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Title: Purchasing and Supply Chain Management, 3e MonczkaTrentHandfield

1
Contract ManagementChapter 14
Purchasing and Supply Chain Management
2
Chapter Overview

This chapter addresses contracting from several
perspective.
The different types of contracts available to
purchasing managers are discussed.
The benefits of long-term contracts and alliance
agreements are presented.

3
Chapter Overview

Unique contracts and basic requirements of
writing contracts are addressed.
The chapter concludes with the issue of
contractual disputes.

4
Types of Contracts

Purchasing contracts can be classified into
categories based on their characteristics and
purpose.
Almost all purchasing contracts are based on some
form of pricing mechanism.
The two basic types based on price mechanisms
fixed-price and cost based contracts.

5
Types of Contracts

Firm fixed price Price stated in the agreement
does not change, regardless of any type of
environmental change.
Fixed price with escalation/de-escalation Base
prices can increase or decrease based on specific
identifiable changes in material prices.

6
Types of Contracts

Fixed price with re-determination Initial
target price based on best-guess estimates of
labor and materials, then renegotiated once a
specific level or volume of production is
reached.
Fixed price with incentives Initial target
price based on best-guess estimates of labor and
materials, then cost savings due to supplier
initiatives are shared at a predetermined rate
for a designated period.

7
Types of Contracts

Cost plus incentive fee Base price is based on
allowable supplier costs, and any cost savings
are shared between the buyer and supplier based
on a predetermined rate for a designated time
period.
Cost sharing Actual allowable costs are shared
between parties on a predetermined percentage
basis and may include cost productivity
improvement goals.

8
Types of Contracts

Time and materials contract Supplier is paid
for all labor and materials according to a
specified labor, overhead, profit, and material
rate.
Cost plus fixed fee Supplier receives
reimbursement for all allowable costs up to a
predetermined amount, plus a fixed fee, which is
the percentage of the targeted cost of the good
or service.

9
Considerations When Selecting a Contract Type

Issues to consider when determining the
appropriate type of contract
Market uncertainty
Industry practices
Desired length of the agreement
Outcomes sought from the agreement

10
Considerations When Selecting a Contract Type

Issues to consider when determining the
appropriate type of contract (contd)
Relationship between contracting parties
Process or technological uncertainty
Suppliers impact on cost or other performance
variables
Total dollar value of the agreement

11
Long-Term Contracts

Industrial buying contracts often classified
based on length of contract term.
Spot Contracts non-recurring limited basis.
Short-term Contracts routinely made over
limited time horizon one year or less.
Long-term Contracts continuing basis for a
specified or indefinite time exceeds one year.

12
Long-Term Contracts

Benefits of Long-Term Contracts
Assurance of Supply
Access to Supplier Technology
Access to Cost/Price Information
Volume Leveraging
Supplier Receives Better Information for Planning

13
Long-Term Contracts

Risks of Long-Term Contracts
Supplier Opportunism
Selecting the Wrong Supplier
Supplier Volume Uncertainty
Supplier Foregoes Other Business
Buyer is Unreasonable

14
Long-Term Contracts

Contingency Elements of Long-Term Contracts
Initial Price Must be set at a level that will
be beneficial for the buyer yet motivate the
seller to perform.
Price-Adjustment Mechanisms - An appropriate
index must be selected to gauge price adjustments
against.

15
Long-Term Contracts

Contingency Elements of Long-Term Contracts
Supplier Performance Improvements Long-term
contracts can be an incentive for suppliers to
improve over time.
Evergreen, Penalty, and Escape Clauses These
elements in contracts can ensure longevity as
well as termination when desired.

16
Nontraditional Contracting

IT Systems Contracts
Also known as systems outsourcing, IT Systems
Contracts are designed to provide access to
expensive computer networks and software that
single companies couldnt afford on their own.
I.e. SAP, Oracle, IBM, and EDS
Other systems and services outsourced include
facilities management services, research and
development, logistics and distribution, and
accounting.

17
Nontraditional Contracting

Minority-owned Supplier Contracts
Minority owned supplier is defined as having a
minimum 51 ownership by minorities such as
African American, Hispanic Americans, Native
Americans, or Asian-Pacific Americans.
Women-owned businesses and firms owned by
physically disabled people are separate classes
of firms with unique designations.

18
Nontraditional Contracting

Consulting Contracts
In writing contracts for consulting services it
is important to remember the person is an agent
for your organization not an employee.
As such, the consultant retains ownership of any
intellectual properties developed during the
consultation.

19
Nontraditional Contracting

Consulting Contracts
Language must be written into the contract
specifying that the intellectual property shared
remains with the buyer.
The development of a standard contract template
for all consulting services will help ensure the
buyer get the most protection from the contract.

20
Nontraditional Contracting

Construction Contracts
Construction contracts are often the result of a
lengthy bid process.
The contract process can be lengthy as well
buyers should consider the following
Bid submissions should include a breakdown of the
total price into different costs by type, phase,
or area.
Safety requirements should be part of the
construction contract.
Penalties for cost overruns, delays, etc. should
be included in the contract.

21
Other Types of Contracts

Purchasing Agreement
Agreements that group similar items together for
procurement.
The results are less paperwork, lower costs, and
leveraging of volume of business.

22
Other Types of Contracts