Chapter 14 — Contract Management
1. In global commerce, people assume that the terms of one market are acceptable in another and do not recognize cultural
or legal landmines.
a.
True
b.
False
True
Easy
Analytic
2. Once a contract has been negotiated and signed, the real work is over.
a.
True
b.
False
False
Easy
Analytic
3. It is often easy to go back and negotiate what contractual terms actually mean once the contract has been signed and a
period of time has passed.
a.
True
b.
False
False
Moderate
Analytic
4. The assignment and contracting clause of a contract stipulates whether the supplier can assign its rights described in the
agreement to another party and whether subcontracting is permissible.
a.
True
b.
False
True
Moderate
Analytic
5. Most commonly used contracts are developed from earlier contracts that are subsequently modified to fit the situation at
hand.
a.
True
b.
False
True
Easy
6. The least appropriate method of drafting a new contract is to start with a general form (or forms) and samples of past
contracts for similar situations.
a.
True
b.
False
False
Easy
Analytic
7. It is always a good idea to double-check all attachments to the contract, because many of the technical details are
included here.
a.
True
b.
False
True
Easy
Analytic
8. Technical sections of the contract are typically the least source of misinterpretation of terms and conditions.
a.
True
b.
False
False
Easy
Analytic
9. In the firm fixed price contract, the price stated in the agreement does not change, regardless of fluctuations in general
overall economic conditions, industry competition, levels of supply, market prices, or other environmental changes.
a.
True
b.
False
True
Moderate
Analytic
10. Fixed price contracts are the most complex and difficult for purchasing to manage because there is a need for
extensive auditing or additional input from the purchasing side.
a.
True
Analytic
Chapter 14 — Contract Management
b.
False
False
Moderate
Analytic
11. In a firm fixed price contract, if the supplier increases its contract price in anticipation of rising costs, and the
anticipated conditions do not occur, then the purchaser has paid too high a price for the good or service.
a.
True
b.
False
True
Easy
Analytic
12. Escalation clauses allow only increases in the base price.
a.
True
b.
False
False
Moderate
Analytic
13. In a fixed price contract with escalation, all price changes should be keyed to a third-party price index, preferably to a
well-established, widely published index.
a.
True
b.
False
True
Moderate
Analytic
14. Cost-based contracts are inappropriate for situations in which there is a risk that a large contingency fee might be
included.
a.
True
b.
False
False
Easy
Analytic
Chapter 14 — Contract Management
15. Firm fixed price contracts are generally applicable when the goods or services procured are expensive, complex, and
important to the purchasing party or when there is a high degree of uncertainty regarding labor and material costs.
a.
True
b.
False
Moderate
Analytic
16. There is an incentive, at least in the short run, for suppliers to be inefficient in cost-based contracts because they are
rewarded with higher prices.
a.
True
b.
False
True
Easy
Analytic
17. Cost-sharing contracts are especially important during a period when raw material prices are decreasing.
a.
True
b.
False
False
Easy
Analytic
18. To be most effective, cost-based contracts should include cost productivity improvements in order to drive continuous
cost reduction over the life of the contract.
a.
True
b.
False
True
Easy
Analytic
19. Under a fixed-price contract, increasing factor market prices will place more risk on the purchasing organization
whereas decreasing such prices will shift the contract economic risk to the supplying organization.
a.
True
b.
False
False
Moderate
20. The longer the term of the purchase agreement, the less likely firm-fixed price contracts will be acceptable to the
supplier.
a.
True
b.
False
True
Easy
Analytic
21. As the total dollar value/unit cost of the contract decreases, purchasers must spend more effort creating effective
pricing mechanisms.
a.
True
b.
False
False
Easy
Analytic
22. Even when there is no contract, most transactions are covered by a “gap filler” known as the Uniform Commercial
Code.
a.
True
b.
False
True
Easy
Analytic
23. Perhaps the most compelling reason to consider a short-term contract, from the buyer’s perspective, is that such
contracts may reduce the level of risk incurred if longer-term contracts are employed.
a.
True
b.
False
False
Moderate
Analytic
24. Long-term contracts can help the buyer to gain exclusive access to proprietary supplier technology, and blocking
competitor access can result in a short-term competitive advantage.
Analytic
Chapter 14 — Contract Management
a.
True
b.
False
True
Moderate
Analytic
25. Agreeing to a short-term contract frequently allows the buyer to have access to more detailed cost and price
information from the supplier in exchange for the flexible contract term.
a.
True
b.
False
False
Moderate
Analytic
26. Long-term contracts should be written to avoid incentive or cost-sharing arrangements.
a.
True
b.
False
False
Easy
Analytic
27. If suppliers are not forthcoming with labor and material cost data, cost models can be developed to improve the
buyer’s negotiating position using material/labor ratios available from industry databases.
a.
True
b.
False
True
Moderate
Analytic
28. Once a long-term contract with a supplier has been executed, it is much more difficult (and expensive) to switch
suppliers.
a.
True
b.
False
True
Analytic
29. To be successful, a good long-term contract needs to only consider the needs of the buyer.
a.
True
b.
False
False
Easy
Analytic
30. A buyer must focus intently on determining an acceptable initial price because over the course of the long-term
contract the price adjustment mechanism will use the initial price as the base for future adjustments.
a.
True
b.
False
True
Moderate
Analytic
31. One of the leading causes for failure of systems contracts is that purchasers get locked into price structures that do not
adequately reflect changes that have occurred since the agreement was originally signed.
a.
True
b.
False
True
Moderate
Analytic
32. In a systems outsourcing situation, acceptance test criteria can only be determined after issuing the contract as actual
operating conditions cannot be specified until the system is fully operational.
a.
True
b.
False
False
Moderate
Analytic
33. A major concern with many outsourced systems contracts today is that much of this work is going overseas to
countries such as India.
a.
True
b.
False
True
34. An important factor to consider when hiring an outside consultant to perform contract services for a company is that
such a person is the purchasing company’s employee, not its agent.
a.
True
b.
False
False
Easy
Bloom’s: Understanding
Analytic
35. There is automatic determination of copyright ownership unless the consultant and the client company execute an
agreement specifically assigning the copyright to the client company.
a.
True
b.
False
True
Moderate
Bloom’s: Understanding
Analytic
36. Even if the client company does not withhold income taxes, a consultant will normally be viewed as an employee, not
as an independent contractor.
a.
True
b.
False
False
Easy
Bloom’s: Understanding
Analytic
37. Perhaps the most important clause of a consulting contract to the consultant is the assurance of payment.
a.
True
b.
False
True
Easy
Bloom’s: Understanding
Analytic
38. In construction contracts, penalty clauses are technically called “liquidated damages clauses;” if they are labeled
“penalty” clauses, there is a long line of cases that say they are not enforceable.
Easy
Bloom’s: Understanding
Analytic
Chapter 14 — Contract Management
a.
True
b.
False
True
Moderate
Analytic
39. The use of automated online catalogs by major suppliers of MRO items allows users to buy directly from blanket
orders and national contracts from their desktops.
a.
True
b.
False
True
Moderate
Analytic
40. A carefully worded and prepared contract is not subject to any form of dispute or disagreement.
a.
True
b.
False
False
Easy
Analytic
41. Generally speaking, the more complex the nature of the contract and the greater the dollar amounts involved, the more
likely it is that a future dispute over interpretation of the terms and conditions will occur.
a.
True
b.
False
True
Moderate
Analytic
42. Taking a dispute into the jurisprudence system should be an automatic step in resolving the dispute, and not viewed as
a last resort.
a.
True
b.
False
False
Analytic
43. Perhaps the simplest method of resolving a contractual disagreement involves straightforward, face-to-face negotiation
between the two parties involved.
a.
True
b.
False
True
Easy
Analytic
44. It is important to ensure that an arbitrator’s opinion will not be binding on both parties to the dispute.
a.
True
b.
False
False
Easy
Analytic
45. Purchasers cannot rely on an arbitration clause contained in their forms, particularly if the suppliers’ forms do not
contain such a clause.
a.
True
b.
False
True
Easy
Analytic
46. In many instances, the alternatives to court adjudication are slower than litigation.
a.
True
b.
False
False
Easy
Analytic
47. _____ involves spending more time in the initial contracting stages to fully understand stakeholder requirements,
expectations, and repeated communication of expectations, to gain a full understanding of elements.
a.
b.
c.
Chapter 14 — Contract Management
d.
e.
Easy
Analytic
48. The _____ clause of a contract defines all of the important terms contained within the contract and is important so
everyone understands exactly what each term means.
a.
supply and delivery
b.
specifications, quality, and health, safety, environment
c.
scope of agreement
d.
force majeure
e.
definitions
Moderate
Analytic
49. The ____ clause of a contract defines what is in and out of scope, which might include the geographical limitations,
the validity or invalidity of prior contracts, preferential treatment by the supplier, or other elements.
a.
force majeure
b.
supply and delivery
c.
scope of agreement
d.
liability
e.
key performance indicators and compensation
Moderate
Analytic
50. The _____ clause of a contract outlines the relationship between the Agreement and any other purchase orders issued
by the company to the supplier.
a.
specifications, quality, and health, safety, environment
b.
most favored customer
c.
statistics
d.
effective date and termination
e.
purchase orders
Easy
Analytic
51. The _____ clause of a contract specifies the terms for supply and delivery of the product or service.
a.
specifications, quality, and health, safety, environment
b.
scope of agreement
c.
payment
d.
confidentiality
e.
None of the above.
Easy
Analytic
52. The _____ clause of a contract specifies method of manufacture and quality requirements and may include language
specific to terms of quality.
a.
liability
b.
specifications, quality, and health, safety, environment
c.
intellectual property
d.
assignment and contracting
e.
confidentiality
Easy
Analytic
53. The _____ clause of a contract specifies terms such as “current price,” “prior price,” and other criteria that determine
how or if prices will be adjusted over the course of the contract.
a.
force majeure
b.
most favored customer
c.
key performance indicators and compensation
d.
payment
e.
intellectual property
Moderate
Analytic
54. The _____ clause of a contract generally specifies who is responsible if there are injuries or damage, over the course
of the contract, and any damages to be paid.
a.
supply and delivery
b.
key performance indicators and compensation
c.
definitions
Chapter 14 — Contract Management
d.
free trade areas
e.
liability
Easy
Analytic
55. The _____ clause of a contract describes the course of events that occur if there are unforeseen calamities such as
earthquakes or hurricanes that prevent a supplier from fulfilling its obligations to the buyer.
a.
liability
b.
force majeure (LO #1
c.
confidentiality
d.
third-party rights
e.
governing law
Moderate
Analytic
56. The _____ clause of a contract stipulates whether either party has the ability to terminate the contract at any time, and
how much advance notice must be given.
a.
effective date and termination
b.
payment
c.
third-party rights
d.
most favored customer
e.
force majeure
Easy
Analytic
57. The _____ clause of a contract specifies conditions regarding who own any IP rights that comes out of the agreement,
and who owns what IP going into the agreement.
a.
liability
b.
confidentiality
c.
intellectual property
d.
technology improvements
e.
assignment and contracting
Easy
Analytic
58. The _____ clause of a contract stipulates whether the supplier can assign its rights described in the agreement to
another party, and whether subcontracting is permissible.
a.
key performance indicators and compensation
b.
assignment and contracting
c.
supply and delivery
d.
scope of agreement
e.
None of the above.
Easy
Analytic
59. The _____ clause of a contract specifies whether the buyer, if he or she becomes aware of any technology or cost
improvements of other products in the market, he or she can share this information with the supplier, and how the supplier
should act on this information.
a.
confidentiality
b.
intellectual property
c.
liability
d.
technology improvements
e.
governing law
Moderate
Analytic
60. The _____ clause of a contract states whether the buyer can expect to receive preferential status over the supplier’s
other customers.
a.
most favored customer
b.
confidentiality
c.
notices
d.
liability
e.
scope of agreement
Easy
Analytic
61. The _____ clause in a contract ensures that all information, technology, and so on shared between the parties remains
confidential and is not shared with other customers or suppliers.
a.
assignment and contracting