivery is dependent on stocks still awaited (2 marks) Confirmation of acceptance of the order by contacting Shenstone when the stock checking and delivery arrangements are complete (2 marks) Earlier advice of delays to specific items when difficulties are known to the suppliers (2 marks) Implementation of a contract that specifically details the responsibilities of both parties when ordering by telephone (2 marks) Additional relevant content might also include: Please note that any answers must be linked to the situation in the case study Total 4 marks END OF MARK SCHEME A8/May11/Shenstone/SK Page 18 of 18