CIPS L4M3 - Commercial Contracting

Request for quotations is often used when the only variable is price and the purchase value is under a financial threshold. This process is less formal than ITT. RFQ should be used in the following circumstances:

- Low-value, low-risk purchases

- When the specifications are sufficiently defined or the product/service is standardised

- Where the suppliers are pre-qualified

- Where there is a framework agreement which specifies the contract terms and conditions.

There are a number of shortcuts that can be taken when drafting the specification. These include the following:

- The use of brand names

- The use of recognised standards

- The use of samples

- Information and knowledge from users/other buyers: Drafting a specification should naturally include those already used within the organisation itself, but also variants used by other companies in the same sector and other companies in different sectors

- Information from suppliers: suppliers will always be willing to assist in specification development, as this this one way in which they can seek to influence the design to favour their own products.

Markup is the percentage between the profit and costs. The cost is $350, markup is 11%. So final price is: 350 + 350x0.11 = 388.5

Specifying that suppliers hold certification to standards like ISO 14001 offers assurance that they adhere to recognised environmental management practices, promoting consistency and reliability. Such standards are internationally recognised, facilitating understanding among both local and global bidders. However, certification does not guarantee the exclusion of all polluting suppliers, nor does it eliminate the need for internal environmental training within the purchasing organisation.

An invitation to treat is an action inviting other parties to make an offer to form a contract. These actions may sometimes appear to be offers themselves, and the difference can sometimes be difficult to determine. The distinction is important because accepting an offer creates a binding contract while "accepting" an invitation to treat is actually making an offer.

One simple test to distinguish an offer and an invitation to treat is to ask what this statement will become when it is accepted. Now we apply this test to four options:

- Tender bid: Tender bid is submitted by a supplier to an invitation to tender from the buyer. It states the specific quantity, price and other elements. If buyer accepts the bid, there will be a contractbetween them. Therefore, a tender bid is an offer.

- Purchase order: Purchase order which is sent by a buyer will state the items, the quantity, the price and terms and conditions. If supplier accepts the purchase order, there will also be a contract between two parties. It is also an offer.

- Price list: Price list is prepared by a supplier. The price list often states the items and unit price. If a buyer accepts it, the contract has not yet been formed since the contract scope has not yet been decided. It is an invitation to treat.

- Invoice: Invoice is often sent after a contract is formed. It is in fact a request for payment, neither offer nor invitation to treat.

Price adjustment formulae are typically tied to objective, external indices such as fuel prices, labour rates, or commodity costs. Rising fuel costs directly affect logistics and production expenses and are a legitimate reason to activate such clauses.

Construction procurement is particularly complex and risky. Forming a contract in construction may take lots of time and energy of both client and contractor. Therefore, standardisation inconstruction contract would help the buying organisation to save their precious resources. Furthermore, the wording of these model form contracts is accurate as it has been agreed among the professionals within an industry.

One of the advantage of using model forms of contract is the balanced of risk and reward allocation between the contractor, consultant engineer and the client.

Advantages for the use of model forms of contract include:

• Helps to reduce the time and cost in contract development, particularly in detailed negotiation of terms and conditions.

• Avoids starting from the beginning each time, avoids” re-inventing the wheel” each time.

• Model contract forms may be widely accepted by both buyers and sellers across the industry or sector.

• Model contract forms are even handed and designed to be fair to both parties in the contract.

• Model contract forms include standard clauses that can be selected or deleted on an as required basis.

• Model contract form’s standard clauses are more likely to contain the correct legal terminology without recourse to third party experts.

Disadvantages of this type of contract include:

• Terms may be less advantageous, than may be achieved through negotiations, particularly where there is one party who is much stronger than the other.

• The generic contract may be difficult to adapt to the specific circumstances between two parties.

• Terms may not necessarily include special clauses or requirements to cover a particular or unusual situation.

• Legal advice and input may still be required, particularly where significant variations to the norm are required.

• There may be costs associated with training staff in the detailed application of the model forms of contract.